For over half a century, right-wing economic theorists and the politicians who enthusiastically implemented their ideas have been giving us all lectures about the benefits of free markets. Competition, we were told, was good because the hidden hand of the market would direct resources to where they could be most efficiently deployed. Anything that got in the way of globalisation was bad and action by governments to control its impact were viewed as wrongheaded attempts to back lame duck industries and prevent the consumer from getting best value.
Message of false hope
Now there is a sea change and many of the political parties that most enthusiastically promoted these ideas have been taken over by people peddling a radically different set of ideas. Nationalism is back in fashion, and we are being told that it is essential for governments to act to put right the harm that has been done by globalisation.
Without so much as a word of apology for the damage done by the extreme conviction that markets are always right, there has been a complete pivot towards an equally extreme belief that imposing blanket tariffs can produce some kind of magical cure-all solution.
To many of those living in long-neglected communities the idea that something might be done to bring the jobs back and restore local pride has sounded like a message of hope which is worth voting for. Unfortunately, it is deeply unrealistic to believe that downtrodden areas are going to be restored to economic dignity by extraordinarily wealthy oligarchs who are riding to power on the back of their promises.
The reality of a trade war
A crude imposition of across-the-board tariffs is almost certain to do more harm than good. It isn’t, as Donald Trump appears to believe, the Chinese government that pays the cost of tariffs imposed in the US. It is American consumers. Tariffs are a regressive tax that hits the poor harder than the rich, and one of the most direct impacts they have is to put up inflation.
Once a tariff war is started, other countries almost always respond by imposing tariffs in retaliation. Rapidly changing rises and falls in tariff rates from unpredictatable politicians adds to the harm. A naïve enthusiasm for tariffs rapidly leads to a decline in the sale of US goods abroad and workers in the US being made redundant. It takes a great deal of time to switch production from one country to another. You can’t just build a steel mill overnight, or develop the expertise to make specialist products that require the import of complex components which are sourced from around the world. Nor can you necessarily sell enough products domestically to cover the cost of investment in a new manufacturing plant.
Tariffs can reduce competitiveness and confidence
It is possible that some factory production will indeed return to the US behind its tariff walls, and that there will be a gearing-up of supply in domestic markets. It is more likely that a lot of US producers will find they become increasingly unable to compete with global innovation and design as they cease to need to modernise and adapt to a changing economy. Their total global sales will drop like a stone. Fossilised technology rarely competes successfully.
What a blanket imposition of tariffs can do is undermine confidence in the ability of a country to service its national debt and force even the most aggressive and bombastic of leaders into an embarrassing climb down.
U-turn on globalisation
Yet that doesn’t mean that the possibility of applying some selective tariffs needs to be dismissed out of hand as always being a bad idea, or that it is wise to return to a naïve conviction that globalisation is always and at all times better than a sensible degree of localisation. There are some products and services that are so critical to the future of a nation that it makes very good sense for that country to protect and ensure there is a dependable local supply that doesn’t depend on international supply chains.
There is also a real need to listen and respond to the very genuine problems that those in hollowed out inner-city communities have been voicing. Globalisation hasn’t worked for many and markets don’t always direct resources to where they are most needed or do anything to promote the well-being of those who are exposed to the full fury of supposedly free enterprise. Sometimes a bit of planning is a good thing, and it is necessary to control the worst excesses of markets or fix gaps in what they supply.
Building resilient communities
The British experience in two world wars demonstrates that there is a clear need for a high proportion of our nation’s food to be produced locally. Just-in-time supply chains are very cheap and efficient and dominate supermarket logistics. They are not a wise way to ensure that it is possible to carry on feeding a nation in the event of international turmoil, climate breakdown or any other shock to the system, such as solar flares knocking out electronic communication systems.
National security justifies significant subsidies to local farmers and a switch to much more of our food being locally produced and supplied in line with what is seasonally possible. Any trade deal that leaves Britain even more dependent on food produced under conditions we would not regard as acceptable on our own farms – as is the case with some US food production – must be resisted.
Planning to retain specialist skills
There is also a good justification for making a number of other key products locally. Steel would be top of the list for most economists. At a time of significant international insecurity, when supply lines through routes such as the Red Sea and into the Suez canal cannot be relied upon, it makes no sense for Britain to have no domestically produced steel industry.
If the economics of supply and demand result in no private company being able to operate a steel mill profitably, then the only sensible options for the British government really are to either nationalise the production and budget for losses, or subsidise a private provider to cover the cost of updating production methods to become greener and more efficient.
It may not be realistic to promise people in Scunthorpe or Port Talbot that every job in the industry will be protected or to try and keep operating plants that produce significant environmental downsides for ever more. It ought to be possible to consciously plan to modernise plants, secure supply lines for vital industries and support communities that depend heavily on a rare source of skilled local employment.
Markets don’t always know best
A policy of absolute insistence on the wisdom of markets is naïve extremism that prevents necessary and helpful planning. If we look at the track record of the economies of different countries over the last 50 years, then the most successful ones on the simple measure of raising most people from poverty are places like China and India where there has been a heavy emphasis on using planning as well as markets.
In economies like the United States, globalisation has resulted in very rapid economic growth but a feeling amongst large numbers of poorer and middle-class people that their lives have become harder. The vast majority of any increase in wealth has gone to a narrow band of very wealthy oligarchs. The consequence is that very many ordinary citizens have felt betrayed and neglected by their own government.
What has happened in China is a very long way from being perfect, as that country has its own collection of oligarchs. Nevertheless, a much higher proportion of the nation’s increased wealth has been consciously directed towards improving national infrastructure, investing in new production facilities, increasing the standard of living of around a billion people and even, eventually, to making significant inroads into massive environmental challenges.
The local matters
It is important to be clear at this point. I am not making an argument for clumsy, state-run economies. They rarely work – as is evident from the extreme poverty of China under Mao, where many millions died in a famine that was the product of bad decisions made by an all-powerful government driven by a naïve faith in state planning.
What I am arguing for is that a naïve faith in market forces directing resources to the best place can also be very damaging, and that we need to control and consciously manage those markets. Locally, regionally, nationally and internationally, economies work best when there is a mixture of planning and individual enterprise. If people of good will ignore that then they risk being outflanked by extreme nationalists who loudly champion the needs of neglected local communities only to sell them out to the oligarchs whilst seeking to keep the poor distracted by a diet of heady and dangerous nationalism.
The local matters. The regional matters. What happens nationally matters. It is important to champion and protect the communities we belong to with a bit of planning and face up to the reality that not everything needs to be sacrificed to the god of globalisation.
