State Capitalism, Enemy of Free Trade

Against the Cacophony of Keynesian Stimulus Packages

“When Barack Obama saved the auto giants of Detroit, he did so by destroying competition from other countries,” writes Marc De Vos. Honest competition and fair globalization are suffering under the rise of protectionist state capitalism.

Three cheers for free trade! The World Trade Organization reports that since September 2009 there has been no significant strengthening of trade barriers. That is good news for whoever is more in favor of global welfare than selfish policies at the expense of other countries. In 2008 and 2009, the World Bank recorded an exponential increase in protectionist measures. Now we are told that this increasing trend reached a plateau in the final months of last year.

But let’s not shout from the rooftops just yet. Just because the fever of economic nationalism is no longer spreading, does not mean that the patient is cured. The years 2008 to 2009 have left behind an embarrassing global legacy comprising hundreds of protectionist hurdles, and it is by no means certain that these will be eliminated in the future. But more importantly, the fever of economic nationalism hides a more basic and more critical problem: the rise of state capitalism. The economic crisis catapulted governments all over the world to new heights of economic activism. Governments chose the winners and the losers in financial and insurance markets, saved car manufacturers with government intervention and funding, and steered the global economy through a cacophony of Keynesian stimulus packages.

Of course, much of this intervention was unavoidable. But each time, they involved injections of cash borrowed from taxpayers for what politicians perceived to be in the national interest and in industries and businesses that make for good politics. The unavoidable result is protectionism. Think of the car industry: When Barack Obama saved the car giants of Detroit, he did it by destroying competition from other countries, by ignoring thousands of workers in businesses that had no claim to American taxpayers’ money, and by tying up tens of billions of dollars that could otherwise have been freely used or invested elsewhere. This did not lead to a trade war within the WTO, but rather to a worldwide gap in the level of state support for car manufacturers. The Opel plant in Antwerp fell into that very gap, despite all rescue efforts from the unions and the Flemish authorities.

Dishonest

Is that a model for honest competition and fair globalization? Of course not. But, at the same time, a similar situation presents itself with the new trend toward national industrial strategies. In order to switch quickly from recession to economic expansion, governments the world over are working on their own strategies for growth. The mantra of “sustainable growth” is leading to an arms race in investment and planning by the state. The environmentally friendly car hypnotises politicians and sucks up billions in state aid worldwide. In France, Nicholas Sarkozy is arranging national lending of 35 billion euros for strategic investment—recipients to be chosen by him, of course. And so it goes on.

The trend toward government-led growth is more fundamental and more problematic for the future of world trade than the largely unconscious burst of protectionist reflexes in the thick of the economic crisis. Besides which, this trend is older than the crisis itself. Developing countries with state-capitalist tendencies — above all China — were winning market share and growing in importance years before the subprime debacle. Both their economic influence and their economic model have since profited from the crisis, which has generally been portrayed as a failure of American free market capitalism.

Open Trade

None of this is easy to quantify in reports from the WTO. But it is still shifting the tectonic plates supporting the whole structure of globalization, and nudging the world in the direction of a less open and more mercantile form of neo-globalization. While the Doha world trade talks remain stuck in the mud, bilateral trade agreements are flourishing as never before, above all in Asia. These bilateral deals are more stumbling blocks than building blocks for international trade. The uneven pace of the worldwide recovery contributes to this. In many developing countries current and future economic growth is strongly determined by the government. In the U.S. and Europe persistent unemployment and sluggish economic growth are the enemies of the free market and of trade, but at the same time both pave the way for more active government. State capitalism, therefore, is not yet a thing of the past.

Free trade has only worked politically if all partners benefit. Market driven globalization brings growth, but also presumes growth. When the weak worldwide economic recovery is transformed into real worldwide economic expansion, then perhaps the rising tide can lift the barriers again and push back the nationalist trend. But for as long as a large part of the world remains stuck in crisis mode, the future of globalization and trade will be less free and more political than before the crisis.