Diatribes of Jay

This is a blog of essays on public policy. It shuns ideology and applies facts, logic and math to economic, social and political problems. It has a subject-matter index, a list of recent posts, and permalinks at the ends of posts. Comments are moderated and may take time to appear. Note: Profile updated 4/7/12

18 July 2010

Trade


Introduction
The West/East Historical Divide
Trade’s Importance Today
Our Hurt Now
Interim Solutions

Introduction

Trade will determine our human species’ future. It is our chief survival strategy and our best alternative to war. How we manage global trade during the current economic crisis will determine how quickly we emerge from it, what the world will look like when we do, and whether our species will continue on its present painful and halting but discernible path toward global enrichment and a planet-wide Golden Age. Trade will also determine whether and how we solve our two most pressing global problems: (1) limited reserves of fossil fuels and (2) climate change induced by our own activities.

For readers who are young today, trade (including tourism, cultural exchanges and working abroad) will determine your standard of living, when, whom (and whether) you marry, your kids’ opportunities, and whether you or they will have to endure war. So, as we professors like to say, pay attention. This will be on the test, which will be your life.

Why is trade so important? Because it is the only entirely voluntary and consensual way in which different cultures and ethnic groups interact to mutual advantage on a daily basis. It is the glue that binds the human species together and makes the globe seem smaller. It and war are the chief means by which human beings from vastly different cultures interact on a regular and sometimes daily basis. Of the two, trade is more pleasant.

The West/East Historical Divide

Anyone who doubts the power of trade should read Gavin Menzies’ 1421, which is probably the most important work of nonfiction to emerge since the turn of the century. In it, Menzies describes how China, then at the apex of its civilization and relative power, “discovered” the world, including North and South America, Australia, New Zealand, and the polar continents, seventy years before Columbus set sail, a century before Magellan, and more than three centuries before Cook.

Menzies’ seminal book focuses on the evidence proving his thesis of prior Chinese discovery. It is a superb historical detective story. But for me, that was an easy sell. I had already seen (in Russia’s Hermitage Museum, I think) a map with clear outlines of most of the world’s continents, reliably dated decades before Columbus’ voyage. Someone had to have done the necessary discovery and charting, and the logical choice was China, then by far the world’s most advanced civilization.

So what intrigued me was not the detailed proof of Menzies’ thesis, which I already half believed. What fascinated me was the kind of world that Menzies’ outlined, fuzzily and sketchily, as he went about the task of proving in detail his principal point.

China’s “discovery” of the world outside was as different from Europe’s as the day is from the night. There were no Conquistadores, no military plunder, no enforced colonization, no enslavement of “savages,” no genocides. There were precious few devastating epidemics, for the Chinese explorers brought with them medical specialists and herbs and implements needed to deal with all the ailments that plagued them. All this happened because the Chinese goal was not conquest or dispossession of natural resources, but trade.

The Chinese at the time were hardly without military resources. Their biggest ships were as wide as the European explorers’ were long (about 50 meters) and were well equipped with cannon, flame throwers, and all sorts of advanced weapons. Their main discovery fleet (which later split) had at least 800 of these behemoths, more than twice the number of much smaller British ships that plagued us over three centuries later (during our Revolutionary War) in the seige of New York. According to Menzies, who is a superbly educated submarine captain and should know, no fleet in human history could have taken on a Chinese discovery fleet and won, until perhaps the late nineteenth century.

But did the Chinese use this advanced firepower to conquer and plunder? Hardly. They charted coasts, bays and rivers. They developed new methods of astronautical navigation. They made friends. They mined and refined minerals, mostly useful stuff like iron, lead and copper. They established small, isolated trading colonies, mostly in already-settled areas. And most of all, they traded. Chinese jade, statuary and porcelain dating to the Ming dynasty remain today as evidence of their presence and principal occupation: lucrative trade. In some cases (probably following shipwrecks), the Chinese left legends of strange foreigners settling in and ultimately their DNA, distinctive chickens and native plants as evidence of their own transplantation.

China asked foreign potentates to send emissaries to China to pay tribute and kow-tow to the Emperor. But who wouldn’t, after seeing the wealth on offer for trade and the self-evident size and power of China’s fleet?

China made the journey and (mostly ritual) submission palatable in many ways. It gave emissaries large private staterooms for the months-long voayages, which were generous even by modern cruise-ship standards. It also gave the voyagers Chinese concubines for companions, space for their servants, slaves, supplies and gifts, and access to the best food, wine, literature, knowledge, music and entertainment that the world then offered. (Printed Chinese encyclopaedias, brought along on these voyages, later helped spark the Italian Renaissance. But that’s another story, outlined in Menzies’ later book, 1434.)

