Trump’s Unilateralism, US Dollar and Its Discontents


October 12, 2018

Trump’s Unilateralism, US Dollar and Its Discontents

by Barry Eichengreen

https://www.project-syndicate.org/commentary/dollar-could-lose-global-hegemony-by-barry-eichengreen-2018-10

Having unilaterally reimposed sanctions on Iran, US President Donald Trump’s administration is threatening to penalize companies doing business with the Islamic Republic by denying them access to US banks. But that could hasten the dollar’s demise as the main global currency.

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Trump is squandering US leverage

BRUSSELS – US President Donald Trump’s unilateralism is reshaping the world in profound and irreversible ways. He is undermining the working of multilateral institutions. Other countries, for their part, no longer regard the United States as a reliable alliance partner and feel impelled to develop their own geopolitical capabilities.

Now the Trump Administration is eroding the dollar’s global role. Having unilaterally reimposed sanctions on Iran, it is threatening to penalize companies doing business with the Islamic Republic by denying them access to US banks.

The threat is serious because US banks are the main source of dollars used in cross-border transactions. According to the Society for Worldwide Interbank Financial Telecommunication (SWIFT), dollars are used in nearly half of all cross-border payments, a share far greater than the weight of the US in the world economy.

In response to the Trump administration’s stance, Germany, France, and Britain, together with Russia and China, have announced plans to circumvent the dollar, US banks, and US government scrutiny. “Plans” may be a bit strong, given that few details have been provided. But the three countries have described in general terms the creation of a stand-alone financial entity, owned and organized by the governments in question, to facilitate transactions between Iran and foreign companies.

Those companies will presumably settle their claims in euros, not dollars, freeing them from dependence on US banks. And insofar as the Europeans’ special-purpose financial vehicle also bypasses SWIFT, it will be hard for the US to track transactions between Iran and foreign companies and impose penalties.

Is this scheme viable? While there is no purely technical obstacle to creating an alternative payments channel, doing so is certain to enrage Trump, who will presumably respond with another round of tariffs against the offending countries. Such, unfortunately, is the price of political independence, at least for now.

Having learned a painful lesson about dependence on the dollar, will other countries move away from it more generally? The fact that the dollar is used so widely makes doing so difficult. Banks and companies prefer using dollars because so many other banks and companies use dollars and expect their counter parties to do likewise. Shifting to another currency would require coordinated action. But with the governments of three large European countries having announced just such coordination, such a scenario can no longer be excluded.

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It is worth recalling how the dollar gained international prominence in the first place. Before 1914, it played essentially no international role. But a geopolitical shock, together with an institutional change, transformed the dollar’s status.

The geopolitical shock was World War I, which made it hard for neutral countries to transact with British banks and settle their accounts using sterling. The institutional change was the Federal Reserve Act, which created an entity that enhanced the liquidity of markets in dollar-denominated credits and allowed US banks to operate abroad for the first time. By the early 1920s the dollar had matched and, on some dimensions, surpassed sterling as the principal vehicle for international transactions.

This precedent suggests that 5-10 years is a plausible time frame over which the US could lose what Valéry Giscard d’Estaing, then France’s Finance Minister, famously called the “exorbitant privilege” afforded it by issuing the world’s main international currency. This doesn’t mean that foreign banks and companies will shun the dollar entirely. US financial markets are large and liquid and are likely to remain so. US banks operate globally. In particular, foreign companies will continue to use dollars in transactions with the US itself.

But in an era of US unilateralism, they will want to hedge their bets. If the geopolitical shock of Trump’s unilateralism spurs an institutional innovation that makes it easier for European banks and companies to make payments in euros, then the transformation could be swift (as it were). If Iran receives euros rather than dollars for its oil exports, it will use those euros to pay for merchandise imports. With companies elsewhere earning euros rather than dollars, there will be less reason for central banks to hold dollars in order to intervene in the foreign exchange market and stabilize the local currency against the greenback. At this point, there would be no going back.

One motivation for establishing the euro was to free Europe from excessive dependence on the dollar. This is likewise one of China’s motivations for seeking to internationalize the renminbi. So far, the success of both efforts has been mixed, at best. In threatening to punish Europe and China, Trump is, ironically, helping them to achieve their goals.

