Geoeconomics, nationalism, and trade

Source: Zhou Ziheng

"Geoeconomics" is a new term that encompasses international economic theory and policy. Gillian Tett of the Financial Times states that in the past, "people generally believed that rational economic interests, rather than dirty politics, were dominant. Politics seemed to be a derivative of economics, rather than economics being a derivative of politics. That is no longer the case. The trade war initiated by U.S. President Donald Trump has shocked many investors, as it appears so irrational according to the standards of neoliberal economics. But whether it is "rational" or not, it reflects a shift: the economy has given way to the political game, and this is true not only in the United States but in many other places as well."

Lenin once said: "Politics is the most concentrated expression of economics." He believed that state policies and wars (other forms of politics) are ultimately driven by economic interests, namely the class interests of capital and the competition among "numerous capitals." However, it is clear that Lenin's viewpoint has now been overturned by Donald Trump. Today, the economy will be dominated by political games; the class interests of capital have been replaced by factional political interests. Therefore, we clearly need an economic theory that can simulate this situation, namely geopolitical economics.

Today, the emergence of geopolitical economics is clearly aimed at making this hegemonic politics appear respectable and "realistic." Liberal democracy and "internationalism," as well as liberal economics, namely free trade and free markets, are no longer significant to economists, whose previous training promoted a balanced, equal, competitive economic world where everyone enjoyed "comparative advantage." All of this has vanished: today's economics concerns the power struggles among nations to advance their own national interests.

A recent paper points out that economists must now consider that power politics will override economic advantages; especially in the case of hegemonic countries like the United States, whose path to enhancing economic advantages lies not in increasing domestic productivity or investment, but in exerting threats and force against other countries: "However, hegemonic countries often seek to influence foreign entities that they cannot directly control. They either do so by threatening that not taking the expected actions will have negative consequences for the target entity, thereby reducing external options for participation; or by promising the target entity that if it takes the expected actions, it will gain positive benefits."

According to these authors from the World Bank, this "power economics" actually benefits both hegemonic countries and the objects of their threats: "Hegemony can be constructed in a way that is friendly to macroeconomists." Really? Tell China, which is facing sanctions, bans, high export tariffs, and the suffocation of its economy by global blockades—all initiated by the current hegemonic power, the United States. The U.S. is afraid of losing its hegemonic status and is determined to weaken and undermine any opposition by any means necessary (including war) through political means. Tell those impoverished countries in the world facing high tariffs on exports to the U.S.

Of course, the international cooperation carried out by equal countries to expand trade and markets has always been an illusion. There has never been trade between equal countries; there has never been "fair" competition among capital of roughly equal size, whether within economies or on the international stage. The strong swallow the weak, especially during times of economic crisis. The imperialist core of the global North has extracted trillions of dollars in value and resources from peripheral economies over the past two centuries.

However, some elites have indeed changed their views on economic policy, especially after the 2008 global financial crisis and the subsequent long-term stagnation in economic growth, investment, and productivity. In the early post-World War II period, international trade and financial institutions were primarily established under the control of the United States. The high capital profitability of major economies facilitated the expansion of international trade, while also allowing the industrial power of Europe and Japan to revive. This period was also characterized by the dominance of Keynesian economics, where the state took actions to "manage" economic cycles and supported industrial development through incentives and even certain industrial strategies.

This "golden age" came to an end in the 70s of the 20th century, when the profitability of capital fell sharply (according to Marx's law) and major economies suffered their first simultaneous recession in 1974-75, followed by a deep recession in manufacturing in 1980-82. Keynesian economics proved to be a failure, and economics reverted to the neoclassical idea of the free market, i.e., the free movement of trade and capital, the deregulation of state intervention and industrial and financial ownership, and the repression of labor organizations. The profitability of the major economies has recovered (slightly) and globalization has become a credo; In fact, imperialism expands the exploitation of the periphery under the guise of international trade and capital flows.

But Marx's law of profit has exerted its influence again. Since the millennium, the profitability of the production sector in major economies has declined. Only the boom in credit-driven finance, real estate, and other non-productive sectors has temporarily concealed the underlying profitability crisis (the blue line in the figure below represents the profitability of the U.S. production sector, while the red line represents overall profitability).

Source: BEA NIPA Table, author's calculation

But in the end, all of this led to a global financial collapse, the Euro debt crisis, and a prolonged recession; the economic downturn brought on by the pandemic in 2020 only made matters worse. European capital has been fragmented. Meanwhile, American hegemony now faces a new economic competitor - China. China's rapid development in manufacturing, trade, and recently the technology sector has not been affected by the Western economic crisis.

Therefore, as Gillian Tett mentioned, in the 2020s, "the pendulum of thought is swinging once again, tilting towards a more nationalist shade of protectionism (with a hint of military Keynesianism), which aligns with historical trends. In the United States, Trumpism represents an extreme and unstable form of nationalism, which now seems to be seriously studied by the new 'geoeconomics' school. Biden has initiated Keynesian government intervention/support aimed at protecting and revitalizing America's weakened production sector, with his 'industrial strategy' involving government incentives and funding for American tech giants, while imposing tariffs and sanctions on competitors (such as China). Today, Trump is doubling down on this 'strategy.'