There was little for foreign emissaries to resist but a glimpse into and access to a far better world than that which they and even their kings enjoyed. For most of the voyagers, it must have felt like being transported and coddled by an advanced alien culture of the type that science-fiction writers now invent.

Unfortunately, that world is long gone. Indeed, it was gone shortly after these great voyages of discovery began. China had overextended itself. Among many other things, it had denuded large parts of southeastern China and provoked (and lost) a war of independence with Vietnam by ravishing enormous areas of trees to build ships. This profligacy turned the powerful Mandarins against the emperor (Zhu Di).

By the time the remainder of the great discovery fleets returned to China several years later, they met a new emperor and an imperial edict to destroy all records of their discoveries and leave the great ships to rot. That’s why it took so long to redisccover these Chinese voyages of discovery.

Menzies leaves one thing only partly revealed: a fleeting glimpse into a world of “discovery” by an advanced civilization not by conquest, colonization, genocide or enslavement, but by mutually beneficial trade. That glimpse is so wildly different from the history of the Americas’ and Africa’s treatment at Europeans’ hands as to seem an alternative universe from a science-fiction movie. If you compare these two histories of discovery, it is impossible to avoid the conclusion that, relatively speaking, we Westerners indeed played the part of barbarians with superior weapons.


Trade’s Importance Today

But I digress. Why is trade vital today? The bloody last century teaches us that. We Westerners treated natural resources (and any native peoples who happened to be in the way) as inanimate objects of plunder by force. Conquest and colonization followed “discovery.” (I put the word in quotes because it seems a bit hubristic to “discover” people who already knew they were there.)

As local societies and government developed, Western conquest became more subtle and less violent, though no less forceful. An example was our own “Gunboat diplomacy” of the nineteenth century, which put natural resources and native peoples at the call of our multinational corporations. The US overthrow of Salvador Allende in Chile, the anti-democratic putsches in Iran, Nicaragua, Panama and San Salvador, plus the numerous attempts on Fidel Castro’s life and regime, may have been the last spasms of our Western “discovery by conquest” regime.

An ethos of discovery and partial occupation (colonization) by conquest has an unfortunate consequence: it invites powers that think they are stronger to take what you’ve got. That’s precisely what happened in Europe and its colonies for several centuries. The Pope tried to establish order among Catholic states by drawing a meridian around the globe, dividing the legitimate domains of Portugal and Spain, which happened to bisect Australia. That didn’t do much for Protestant nations. A several century free-for-all ensued, culminating in the forced “opening” of Tokugawa Japan by Admiral Perry’s black ships and the slicing up of China by Western colonial powers like a piece of smoked ham.

The last century’s two great wars were just the culmination of this ethos. Although the Nazis coined the phrase “Macht macht Recht” (“Might makes right”), they had plenty of precedent. For several centuries, that had been the norm governing inter-imperial relations and especially colonial relations with native peoples, despite sporadic attempts by expatriot priests, cardinals and others to describe how terrible was the fate of native peoples that resulted.

Viewed from this historical perspective, World War II takes on a different mein. The Holocaust becomes a puzzling aberration, and the motive force of Germany’s and Japan’s aggression a quest for territory, colonies and natural resources in the mainstream of Western European history, by two nations that came late to the colonization party. How different it all might have been if China, with its vast trade and humiliating but harmless ritual submission had set the norms for international relations and treatment of native peoples, including “savages” and “barbarians”!

But history is history. No use crying over split milk. Then next step in Western social evolution was much better. Chastened by the loss of 50 million souls, the devastation of three continents, and the specter of a irremediable nuclear holocaust, the Western world began to wise up after World War II. Gradually, over several decades, it set up the current international trading regime to replace the former regimes of conquest and colonization. Then (and now) if you wanted natural resources like oil, gold, iron, copper or bananas, you could buy them in free trade. You didn’t have to fight for them or conquer and terrorize native peoples on whose land they happened to be. Militarization became much less important for economic survival---a good thing in the nuclear age.

One still wonders how different the world might be if the reign of Zhu Di had continued and his discovery fleets had returned to a heroes’ welcome and a thriving society ready to become even more prosperous and advanced through peaceful trade. But better late than never. The Western world eventually learned the value of trade over conquest, as the Chinese had centuries before. Now Germany and Japan, the instigators of humanity’s most terrible conflict, are at peace and among the world’s most productive, advanced and prosperous societies, all through the miracle of trade.