Moreover, Trump is squandering US leverage. Working with the Europeans and the Chinese, he could have threatened Iran, and companies doing business there, with comprehensive and effective sanctions had there been evidence that the country was failing to live up to its denuclearization obligations. But working together to ensure Iran’s compliance was, of course, precisely what the Joint Comprehensive Plan of Action, renounced by the Trump administration earlier this year, was established to do.

 

 

Mahathir the Disappointed Leader–Father


September 12, 2018

Mahathir the Disappointed Leader–Father

Opinion

by Nathaniel Tan

 

COMMENT | Over the (very many) years, Prime Minister Dr Mahathir Mohamed has kept a fairly consistent tone regarding what I suppose he might term the Malay Dilemma – a tone that we saw again during the recently held Future of Bumiputeras and the Nation Congress (KBN 2018), at the Bersatu anniversary,  and a recent interview.

I suppose I might term this tone that of the Disappointed Leader–Father.

I have this image in my head of Mahathir, himself a successful bumiputera, looking down and shaking his head while sighing, maybe face in hand, constantly disappointed at what he sees to be an endemic failure of his fellow bumiputeras to live up to his hopes and expectations.

We get the sense that Mahathir has a very clear idea of the kind of attitude and character you need to succeed as an individual and as a community, and that a big part of his persona seems to be having to deal with his view that the bumiputera do not live up to these standards.

Mahathir’s favourite counterpoint appears to be the Japanese, a fact reiterated by his recent visit to Japan and specifically named once again in the interview, where once he again he has held them up as the paragons of self-sacrificing patriots whose self-worth is tied to how diligently they can contribute to the betterment of their nation.

He then likes to ask: “Why can’t the Malays be more like the Japanese?”, in the same tone perhaps a dad would ask his kid, “Why can’t you be more like your older brother?”

Unhelpful comparisons

Mahathir’s other big go to, of course, is to compare Malays with other ethnic groups, notably the Chinese. A common theme of his seems to be something along the lines of the Chinese are successful because they are hardworking, and the Malays are not, because they are lazy.

“Mahathir’s sincerity is not doubted, and he has a great many strengths. Effective motivation, however, may not be one of them. His recent comments show that while he has changed in many positive ways, he still seems to rely on a certain amount of BN era fearmongering, his trademark sarcasm, and a degree of condescension.”

Most recently, at KBN 2018, Mahathir has taken this a step further:

Prime Minister Dr. Mahathir Mohamad today questioned whether the bumiputera will be able to compete with a new wave of skilled and business-savvy entrepreneurs from China making their way to Malaysia.

Speaking during a dialogue session on bumiputera economy, Mahathir said the new wave of immigrants will be unlike early Chinese settlers in Malaysia – who were then mostly involved in small businesses, and whose children have now gained control of major developments in the cities.

“These are the Chinese already in Malaysia whose attitudes we can accept. But if we bring in three million more people from China, what will happen to us?” he asked.

“They are hardworking and skilled in business. The ones who are coming, they are not labourers, but those who are already successful. Will we be able to compete with them?” he said in response to a question on China nationals buying property in Malaysia.”

In the West nowadays, this kind of framing would likely be denounced as having considerable elements of racism. Sadly, the truth is that this rhetoric retains the culture of fearmongering perpetrated by UMNO over so many decades – a variation on the theme that the bumiputera are under constant threat by other ethnic groups.

Mahathir’s approach is marginally better in that his conclusion is not “Therefore you need UMNO to protect you” but “Therefore you need to work much harder.” Of course, this is not to say that Mahathir’s tone has not changed at all. He now says that it is foolhardy to blame other races for the shortcomings of the Malays. On the whole, though, we should ask: is this a truly helpful approach?

Has Mahathir’s approach worked?

Mahathir’s sincerity is not doubted, and he has a great many strengths. Effective motivation, however, may not be one of them. His recent comments show that while he has changed in many positive ways, he still seems to rely on a certain amount of BN era fearmongering, his trademark sarcasm, and a degree of condescension.

If you have ever been on either end of questions like “Why can’t you be more like your brother?” being repeated over and over, I think you know the ultimately negative end result – a lot of resentment, and almost never any actual change towards becoming like the said brother.

