Make America Innovate Again
Part 2 of 2 on The Scourge of Protectionism
The U.S. preached the virtues of free trade and globalization when less-developed economies were poor and generated only a small percentage of the world’s productivity. In 1980, when only 37% of global productivity—measured by economists as Gross Domestic Product, or GDP—came from developing countries, the U.S. and other advanced economies leveraged their economic might to dictate trade terms to poorer countries. American corporatists effectively moved the world’s manufacturing base to developing countries with much lower wages and few labor protections, filling the pockets of investors and sparking a manufacturing boom in developing countries.
As a result, several of those ‘developing’ economies now are catching up to the ‘advanced’ economies in their standards of living: the average Chinese citizen who produced $205 per year in 1980 produced $9,971 in 2018, while the average South Korean increased her annual output from $1,704 to $31,363. It is projected that in a few years the ratio will have flipped completely: whereas developing economies only produced 37% of world GDP in 1980, they will be generating 63% by 2024, with the world’s ‘advanced’ economies contributing only 37%. That’s breathtaking progress in favor of the world’s poor.
There was some good news for Americans, too, as consumers have enjoyed cheaper imports from lower-cost countries, increasing their own standard of living. More importantly, this new dynamic has compelled the U.S. to step up its game and innovate, replacing low-skill, low-margin manufacturing jobs with higher-skill, more profitable service jobs. While the U.S. population increased by 44% since 1980, manufacturing jobs actually decreased to below 20 million, and service jobs nearly doubled from around 50 million to almost 100 million. This transition to a high value-added service economy was earned through Americans’ hard work and ingenuity—their ability to compete and to innovate.
Source: U.S. Bureau of Labor Statistics, via NPR
Increasingly powerful developing economies have earned the leverage to negotiate better trade terms with advanced economies. This prompted the creation of the World Trade Organization (WTO) in 1995, to settle trade disputes between countries fairly and transparently. That initiative was led by the U.S., a then-confident nation with the world’s highest productivity and most impressive record for innovation. The U.S. has consistently championed the WTO as the most effective forum to level the playing field for international trade—until now.
The U.S. has some valid complaints about China’s trading practices, especially when it comes to safeguarding intellectual property rights, and to China’s centralized planning and subsidizing of its manufacturing base. Those are exactly the types of grievances that the WTO should resolve. Instead, the Trump administration, intoning its mantra of “America First” to an unwitting domestic audience craving easy solutions, is pursuing the un-American, non-market-based solution of protectionism, mainly through heavy-handed tariffs. Tariffs are especially insidious to geopolitical stability, as U.S. trade policy has always been an essential balancing component in its carrot-and-stick diplomacy around the world.
Never mind that the tariffs won’t work against a sophisticated and ruthlessly competitive Chinese economy; the current trade war is a lose-lose prospect. Much more dismaying is that the Trump administration over the past six months has quietly moved to eviscerate, and apparently to eventually eliminate, the WTO.
What could be less American than the Trump administration’s fear of the WTO’s efforts to move the world toward a fairer, more free-market playing field? The U.S. no longer leads the fight for fairness in trade; it is now moving decisively to stamp out the transparency and fairness that the WTO ensures. Cheating is always easier without referees looking over your shoulder.
The secret to the U.S.’s leading role in the world economy is no longer agriculture, nor manufacturing, and certainly not any ill-conceived manipulation of trade policy. The secret is competition through innovation: the U.S.’s past success, and future prospects, are a function of its unique ability to lead the world into the new economy. The aftermath of the COVID-19 pandemic will challenge America’s capacity for reinvention like never before. This will require long-term investment: diverting money from tax cuts for the rich, from excessive defense spending, and from the massive “corporate socialism” of anti-capitalistic subsidies, in favor of education (including vocational training), infrastructure, and technological innovation, with a safety net for those who will inevitably come out on the losing end of continued economic transformation.
Innovating is never easy, but it always works. China stands ready to fill the innovation vacuum that the U.S. is creating. “America First” today is doomed to put America last tomorrow.
Gregory Testerman is CEO at Testerman Advisory, LLC, a firm providing Sustainability and ESG (Environmental, Social, and Governance) consulting services to emerging markets banks.
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