The inconsistencies between Clausing 1.0 and Clausing 2.0 are indicative of an economics profession that has eschewed its own humble insights.
Economic illiberalism has been on the rise as a tool of United States foreign policy. “Economic illiberalism” includes not only increased tariffs and trade sanctions, but the blocking of takeovers of American companies by foreign companies. It also encompasses important efforts at structural change in international economic law to increase American geopolitical leverage. Perhaps most importantly in this regard, the United States is refusing to permit appointment of any further judges to the World Trade Organization dispute resolution tribunal, which will bring to a halt final legal international resolution of WTO disputes.
While some have seen Trump’s economic nationalism as the source of most of these developments, the rise of these economic restrictions as a tool of American foreign policy are propelled by factors that will continue long after the Trump administration has gone. Their deep roots should force friends of liberty to consider new ways to pursue greater international economic liberalism that reflect the current evidence of the effects of international economic liberalism and the current constraints of American foreign policy.
The Limits of Doux Commerce
Besides its economic advantages, under the doux commerce thesis open trade has long been held to generate long-term advantages for international peace and stability. The interdependence of trading nations is thought to reduce the chances of warfare between them by making war more costly. The prosperity created by trade is also thought to create a swelling middle class that will in turn force even authoritarian governments to provide more human rights at home and engage in fewer adventures abroad.
Doux commerce was deployed to justify permitting Communist China to become part of the WTO. But so far, China is more prosperous than it was, but no freer. Indeed, with the accession of Xi Jinping to paramount leadership, control has become more centralized with less room for dissent. And China has become more aggressive, trying to turn the South China Sea into a lake within its territorial control.
There are also theoretical reasons to suspect that doux commerce theory has limited application to totalitarian nations in the modern world. Since many companies are owned or heavily controlled by the government, a nation like China can strengthen its regime by directing the advantages of trade to favored groups. Moreover, rather than broadening rights to satisfy a rising middle class, it can create a propaganda campaign to unite its citizens on the basis of nationalism and use its greater resources to engage in even more foreign adventurism.
Thus, the Trump administration’s decisions to impose increased tariffs on China and impose export control on technology companies such as Huawei, reflect a rational recognition that geopolitical benefits of open trade with China have not been realized and that in fact have bolstered the power of a totalitarian regime.
Trump’s reversal of the agreement with Iran also should be seen as a recognition of the limits of doux commerce. One of the assumptions of the Iran agreement was that giving up sanctions and integrating Iran into the global economic system would lead to improvement in its behavior. (The essential nature of that assumption follows from the ten-year limit on the restrictions on Iran’s nuclear facilities). But Iran too could channel the benefits of the agreement to sectors controlled by its revolutionary guard and gain resources to carry out its nationalist, revolutionary agenda. On a smaller-scale, the limits of doux commerce also support the administration’s skepticism toward the Obama administration’s opening of trade to Cuba.
The Decline of US Power
Another reason for the increased use of economic illiberalism is the decline of the threat of United States military power. One factor is the declining relative size of the defense budget. That decline is ultimately the result of the rise of the entitlement state which crowds out funding for traditional public goods, particularly defense, as government becomes instead a vehicle for transfers from one group to another. (If there is any doubt about such crowding out, consider our social democratic allies in NATO which have proportionally much bigger government budgets and yet struggle to spend even 2 percent on defense). Consider also the domestic unpopularity of recent exercises of force. The interventions in Iraq and Afghanistan are widely regarded as failures by the public. As a result the United States is today more unwilling to engage in large scale use of force (and even small-scale use that carries the risk of larger scale escalation) than at any time since Vietnam.
If the United States cannot as credibly threaten military action as it could before, it will naturally look to other levers of international power. It remains the preeminent economic power in the world and thus will resort to the use of its economic power—through sanctions and tariffs.
Its decision to block the WTO’s dispute resolution system helps change the structure of trade relations to permit the United States to exercise its economic power on behalf of broader objectives. When the WTO dispute resolution system was put in place in the 1990s, it was celebrated as the substitution of a legal rather than diplomatic mechanism for the settlement of trade disputes, putting all nations on a more even playing field. The United States could afford to impose rules on itself in the heady aftermath of its victory in the Cold War and given its status as the sole hyper-power with a budget that was in balance. But today, it needs all the tools it can find to enforce its will internationally. Going back to trade diplomacy rather than subject itself to a rule-based system gives it more opportunities to use its economic clout to pursue other objectives.
International Economic Liberalism in Our New World
Given that the limits of doux commerce and the reasons for decline of our military credibility are unlikely to change any time soon, administrations after Trump can be expected to turn increasingly to economic obstructions and threats to achieve geopolitical objectives. But that trend does not block all areas for a revival of economic liberalism. The most important are bilateral free trade treaties with close allies. The doux commerce theory still holds with democratic, market-oriented nations. (Whatever its other failings, the relatively open trade regime of the EU has helped keep the peace there for decades.) And the United States does not need to create the same levers of power to pressure our close allies.
Thus, the United States should consider negotiating a free trade pact with the United Kingdom once Brexit occurs. It should also consider negotiating a free trade treaty with Japan and widen the scope of those with Australia and South Korea. Such treaties will boost growth in the United States and expand opportunities for our citizens to freely do business in important markets. And these treaties will have important geopolitical benefits, cementing ties with the nations most important to an alliance that can contain China.