After all the years of Mahathir’s Look East Policy, do we actually see any significant movement of Malays or Malaysians adopting Japanese values? (Anime does not count.)

I am also most curious as to where this idea of letting in three million new Chinese nationals came from. Is this a thing? Or was it plucked from thin air, to be used as the convenient bogeyman?

It’s true that global competitiveness should always be a cause for concern, but bringing up the sceptre of some sort of invasion by foreigners who bear a striking resemblance to Chinese Malaysians in a Malay-only conference could easily be seen as striking the wrong note.

The dichotomy of the ‘successful’ Chinese nationals of today compared to the ‘inferior’ Chinese labourers from whom today’s Chinese Malaysians descended could also rub people the wrong way.

Inspire hope, don’t fearmonger

Some say that the biggest two motivators are hope and fear. One might have hoped that a coalition named Pakatan Harapan might be intrinsically inclined towards one instead of the other.

At the end of the day, Malaysians are Malaysians, and the Japanese are Japanese. Each has their strengths and weaknesses, and each can learn something from one another.

If, however, you keep expecting one to become the other – something they simply are not – only disaster awaits. Your children may be siblings, but they are each unique individuals.

Instead of constantly berating or belittling Malays with fearmongering, unflattering comparisons or sarcastic jibes at every turn, think about how you can motivate them positively.

It is good that we start addressing practices like Ali Baba schemes out in the open, but why not focus more on success stories? Highlight successful bumiputera entrepreneurs and how and why they succeeded. Use them as inspiration.

Sometimes all that is needed is the reminder that having only ‘becoming rich’ as the goal is a recipe for failure.

We need only look at the lives of successful Malaysians – from any ethnic group at all – to see that the right goal is to develop the attitude, character and habits that breed success, and that once that goal is achieved, riches come fairly easily.

Abandoning the racial lens

As a Malaysiakini commentator correctly said, it is in the interests of all Malaysians for Malays to be successful. That said, perhaps a big part of the problem is looking at it as a Malay or bumiputera problem.

 

Perhaps what we need to solve racial inequality, somewhat counterintuitively, is to stop seeing everything through a racial lens, and stop obsessing about comparing one ethnic group with another.

If, for example, you have never met a lazy Chinese, you simply haven’t met enough Chinese.

It’s not accurate to go so far as to say that culture plays zero role in the welfare of a community. Sometimes, historical factors such as living in harsh climates where saving for the winter is essential to survival, breeds a slightly different work ethic than living in temperate climates, where food is easily available all year round.

That said, any type of biological determinism is inherently unhelpful, and not relevant to the question of how we can best move forward.

Play to each individual’s and community’s strengths

People react much better to being inspired and encouraged than they do to being belittled or scared–especially when it comes to becoming self-motivated achievers. Every sibling has unique strengths and talents to contribute.

The role of the parent is to play to those strengths, encourage those talents, and help each child maximise their potential – on a road that they themselves determine.

Ultimately, helping each Malaysian achieve their unique potential is the single best way to help the Malaysian family as a whole.

The way to do this is to reverse this habit of public dressing downs and bemoaning, and adopt instead an approach that does not ignore reality, but acts on that reality in a manner that is less negative, and more one of positive encouragement.


NATHANIEL TAN is eager to serve.

The views expressed here are those of the author/contributor and do not necessarily represent the views of Malaysiakini.

Well Done, Prime Minister, Sir: Sock it to the Malays, we deserve it for taking things for granted–Jadi Kuli lebih senang, Jadi Tuan Tanggungjawab berat


September 1, 2018

Well Done, Prime Minister, Sir: Sock it to the Malays, we deserve it for taking things for granted–Jadi Kuli lebih senang, Jadi Tuan Tanggungjawab berat

by Alyaa Alhadjri@www.malaysiakini.com

Image result for Kongres Bumiputeri Nasional

Action Speaks Louder than Words, Sir. Let us see some real action from here on. NEP/NEM, 1970-2018, should be enough

 

KBN CONGRESS | Prime Minister Dr Mahathir Mohamad today reminded bumiputera that they will remain behind others unless they stop spurning the opportunities that the government provides them.

“We (the government) have tried our best, but we found that the culture (among Malays) to make a quick profit had contributed to their own failure.

