August 10, 2005

Intelligence Brief: Economic Nationalism

Since the emergence of globalized capitalist markets in the nineteenth century, the trade policies of states have cycled between support of liberalization and adherence to economic nationalism, depending on whether significant domestic interests are winning or losing in international competition.

The majority of economists who argue that free trade increases wealth in the long run and on the whole through the operation of comparative advantage also admit that in the short run some industries and regions are disadvantaged -- often severely -- by shifts in production to more efficient and innovative enterprises. The inevitability of winners and losers in trade competition opens the way for the latter to seek state protection and subsidies, either to allow them to mature into effective competitors or simply to survive.

Attempts to use the state to protect economic interests are normal, and success or failure is mainly dependent on the domestic balance of power, which in large advanced economies is determined by continual face-offs between winning and losing industries and sectors. More general shifts between liberalization and protectionism call into play public opinion, which can deepen and increase the scope of incipient tendencies.

Long the major supporter of trade liberalization in world forums, the United States has recently had to adjust to growing economic nationalism in the U.S. that is likely to result in a slowing and perhaps a reversal of the thrust toward liberalized global markets.

During the week of August 1, Washington found itself on the nationalist side of the trade spectrum when China National Offshore Oil Corporation (C.N.O.O.C.) withdrew its bid for U.S. oil company Unocal, citing "unprecedented political opposition," and Tokyo, acting within the guidelines of a World Trade Organization (W.T.O.) decision against Washington on steel tariffs, moved to impose punitive tariffs on some goods produced in the U.S. Although the Bush administration did not come down on the side of U.S. Congressional opponents of the C.N.O.O.C. bid and proponents of protecting the U.S. steel industry, it did nothing to resist the drift toward nationalism. [See: "Intelligence Brief: Unocal"]

C.N.O.O.C. Withdraws

C.N.O.O.C.'s bid to take over Unocal collapsed after both houses of the Republican-controlled Congress agreed to propose a bill that would require the departments of defense, energy and homeland security to investigate the bid before it was vetted through normal administrative procedures. The Congressional pressure, which promised to delay a successful C.N.O.O.C. takeover, was the result of a full-scale lobbying campaign by Unocal's other suitor -- Chevron -- that gained the support of security hawks as well as legislators in Chevron's constituencies, and spread to lawmakers playing to sentiments of economic nationalism.

The success of Chevron's strategy of throwing the viability of C.N.O.O.C.'s bid into question prompted Institutional Shareholder Services, a proxy advisory service, to announce on August 1 that Chevron's lower bid was "not unreasonable" in light of Congressional pressure which "opens the door for adverse developments that could place a C.N.O.O.C. bid in jeopardy." C.N.O.O.C. withdrew its offer the next day, clearing the way for Chevron's takeover.

The two most significant factors in C.N.O.O.C.'s failure were the intensity of Congressional opposition to its bid and the silence of the Bush administration throughout the fray. With powerful U.S. business interests on both sides of the issue, it is likely that the Congressional tilt to economic nationalism and the administration's acquiescence in it were fueled by the mobilization of popular sentiment against China over U.S. job losses, which made Congressional opposition to C.N.O.O.C.'s bid politically expedient and the administration's acquiescence in it politically prudent.

Tokyo Strikes Back

On August 3, Tokyo announced its imposition of punitive tariffs on a range of U.S. goods, including ball bearings and aircraft components, in retaliation for the failure of Congress to repeal the Byrd Amendment, which diverts the proceeds of U.S. tariffs placed on foreign steel that has been determined to have been dumped on the U.S. market directly to domestic U.S. steel producers.

Tokyo had argued successfully before the W.T.O. that the Byrd Amendment violated international trade agreements because it not only penalized Japanese producers, but also rewarded their U.S. competitors. Since the W.T.O. decision, the Bush administration has sought to have the Byrd Amendment repealed, but Congress has dragged its feet. As in the C.N.O.O.C. affair, powerful U.S. business interests are on both sides of the steel tariffs issue, with U.S. steel producers predictably in favor of keeping the Byrd Amendment in force and steel consuming industries in favor of its repeal.

In the case of the Byrd Amendment, the purely economic balance of power would seem to favor the forces for repeal, since steel consumers are more financially powerful and greater in number and political influence than steel producers. Organized as the Consuming Industries Trade Coalition, the consumer interests have made inroads in Congress, but have not achieved success. Their failure is another indication that sentiments of economic nationalism are providing added energy to protectionist interests, giving them victories on issues in which they would have lost or at least have had to compromise in climates of opinion more favorable to trade liberalization.

The Bottom Line

Signs of growing economic nationalism in the U.S. -- where mounting, though still inchoate, popular resistance to liberalization of global markets finds resonance in Congress -- do not portend a radical shift to protectionism, but a normalization of trade policy, in which internationalist and nationalist interests compete for influence in the state.

As rising economic powers throughout the world become more competitive, the U.S. is bound to lose comparative advantage in many industries, setting off moves for protection that will be opposed by industries that gain or maintain advantage.

Look for Washington to lose its role as leader in the drive for open markets and to become a player in a complex international system of markets that remain global but are hedged by restrictions and do not move in the direction of neo-liberal models of "free trade."

The greatest threat to normal bargaining that would set off a decisive tendency toward protectionism would be the mobilization of popular nationalist sentiment that political classes are unable to contain.

Report Drafted By:
Dr. Michael A. Weinstein


The Power and Interest News Report (PINR) is an independent organization that utilizes open source intelligence to provide conflict analysis services in the context of international relations. PINR approaches a subject based upon the powers and interests involved, leaving the moral judgments to the reader. This report may not be reproduced, reprinted or broadcast without the written permission of inquiries@pinr.com. All comments should be directed to content@pinr.com.

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