Finding an Alternative to Populist Trade Policies

Even before the chaos of Trump’s second term, bringing back factory jobs and talking about tariffs were the predominant trade policy discussions in many countries. While these clearly have some significance, they’re part of a far bigger picture that makes specific efforts liable to fail.

For production is now largely organised in global supply chains operated by large companies. Consumers across the world directly trade services via smartphones as ideas and technologies flow almost seamlessly. Across sectors there is a far greater range of products than was ever previously available, serving many functions from keeping us healthy to offering domestic products affordably.

There is a significant side-effect of this evolving world economy. Governments have lost powers to influence their national economies. While that may please libertarians, it is leaving an unsustainable vacuum, arguably in turn leading to a vicious cycle of failed promises.

Politics needs to be the forum for argument on how a country should operate, but at the moment too much of that will continue whoever is elected. As consumers, we like the choice, as citizens we feel the lack of control.

How the International Economy Changed

Technology has transformed global business since the widespread adoption of the internet. As a broad generalisation, prior to the 1990s all of the activities of a company needed to be closely co-located to be effectively monitored – hence large factories which should also be close to consumers. In the last thirty years this has changed to a situation where all elements of production and service can be isolated and optimised, markedly increasing productivity and factory skill levels.

While the transformation has been blamed on trade policy, the deliberate promotion of “hyper-globalisation”, or China breaking the rules, it was mostly companies seeking competitive advantage. Reduced trade barriers only assisted a process already happening. There is a stronger correlation between trade and the evolving internet than with the level of tariffs.

Short of finding a time machine we are not going back to the age of large factories. Evidence for this comes from the USA, now 9 years into a bipartisan consensus that more manufacturing jobs are needed, with no noticeable success. Failed diagnosis followed by the reach for easy solutions. Trump’s current round of tariffs seems no more likely to fundamentally change supply chains.

Other countries are not immune from simplistic trade policy. Most notably Free Trade Agreements continue to be the main tool despite the declining economic benefits of tariff reduction. Thinking that digital agreements of limited commitments would be similarly transformational fall into the same category error of just doing something. Politicians like to sign international trade deals, but mostly their best case is symbolism as an incentive for investment.

Meanwhile other issues with the new international economic reality have been largely ignored. Countries are in a bidding war for international investment, smaller companies are systematically disadvantaged almost certainly costing economic dynamism, and trying to regulate all of this adds further complexity. Meanwhile what could be seen as the new factories – distribution hubs – are largely ignored as unimportant. Worst of all, countries seem to think they can have the benefits of new technology such as Artificial Intelligence while also preserving an older industrial model.

Government Concerns

If supply chain management has become the main function of modern international companies, for governments regulation has moved to primacy alongside tax. In the 1980s and 1990s this was market-making in removing overt restrictions such as monopolies and credit supply. Latterly the focus has switched to fair competition, balancing the interests of companies of different types, consumers, policy objectives such as climate change, and the public realm.

All developed economies are highly regulated, something unlikely to change given demands from so many different actors such as business, consumers and politicians. Though specifics can always be improved, simplistic demands for widespread deregulation should thus be seen rather sceptically.

What regulation cannot change is that governments do not control supply chains affecting their countries, even when political discussions suggest otherwise. Regulations, taxes, subsides, trade policy, infrastructure, skills and other domestic choices all influence corporate decisions. Ultimately though the state has less control than in the previous age of predominantly national goods production.

Covid and Europe’s realisation of the dangers of energy dependence on Russia led to greater concerns among politicians about supply chains. While they are in general far more resilient than depending on national production, governments feel understandably vulnerable about unknown risks. Economic security is the resulting doctrine, though as yet relatively undefined and in danger of sinking under the weight of possible content. At its simplest though should be the aim of avoiding dependencies for imports or exports, particularly given global political instability.

All of which are important roles for government, but largely technocratic in nature. While serious political parties will claim slightly different balances, their actions in government are frequently going to be similar to predecessors. This is somewhat hidden beneath the noise of 24-hour news, that perhaps more seriously hides the complexity and difficulty of making significant interventions.

A Bad Answer – Populism

For some years there have been a growing number of commentators arguing that an age of economic ‘liberalism’ is coming to an end. Their narrative is based on today’s globalisation being created by politicians whose successors now reject this approach. Solutions offered include subsidies, loosening world trade rules to allow more national decisions, and increasing tariffs.

Such nativist nostalgia is often linked with the demand for greater immigration controls. What is essentially proposed is a return to strong borders. Quite how we get there from open economies fuelled by technology without significant economic damage is almost never spelled out. Though that may be changing with President Trump and those around him talking about economic retrenchment. Business and consumer views on this will be interesting to watch, but Argentina is a long-standing example of what can go wrong.

There is always likely to be an appeal to populist ‘solutions’ when the alternative is technocratic, often combined with watered down nativism. What is missing are mainstream political visions that accept the current economy and propose how this can be developed to ultimately improve the welfare of citizens, in a manner distinguishing parties from each other, and which actually suggests some state agency over the economy.

Wanted – New Politics

One reason for politicians failing to accept modern economic realities is that their parties so often reflect the previous age of predominantly national economies. Such certainties, of a centre-left party of the workers and a centre-right of capital, have long been swept away leaving confused identities.

International trade also traditionally cut across party lines. Left-leaning parties could be supportive of selling national products more easily, or resentful of their workers being undercut. Centre-right parties most recently supported open trade but not its enabling rules. Suspicions of large companies are not restricted to one tradition.

Even with these factors and the difficulties of shaping today’s international economy to deliver domestic results, there should still be political choices to propose. As an illustration, traditional centre-left parties might emphasise the need for greater regulation or higher pay, while a centre-right one may emphasise more flexibility in attracting investments. Green parties would encourage the promotion of climate friendly policies and investments. Realistic costs and benefits should be part of the conversation.

This would come alongside issues recognisably cross-party such as food security, in which governments of any party have to work alongside producers and retailers. One aspect of the modern international economy is that countries have to negotiate with companies as much as with other countries. Ideally there should be some consistency in major regulatory and trade frameworks to attract investments, but balancing this against political differences should be discussed.

Whether today’s politics increasingly played out in social media less regulated than its traditional form can support such discussions is to be seen. Private discussions with politicians reveal a level of thoughtfulness rarely revealed in public debate. In too many modern governments there is also a tricky relationship between ministers and specialists who won’t fully follow a party line. With the health of democracy on the line unravelling these issues is crucial.

Without bringing politics and economics back together this era is one of deepening fragmentation as countries try to meet the demands of politicians for the current range of consumer products made locally with no risk of supply disruption. Confusion will deepen as countries oscillate between considering new technology an opportunity or threat. Populism will thrive amidst the uncertainties.

Hopefully an improved politics will help to deliver growth. But just as important may be the better political guides that help citizens make sense of the world to restore a feeling of control. Politics is rarely seen positively, but fulfils an essential purpose in a healthy society, that with regard to the modern economy is currently being failed.