“The ones who succeeded were the non-bumiputeras, if you know what I mean,” said Mahathir in his opening speech at the government’s Future of Bumiputeras and the Nation Congress (KBN 2018) this morning.

Mahathir said while the government had provided opportunities for bumiputeras to enter business through the New Economic Model (NEM), some beneficiaries instead chose to make a quick profit – for instance, by selling off their permits to imported cars, or sub-contracting projects.

Pushed to the fringes

As a result, the Prime Minister said, Malays eventually found themselves being left out of major developments in the city centres and constantly being pushed further away to rural areas.

“We don’t want to do business, so others do business using opportunities provided to us, and they succeed. We are not there (in the big cities) because we did not go into business, we sold off our opportunities.”

Mahathir pointed out that those who are poor will be more exposed to pressures from the rich, citing Malay villages in city centres that had been bought over for major development projects.

“In the end we are living in the fringes of the jungles… (Developments in) the city are no longer ours,” he said.

‘What privileges?’

Mahathir further stressed there will be little point for Malays and bumiputeras to flaunt their privileges, if in reality they are still behind the other races.

“The poor must be subservient to the rich. If we are the driver, are we still the master, or is the person sitting in the back seat the master?

“There is no use shouting ‘ketuanan Melayu‘ if we are the kuli and not the master,” he said.

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Unless the bumiputeras work to change their attitude of wanting to make an easy profit, Mahathir cautioned that they will continue to fall behind other ethnic groups.

Over 2,000 participants attended today’s congress organised by the Economic Affairs Ministry at the Kuala Lumpur Convention Centre.

Also present were Economic Affairs Minister Mohamed Azmin Ali, who moderated a dialogue session with stakeholders, Mahathir’s wife Dr Siti Hasmah Mohd Ali, Dewan Rakyat Speaker Mohamad Ariff Md Yusof, cabinet ministers as well as various Menteris Besar.

The Economic Affairs Ministry previously said that today’s congress is part of its constructive engagement with bumiputera stakeholders, and will be the basic platform for the government’s efforts to formulate a new empowerment agenda for the community.


RELATED REPORTS

Can bumis compete with new wave of China nationals – asks PM

Malaysia: Protect our Financial and Economic Resilience


August 29, 2018

Malaysia: Protect our Financial and Economic Resilience

by Martin Khor

http://www.thestar.com.my

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As we found out in the 1997-99 financial crisis, and as the Turkey implosion is now reminding us, it is crucial to defend our economic independence, and that can be done only by keeping out of a debt crisis.

IT’S a few days more to National Day. It’s a good time to remember that nothing is more precious than our independence, where we have the right and means to determine our own economic and social policies.

With that freedom and space, the country and its leaders must then make and implement good policies and practices that improve the people’s lives and well-being.

This is easier said than done. A wrong turn on the road can land the country in trouble, and its independence can even be snatched away.

The new Pakatan Harapan government has highlighted how government borrowings had increased explosively under the previous regime, until the country was on the brink of a debt crisis.

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Averting that trap has correctly been a top priority of the government during and after its first 100 days.

Prime Minister Tun Dr Mahathir Mohamad’s trip to China last week was aimed at addressing the high cost of three projects. Their cancellation or postponement results in compensation costs, but these will be less wasteful than pouring money into the over-priced projects.

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Malaysia’s ex-Finance Minister thinks that he is a Fiscal Genius. He has been charged with corruption and abuse of power.

There is also the 1MDB saga and many other direct or government guaranteed loans that went sour. If loans are taken for projects that do not yield enough revenue to service the debts, they add to the problem. And if the total loans are huge, the government is in trouble.

Since the federal government debt has reached one trillion ringgit or more, it is imperative to bring it down to a manageable level. Not an easy job at all.

Already a large part of the government budget must be set aside to service the debt, with less available for operations and development.

Some of the Pakatan manifesto promises will have to take longer to fulfil because there is less money. Many understand that saving the country from economic disaster is more important than having goodies now that we can’t afford.

For example, cancelling all highway tolls just can’t be done now, and may be unwise even later; at the least, it should be selectively done. Revenue should be raised for example by increasing “sin taxes” on cigarettes and gambling, and by new taxes on sugar-filled products, including soft drinks.