The combination of international protectionism and domestic government intervention has weakened government services, halted climate change mitigation spending, relaxed financial and environmental regulations, and strengthened the military and homeland security forces (particularly increasing deportations and intimidation).

This brutal hegemonic power politics is now being given logic by right-wing economists, even to the benefit of all Americans. In a new book titled "American Industrial Policy," two economists, Marc Fasteau and Ian Fletcher, who are favored by the "American Dream" (Maga) group, write. They are members of the so-called "Council for a Prosperous America," which is funded by a group of small companies primarily engaged in domestic production and trade. "We are an unparalleled coalition of manufacturers, workers, farmers, and ranchers working together to rebuild America for ourselves and our descendants. We value high-quality jobs, national security, and domestic self-sufficiency, rather than cheap consumption." This is an institution based on the unity of capital and labor classes, aimed at "making America great again."

Fausto and Fletcher believe that, due to new classical liberal market economics, the United States has lost its hegemonic position in global manufacturing and technology: "The idea of laissez-faire has failed, and a strong industrial policy is the best way for the United States to maintain prosperity and security. Trump and Biden have implemented some policies, but the U.S. now needs some systematic and comprehensive policies, including tariffs, competitive exchange rates, and federal government support for the commercialization of new technologies (not just inventions)."

F&F's "industrial policy" has three main "pillars": rebuilding key domestic industries; protecting these industries from foreign competition by imposing tariffs on imports and sanctions on foreign economies that create barriers to U.S. exports; and "managing" the dollar exchange rate until the U.S. trade deficit disappears, i.e., the dollar depreciates.

The F&F rejected Ricardo's theory of trade in comparative advantage, which is still the theoretical basis of mainstream economics, arguing that "free" international trade would benefit all countries, all other things being equal. * They argue that "free trade" would actually reduce output and incomes in countries like the United States, because cheap imports from low-wage countries would destroy domestic producers and weaken their ability to gain market share in global exports. Instead, they argue that protectionist policies, such as import tariffs, can boost the productivity and income of the domestic economy. * "U.S. free-trade policy, shaped in an era of global economic dominance long gone, has failed in theory and practice. Innovative economic models show that well-designed tariffs (to cite just one example of industrial policy) can lead to better jobs, higher incomes, and GDP growth. "* Yes, according to the author, tariffs will bring higher revenues for all.

F&F represents the interests of American capital rooted in the local market, which has become unable to compete in numerous global markets. As Engels argued in the 19th century, as long as hegemonic economic powers dominate international markets with their products, they will support free trade; but once they lose their dominant position, they will adopt protectionist policies. (See my book "Engels," pages 125-127). This is exactly the state of British policy at the end of the 19th century. Now it is America's turn.

David Ricardo (and today's neoclassical economists) mistakenly believe that if all countries specialize in exporting products with "comparative advantage," they will benefit from international trade. Free trade and specialized division of labor based on comparative advantage do not generate a trend of mutual benefit, but rather exacerbate imbalances and conflicts. This is because the nature of the capitalist production process determines the trend of increasing concentration of production, leading to imbalanced development and crises.

On the other hand, protectionists claim that import tariffs and other measures can restore a country's previous market share, which is a misconception. However, F&F's industrial strategy does not solely rely on tariffs. They define industrial policy as "the deliberate support of the government for industries, which is divided into two categories. The first category is broad policies that support all industries, such as exchange rate management and R&D tax credits. The second category is policies aimed at specific industries or technologies, such as tariffs, subsidies, government procurement, export controls, and technology research conducted or funded by the government."

F&F's industrial strategy is unworkable. In an economic system, productivity growth and cost reduction depend on increasing investment in areas that enhance productivity. However, in a capitalist economy, this depends on the willingness of profit-oriented enterprises to increase their investments. If profitability is low or declining, they will not invest. This has been particularly true over the past two decades. F&F hopes to restore wartime policies and Cold War strategies to build domestic industry, science, and military power. But this will only work if there is a massive shift towards direct public investment through state-owned enterprises that formulate national industrial plans. F&F does not wish for this, nor does Trump.

F&F claims that their economic policy is neither left nor right. In a sense, this is indeed the case. Left-wing Keynesians in the UK, Elizabeth Warren and Sanders in the US, and even Mario Draghi in Europe all advocate for industrial strategy. In the second half of the 20th century, most East Asian economies adopted "industrial strategy" as their economic policy (although it has become increasingly rare now).

Of course, F&F's ostensibly "neutral" industrial strategy is not so in the face of China, because, as they say, China is "the first military and economic threat to the United States in more than 200 years." They are blunt: "More and more Chinese industries are competing fiercely with high-value U.S. industries, and China's gains are our losses." The United States cannot maintain its status as a military superpower unless it becomes an industrial superpower. * This encapsulates America's motivation to abandon neoclassical laissez-faire and free-trade economics. To date, this economic theory has dominated the academic ivory towers of various economic sectors and international economic institutions. The economic dominance of the United States (and Europe) has been eroded, to the point that the risk of China dominating the globe within a generation is extremely high. Therefore, the United States must act decisively.

Abandon the concepts of free competition, markets, and trade - they have never actually existed. Introduce the realism of winning political and economic power struggles at all costs. This is the essence of the new geopolitical economy, which, despite the opposition from the currently dominant neoclassical and neoliberal professors, is likely to soon appear in the economics departments of universities in the Global North.