To say that economists think poorly of US President Donald Trump’s economic policies is to understate matters. Most see him as an unhappy combination of a 19th-hole savant and that student — there is one in every classroom — who insists on the rationality and inevitability of socialism. President Trump differs from the student in that his own guiding star is economic nationalism rather than socialism.
But, as many have pointed out since the administration decided to take a 10 percent stake in Intel and cull 15 percent of Nvidia’s and AMD’s China revenues, economic nationalism and socialism are not so far apart. Each leans toward state self-sufficiency and tends to involve state control of the means of production. Both involve the state imposing its priorities on the market. Economists since Adam Smith in The Wealth of Nations (1776) have seen such state control as less efficient than market allocation of resources. Thus, in part, economists’ anxieties about Trump policy.
This four-part series will look at how economic nationalism has persisted despite its theoretical irrationality. The question is significant for investors because investments are often based on assumptions about economic maximization in free markets. Economic nationalism confounds such assumptions and complicates investment. It might also make the global economy’s “weaponized interdependence,” in Henry Farrell and Abraham Newman’s phrase, exceptionally dangerous. This series tries to assess that threat.
Adam Smith argued that, whether inside a state or between states, producers should specialize in what they already do best. Trade would then ensure that the best products at the lowest prices would reach customers and the overall economy would produce the most and best for least. Restraining trade would by definition reduce efficiency.
That was a leading reason why Smith and most economists after him were anti-imperialist. To take over territory, people and resources and bend them to making things the imperial center wanted, rather than what they might do best, ran contrary to market economics. The American revolutions, from Buenos Aires to Haiti to Boston, were led by people who wanted to take control of production away from empires. Settler colonialism was, in this sense, a school for radicalism.
It was also, of course, a school for economic nationalism. Newly ex-colonial states like the US appreciated that their former masters had a head start in developing the most productive technologies and business methods. The point of anti-imperial revolution circa 1800 was not simply to exchange formal domination for informal subordination by superior economies. Economic nationalism was animated by the desire for sovereignty: the business of states, so to speak, rather than of businesses. Restraints on trade, in the service of economic nationalism, always operated alongside their opposite, namely free trade. This was true in the 18th century as it is today. It was a feature, not a bug, of modernity.
The first Trump administration, running contrary to modern economic theory, embraced such an economic nationalism and the restraints on trade designed to advance it. The proximate cause was China and its set of policies gathered under the name of Made in China 2025 (launched in 2015). If the state-controlled 18 percent of humanity known as China was going to structure its economy to further its own economic nationalism, then the US was going to do the same. Tellingly, in arriving at Made in China 2025, Chinese economic thought took the anti-imperial US economy of the late 19th century as one model in combining restraints on trade with a conditional embrace of free-market forces, both aimed at the political goal of economic sovereignty and the historical goal of catching up to the modern world’s first movers, which were primarily empires. (Industrializing, imperial Japan circa 1890, one of whose aims was unfortunately supremacy over imperial China, was a similar and powerful model, especially for non-Europeans.)
As Trump’s and then Joe Biden’s economic policies developed, it became clear that China and the US were jointly reconfiguring the global economy to advance their respective economic nationalisms. What neither the US nor China seems to have anticipated was that this dynamic would solidify among other large economies as well, from the European Union to India, to create the global economy we have now, raising up sovereignty and self-sufficiency at the sacrifice of overall economic efficiency. Such an economy is inherently conflictual as well as inefficient. Indeed Adam Smith’s economics was an important inspiration for 19th-century peace movements: a reduction in economic sovereignty was thought to create an interdependence and frequency of cross-border exchange that would tend to reduce interstate conflict. Smith would have seen today’s worldwide rise in military spending and investment as a dead weight on the economy. He would have seen today’s goal of economic self-sufficiency as hopeless and misguided. But the relationship between economic nationalism and economics is complicated. Businesses of many different kinds now find they have to negotiate both simultaneously.
The next post will look at two recent examples of how complicated, and unexpected, such negotiations can be.