Many projects on the drawing board or in the pipeline should be reviewed. Even some projects that make sense may need to be postponed. Those that are not economically feasible – they can’t yield sufficient revenue – should not be implemented, unless they are really urgently needed.

Besides their overly high cost estimates, some projects have projected revenues that are unrealistically hiked up, for example, those that rely on over-blown estimates of the numbers of people who will use a highway or a train service.

In designing and carrying out reforms, it is important that the government ensures that the costs of policy adjustments do not fall on the bottom sections of society.

While the focus has been on government debt, it is also necessary to carefully manage the country’s external debt. These are debts owed to foreigners and foreign institutions by the government and its enterprises, private companies and banks.

In recent years, the country’s external debt has been growing, reaching RM936bil at end-June. This comprises the external debt of government (RM184bil), banks (RM354bil), other institutions including companies (RM387bil) and monetary authorities (RM12bil).

About two-thirds of the total debt is denominated in foreign currency (mainly US dollars) and a third (mainly government bonds) are ringgit-denominated.

Though the external debt level is high, Malaysia currently does not have a problem servicing it. The international reserves – RM421.7bil at end-June – are sufficient to cover the debt servicing costs. There is a need, however, to keep close tabs because the international situation has darkened considerably. And many countries, Malaysia included, are affected.

A “perfect storm” has in fact started. The United States has stopped pumping billions into its banking system, thus reversing its quantitative easing policy. So there is now less liquidity and US interest rates are rising.

Funds that surged into emerging economies are moving out. Currencies of developing countries are declining against the US dollar, and their stock markets are declining. The trade war is adding to the gloom.

All that’s needed is a trigger to set off a chain of events. This seemed to have arrived with the currency crisis in Turkey.

The country was already very vulnerable, with a big current account deficit, large external debt, low foreign reserves and high inflation. When the US doubled the tariffs on Turkey’s steel, that triggered an exodus of funds from Turkey and a fall in its currency, which has lost 40% of its value against the US dollar since the start of the year.

The Turkish government is now in full battle mode, trying to keep the country from having to go to the International Monetary Fund for a bailout. It is in a tough fight trying to defend its economic independence.

Spooked by the Turkey crisis, on top of the trade war, foreign funds in the past few weeks have been leaving many developing countries, including Malaysia.

The dreaded term “contagion effect” is increasingly used to describe the situation. Most vulnerable are countries that have high external debts, current account deficits and low reserves. Fortunately Malaysia is not in the frontline of these crisis-prone countries.

But there is global turbulence on the near horizon, and we should prepare for it, on top of the efforts to control the domestic problems of government debt, budget deficit, unviable projects, a high cost of living and a host of social issues.

As we found out in the 1997-99 financial crisis, and as the Turkey implosion is now reminding us, it is crucial to defend our economic independence, and that can be done only by keeping out of a debt crisis.

A country forced to take a bailout loan from the IMF faces conditions that are often humiliating and inappropriate. It loses its independence.

So let us happily celebrate the Merdeka anniversary, for there is much to be glad about this year with a new government that brings the promise of a New Malaysia.

But let us also remind ourselves of the importance of retaining enough freedom to make our own policies, and to ensure we do make the right policies to maintain and defend our economic independence and national sovereignty.

Martin Khor is adviser of the Third World Network. The views expressed here are entirely his own.

 

Protectionism for Liberals


August 21, 2018

Protectionism for Liberals

The ability of companies to allocate jobs globally changes the nature of the discussion about the “gains from trade.” In fact, there are no longer guaranteed “gains,” even in the long run, to those countries that export technology and jobs.

 

LONDON – Liberal revulsion at US President Donald Trump’s mendacious and uncouth politics has spilled over into a rigid defense of market-led globalization. To the liberal, free trade in goods and services and free movement of capital and labor are integrally linked to liberal politics. Trump’s “America First” protectionism is inseparable from his diseased politics.

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But this is a dangerous misconception. In fact, nothing is more likely to destroy liberal politics than inflexible hostility to trade protection. The upsurge of “illiberal democracy” in the West is, after all, the direct result of the losses suffered by Western workers (absolutely and relatively) as a result of the relentless pursuit of globalization.

