There is a fine line between economic nationalism and a closed economy, but it may work

There is a fine line between economic nationalism and a closed economy, but it may work

With the United States leading the way, the world appears to be entering a new era of economic nationalism, with many countries prioritizing their domestic social, economic, and environmental agendas over free trade and multilateralism. While US President Joe Biden’s approach is more moderate and open to international cooperation than Donald Trump’s, it nonetheless raises concerns among economic liberals, who see echoes of a return to 1930s-style protectionism and self-sufficiency.

But “economic nationalism” is one of those scary terms that economic liberals use to discredit practices they don’t like. As with any ideologically loaded label, it hides more than it reveals. After all, economic nationalism comes in many different forms, some harmful and some beneficial. Moreover, some prominent theorists of economic nationalism, such as Alexander Hamilton and Friedrich List, were political liberals.
Although economic nationalism can backfire when taken to extremes, so can liberalism. When applied wisely in pursuit of legitimate domestic goals – such as building economic power and strengthening a sense of national purpose – it can be beneficial without necessarily harming other countries. Economic nationalism frames the economy primarily in terms of the nation, just as political nationalism does with the political system. The economy exists primarily to serve the nation, just as the nation-state pursues the national interest.

Neither version has much content to begin to determine what “serve the nation” or “national interest” means. A focus on the national economy may be entirely benign, as it is compatible with greater degrees of openness to international trade and finance. According to traditional economic theory, it is in a country’s interest to embrace free trade. A government that seeks self-sufficiency will forego the benefits of specialization, miss out on leading-edge technologies, and lose access to foreign capital.
As economic historian Marvin Suisse argues, economic nationalism oscillates between two somewhat contradictory motives: the temptation to restrict economic exchange with other countries in order to promote national independence; The desire to expand international ties and benefit from them in the service of national economic growth and development.
More recently, no country has done a better job of combining these motives than the “developmental” countries of East Asia. Japan, South Korea, Taiwan, and China, astonishingly, have relied on a combination of policies that encourage global economic integration and selectively protect key industries. Each has shaped its economic future through a wide range of industrial policies – targeted credit, subsidies, tariff and non-tariff barriers, domestic content and other requirements for foreign investors – that have helped it develop new areas of economic efficiency.

These were not just economic programs. They were national renewal projects aimed at catching up with the West. As political scientist Elizabeth Thorbon of the University of New South Wales and her co-authors put it, development-minded policymakers “view domestic manufacturing capacity, technological independence, and export competitiveness as the fundamental foundations of domestic political legitimacy, national security, and international policy.” Status and prestige, and adopting a central role for the state in achieving these goals through strategic interventions in the market. China has become one of the advanced economies in less than two generations. China has become not only an economic power, but also the West’s main geopolitical competitor.
Each country’s tremendous rise has been met with accusations that it was not open enough or providing enough market access. Broad government subsidies – for steel, cars, solar cells, and so on – have often undermined the competitive positions of foreign companies and angered their governments. Overall, however, economic nationalism in East Asia has been a boon to the rest of the world. Even with trade barriers here and there, the thriving markets it created for trading partners were far greater than any alternative economic strategy could have produced. Moreover, according to the logic of economic liberals, subsidies were a gift to other countries because they helped lower prices for consumers.
The rapid expansion of China’s exports has certainly created some important difficulties for advanced economies. The “China shock” has led to long-term job losses in areas most exposed to competition from Chinese imports, thereby increasing political support for authoritarian right-wing populists in both the United States and Western Europe. But if anyone bears more blame, it is Western governments, because they have failed to manage trade with China properly (by not liberalizing their trade more slowly, for example). While China was achieving unusually strong export performance, these governments were clinging to an excessive faith in economic liberalism.

Of course, economic nationalism has not worked well everywhere. Too many governments have engaged in too much governance (state ownership or control), subsidized inefficient companies for too long, and shut down their economies too haphazardly. When governments make these mistakes, it is their people who pay the price first. The failure of economic nationalism constitutes a policy of impoverishment of self, not of impoverishment of neighbour.
The development movement in East Asia provides a lesson for today’s world. If economic nationalism in the United States focused on creating a strong, inclusive domestic economy, it would do a lot of good – even when it violates some principles of economic liberalism. Indeed, such a strategy would revive an earlier tradition of development in US history. Other countries will ultimately benefit from a healthier American economy and a more cohesive society, and will not have much to complain about.
As Suess explains, economic nationalism is usually a response to other countries falling behind. Here, the current US experience is somewhat different. Although other countries – especially China – have managed to catch up, the United States remains the strongest country on the technological and military levels.

The danger here is that American economic nationalism will go beyond simply building a better society at home. If the United States acts like a bully, imposing its policy preferences on others and seeking to undermine the technological development of its competitors, it will do great harm to the rest of the world and little good for itself. ©2023/Project Syndicate

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    (Tags for translation) East Asian countries 

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