Diminishing the economic reasons for war is not all that international trade has accomplished. As I noted five years ago, trade is in the process of transferring the benefits of rational, modern social organization from Northern Europe and North America to the rest of the world. In the process, it has lifted more people out of deeper poverty more rapidly than any social, political or military movement in human history. In the last ten years alone, hundreds of millions in China, India and Brazil have risen from poverty to the middle class, and the perpetual sinks of disease and misery in Africa and Southeast Asia have begun to dry up.

If you include education, tourism and cultural exchanges, all this is a result of trade. Since World War II, trade has accomplished far greater net good for a far greater number than all the conquests and military victories in human history.


Our Hurt Now

Unfortunately for us gringos, trade has lately come to be a giving proposition. We have nearly exhausted our oil and much of our mineral resources, so we have to bid for these commodities against the rest of a hungry world. Workers abroad will work for less and tolerate more abuse and pollution, so we have lost tens of millions of jobs, which are not coming back any time soon. The country whose innovation, industry and Yankee-trading impulses led the greatest (and most peaceful!) transfer of wealth in human history has been hollowed out and left to seek its solace in financial machinations and swindling.

Of course the exodus of jobs is only a short-to-medium term problem. As the developing world industrializes, its people will demand higher wages, better working conditions, better benefits, cleaner air, water and soil, and the right to participate in managing their industry and society. Then the international playing field of labor will be leveled, and jobs will seek the highest skills. This already has happened in Japan and Korea. It is starting to happen in China. The result—eventual worldwide parity of workers—will bring jobs back to our shores and favor the highly educated worker.

But that’s at best in the medium term, at worst in the long term. As the great economist John Maynard Keynes once said, in the long run we are all dead. What do we do in the interim?

There indeed is the rub. That nation that started this enormous global transfer of wealth out of enlightened self-interest got too enlightened and not sufficiently self-interested. Jobs left us in droves, hollowing out our middle class, deepening poverty and convincing millions (not without reason!) that the “American Dream” is finished. The result is great economic pain, dislocation of millions, and political unrest that could destabilize this country and, through it, much of the world.

This is not just an American problem. Albeit in decline, we are still the leader of the free world, ideologically, culturally and militarily. We are still the world’s largest consumer, the world’s largest national market and the world’s second largest regional market, after the EU. When we suffer, the rest of the world hurts, too. More important, our enthusiastic adoption and sponsorship of free trade is what put the world on a glidepath to a new Golden Age in the first place. Do we want to give all that up? Do we want to return to the bad old days of resource allocation by conquest? I don’t think so.


Interim Solutions

Seen in this light, the trade problem changes character. In general, trade is not a bad thing; it just happens to be hurting us now. So what interim measures can we adopt, in a regime of free trade, to get us “over the hump” to the coming age of worldwide labor parity and robust, “fair,” level-playing-field competition? What short-term measures can we adopt to assuage our hurt and improve our lot until the coming Golden Age?

Two very smart people, Nobel Laureate and columnist Paul Krugman and Intel Founder Andy Grove, seem to recommend a return to protectionism. But I don’t think they really mean it. As an economist, Krugman knows how damaging a cycle of protectionism and retaliation would be. That’s why he recommends “trade sanctions,” by which I think he means hauling China before the WTO and claiming that its currency manipulation is trade protectionism, permitting legal retaliation under WTO rules.

The problem there is timing. WTO cases take years to grind on. By the time we won one (if we did), China would have opened other markets for its products, so that any trade sanctions we’d impose would only hurt ourselves. China’s migration from low-tech to high-tech products would only make that solution worse. We could keep out Chinese toys and lawn furniture, but we might need to buy Chinese windmills for our energy or good Chinese batteries for our electric cars. Getting into a protectionist trade spat with a country of four times our population, which now offers low-cost production and soon promises to be the world’s technological leader, just doesn’t seem to make much sense.

As for Andy Grove, he’s a brilliant engineer and technological visionary, but he’s not an economist. His endorsement of protectionism seemed more a cry of desperation or a threat to China than a reasoned call to action. Making threats is no good unless you can carry them out, and China is smart enough to know that mutual protectionism would not be in our own interest.

So what are the real solutions to out short-term dilemma? If we weren’t broke, we could fight China on the currency exchange markets, driving the renminbi up as China tries to drive it down. But we can’t do that because China has the surplus and we are in debt. Protectionism is a dangerous illusion, for the reasons stated above. So what can we do?