Liberal opinion on these matters is based on two widespread beliefs: that free trade is good for all partners (so that countries that embrace it outperform those that restrict imports and limit contact with the rest of the world), and that freedom to trade goods and export capital is part of the constitution of liberty. Liberals typically ignore the shaky intellectual and historical evidence for the first belief and the damage to governments’ political legitimacy wrought by their commitment to the second.

Countries have always traded with each other, because natural resources are not equally distributed round the world. “Would it be a reasonable law,” asked Adam Smith, “to prohibit the importation of all foreign wines, merely to encourage the making of claret and burgundy in Scotland?” Historically, absolute advantage – a country importing what it cannot produce itself, or can only produce at inordinate cost – has always been the main motive for trade.

But the scientific case for free trade rests on David Ricardo’s far more subtle, counter-intuitive doctrine of comparative advantage. Countries with no coal deposits obviously cannot produce coal. But assuming that some production of a naturally disadvantaged good (like wine in Scotland) is possible, Ricardo demonstrated that total welfare is increased if countries with absolute disadvantages specialize in producing goods in which they are least disadvantaged.

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Rejection of neo-liberalism as the ideology of market fundamentalism fails to grasp its social validity. 

http://logosjournal.com/2017/authoritarian-liberalism-class-and-rackets/

The theory of comparative advantage greatly widened the potential scope of beneficial trade. But it also increased the likelihood that less efficient domestic production would be destroyed by imports. This loss to a country’s production was brushed aside by the assumption that free trade would allocate resources more efficiently and raise productivity, and thus the growth rate, “in the long run.”

But this is not the whole story. Ricardo also believed that land, capital, and labor – what economists call the “factors of production” – were intrinsic to a country and could not be moved round the world like actual commodities. “Experience … shows,” Ricardo wrote,

“that the fancied or real insecurity of capital, when not under the immediate control of its owner, together with the natural disinclination which every man has to quit the country of his birth and connexions, and intrust himself, with all his habits fixed, to a strange government and new laws, check the emigration of capital. These feelings, which I should be sorry to see weakened, induce most men of property to be satisfied with a low rate of profits in their own country, rather than seek a more advantageous employment for their wealth in foreign nations.”

This prudential barrier to capital export fell as secure conditions emerged in more parts of the world. In our own time, the emigration of capital has led to the emigration of jobs, as technology transfer has made possible the reallocation of domestic production to foreign locations – thus compounding the potential for job losses.

The economist Thomas Palley sees the reallocation of production abroad as the distinguishing feature of the current phase of globalization. He calls it “barge economics.” Factories float between countries to take advantage of lower costs. A legal and policy infrastructure has been built to support offshore production that is then imported to the capital-exporting country. Palley rightly sees offshoring as a deliberate policy of multinational corporations to weaken domestic labor and boost profits.

The ability of companies to allocate jobs globally changes the nature of the discussion about the “gains from trade.” In fact, there are no longer guaranteed “gains,” even in the long run, to those countries that export technology and jobs.

At the end of his life, Paul Samuelson, the doyen of American economists and co-author of the famous Stolper-Samuelson theorem of trade, admitted that if countries like China combine Western technology with lower labor costs, trade with them will depress Western wages. True, citizens of the West will have cheaper goods, but being able to purchase groceries 20% cheaper at Wal-Mart does not necessarily make up for wage losses. There is no assured “pot of gold” at the end of the free-trade tunnel. Samuelson even wondered whether “a little inefficiency” was worth suffering to protect things which were “worth doing.”

In 2016, The Economist conceded that “short-term costs and benefits” from globalization are “more finely balanced than textbooks assume.” Between 1991 and 2013, China’s share of global manufacturing exports increased from 2.3% to 18.8%. Some categories of American manufacturing production were wiped out. The United States, the authors averred, would gain “eventually.” But the gains might take “decades” to be realized, and would not be equally shared.

Even economists who concede the losses that come with globalization reject protectionism as an answer. But what is their alternative? The favored remedies are somehow to slow down globalization, giving labor time to re-skill or move to more productive activities. But this is scant comfort to those stuck in the rust belts or decanted into low-productivity, low-paid jobs.

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Liberals should certainly exercise their right to attack Trumpian politics. But they should refrain from criticizing Trumpian protectionism until they have something better to offer.