One “solution” is just sucking it up. That appears to be the Republicans’ approach. They are so desperate to return to power they will tell any lie and spread any rumor, and they will try to convert a long-term problem (the deficit) into an urgent short-term one. If they do regain power, even in Congress, they will kill any chance for protectionism because they have only four notes to their score: more trade, less regulation, lower taxes (especially on the wealthy) and fewer lawsuits. What the idiot Tea Partiers don’t understand is that, if they get their fondest wish and undermine the President’s power still further, they will get more of the Republicans’ medicine. In the long run, that will be good for trade, although it will almost certainly produce a double-dip recession or another severe asset bubble in the shorter term.

These proposals are not serious attempts to solve the underlying problem: severe short-term detriment from ultimately beneficial international trade. They are reflex solutions that beg to be ignored.

What we need, I think, is a third way: a compromise between absolute free trade that sucks jobs abroad and the Smoot-Hawley tariffs that helped bring on World War II. We need to find a middle way, just as FDR and his “Brain Trust” found a middle way between the false choices of central-command socialism and rampant laissez faire capitalism of his age. We need to find an analogue to the regulated capitalism that brought us the world’s strongest economy for half a century.

The only real solution I can see is massive government investment in industrial policy. While free trade has accomplished wonders among nations, here at home free-market fundamentalism hasn’t done so well. It has given us the world’s most inflexible energy infrastructure, an addictive dependence on rapidly vanishing oil, a preference for the worst possible fuel (coal) as an alternative, a hollowed-out heavy-industrial and manufacturing base, and reliance for economic growth on financial-institution swindling and fads like huge shopping centers and thousands of “me, too” Internet companies.

All of these things have to change. At the risk of incurring a little more debt, we can change them with intelligent national industrial policy, followed by massive federal investment in infrastructure and new industries.

We don’t know for sure what all of those industries will be, but we know what some of them will involve. There will be electric cars and good batteries to run them. There will be windmills, solar panels and solar thermal plants to generate electricity because the wind and sun are free. There will be more nuclear power plants. There will be more efficient means of mass transportation, including high-speed rail and ships designed for efficiency, perhaps even new, “high-tech” sailing ships. The science of genomics will combine with computers, medicine and molecular biology to produce steady progress against debilitating diseases, including most forms of cancer. And space travel, to Mars and beyond, will present a constant blandishment that no ambitious, exploring species can ignore. New breakthroughs will follow from these new industries just as they have in the past.

What if we took a few hundred billion dollars to invest in infrastructure, research-and-development, and scaling up for production in these fields? What if the government guided and helped manage the development of these industries, in partnership with private investors, and financed the infrastructure upgrades (nationwide fiber-optic networks, high-speed trains, electric-car charging stations, biofuels, etc.) needed to make them succeed?

We should never forget that our government was instrumental [search for "9."] in guiding, encouraging, managing and investing in the development of our species’ most impressive industrial achievement to date: air travel. The present regime of deregulation and privatization began only late in the 1970s, long after the industry’s maturity, and seven decades after its beginning.

This does not mean picking winners. Everyone knows that, one way or another, these industries will win. The role of government would be to vet the most promising contenders and make sure none languishes due to private investors’ risk aversion or the lack of nationwide infrastructure. Building the infrastructure alone, such as nationwide WiFi or 4D phone towers, would create a lot of jobs, just as building the Interstate Highway system did in the 1950s and 1960s. And the results would give our own industry—whatever precise form it might take—an advantage in international competition.

Might China and other trading partners cry “foul” and claim an unlawful trade subsidy, just as we did with Airbus and Airbus will do with Boeing? Sure. But WTO proceedings move slowly, and government investment, especially in infrastructure, is not obviously protectionist. Let our trading partners bring their cases: by the time they win (if they do), labor costs may already be at parity and our job crisis may be over. In the meantime we will have repaired and enhanced our aging infrastructure, given our future industries a head start, and put ourselves back on the road to competitiveness.

Will this approach increase our deficit? Sure. But it will do so only in the short-to-medium term. If government assistance, for example, can make GM’s Chevy Volt a world-beating electric car, provide infrastructure for its widespread use, and help GM scale up production so as to halve the manufacturing cost, we can start exporting cars again, in quantity.

The alternative is to do nothing, or to wait until the Republicans return to power and do nothing but lower taxes on the wealthy and continue business as usual. That seems like an almost certain recipe for continued national decline.

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