EU- Cambodia Relations–The EU should do the right Thing– Respect Cambodia’s sovereignty


March 8, 2019

EU- Cambodia Relations

The EU should do the right thing– Respect Cambodia’s sovereignty

By Kimkong Heng
Image result for cambodia and eu
The European Union’s coercive measures or scare tactics do not seem to yield intended results as the Cambodian government refuses to give in to the EU’s demands for improving core human rights and labour rights in the Kingdom. Xinhua

Though the European Union could succeed in withdrawing Cambodia’s EBA status, the EU also has to be prepared to accept the fact that it could fail to reverse the perceived deterioration of human rights and democracy in the country, argues Kimkong Heng. 

The European Union (EU) and Cambodia are now engaged in what can be seen as a tug of war for influence and sovereignty, respectively. Despite unequal power relations, both sides are apparently trying to strengthen their stances against one another.

While the EU demands that the Cambodian government reverses Cambodia’s democratic drift and improve the country’s human and political rights situation, the Kingdom wants the EU not to interfere in its internal affairs. Both parties appear not to understand or seemingly ignore each other’s calls and look set to proceed with their own agendas, understanding, and assumptions.

..

In response to Cambodia’s crackdown on dissent and the dissolution of the leading opposition party, the Cambodia National Rescue Party (CNRP), the EU announced last October that it would begin a formal process to withdraw its Everything But Arms (EBA) trade scheme from Cambodia. On February 11, it kicked off a six-month period of intensive monitoring and engagement that could lead to the temporary suspension of Cambodia’s preferential, tariff-free access to the EU market. The EU stated that the removal of Cambodia’s EBA status is only “the option of last resort”.

Cambodia has firmly responded to the EU’s EBA threat. The country has condemned the EU’s demands, regarding it as an “extreme injustice” and “acts of interference” in Cambodia’s domestic affairs. Prime Minister Hun Sen has repeatedly maintained that Cambodia will not “exchange national sovereignty with aid”.

As it now stands, the EU seems to have no other choice but to eventually withdraw its trade privileges from Cambodia, if no concrete measures are taken by the Cambodian government to address the EU’s concerns and demands. The Kingdom, however, is presented with limited options and the lack of willingness to manage the EU’s demands is because Cambodia views such actions as a practice of “double standards”.

Thus, while the world’s largest trading bloc criticizes the Southeast Asian nation for engaging in human rights violations, the latter sees such criticism as an injustice and interference. Each side no doubt sees the same issue from different angles, the result of which is a failure to engage in channels of dialogue at both bilateral and multilateral levels.

In this regard, it seems sensible that both parties take a step back and rethink their own approach. The EU’s coercive measures or scare tactics do not seem to yield intended results as the Cambodian government refuses to give in to the EU’s demands for improving core human rights and labour rights in the Kingdom. Cambodia’s “sovereignty-maintaining approach” does not seem to turn out to be effective, either.

..

If both sides proceed with their plans and stick to their own terms, it will lead to a lose-lose scenario that is in no one’s interests. Clearly the suspension of Cambodia’s EBA status will definitely damage relations between Cambodia and the EU. Cambodia will draw closer to China, its closest ally and largest economic and military benefactor, at the expense of its relations with the West. The EU, together with the United States, surely would not want Cambodia to alienate them and fully embrace Beijing.

Cambodia also does not want to break with the West, but the incumbent government led by the Cambodian People’s Party (CPP) seems to have other more important priorities than its diplomatic relations with the EU and the US. Political domination and maintenance of peace and sovereignty are seen as number one priorities for the CPP-led government.

As argued in a recent article in the Bangkok Post, the CPP is “willing to lose the EBA status in exchange for getting rid of the opposition party” so that its dominance in Cambodian politics will not be undermined. This statement has implications for the EU.

Rather than moving ahead with its forceful approach to suspend Cambodia’s EBA trade benefits, the EU should perhaps consider alternative measures that would have consequences for the ruling elites, not the ordinary Cambodians. It is agreeable that withdrawing Cambodia’s EBA privileges will most likely have negative impacts on nearly one million Cambodian garment workers, most of whom are women. The chance that such measures would adversely affect the financial standing of the CPP elites is slim.

Thus, it is arguably more judicious that the EU direct its actions toward the CPP leadership rather than threaten the mainstay of Cambodia’s economy. The EU should try to understand Cambodia and what Hun Sen’s government wants and is willing to lose. For the time being, losing the EBA benefits perhaps does not cause great concern for the Cambodian government in the same way as losing votes and political domination.

..

Whether one likes it or not, a warning by Prime Minister Hun Sen that the withdrawal of EBA scheme from Cambodia could amount to the West’s third mistake may become true, if the EU succeeds in withdrawing the Kingdom’s EBA status but fails to reverse the perceived deterioration of human rights and democracy in this Asian country.

The EU, taking into account this scenario, may consider rethinking its approach to dealing with Cambodia. Instead of jeopardizing its relations with the Kingdom and compelling this small and open economy to have no hesitation in further embracing China, the EU as a major international actor has the responsibility to bring about hope and prosperity to people of all nations, and Cambodians are no exception.

Kimkong Heng is a doctoral candidate at the University of Queensland and a recipient of the Australia Awards Scholarship.

 

Everything You Know About Global Order Is Wrong


January 31, 2019

Everything You Know About Global Order Is Wrong

If Western elites understood how the postwar liberal system was created, they’d think twice about asking for its renewal.

 
 
 
Image result for the imf and world bank

Klaus Schwab, impresario of the World Economic Forum, released a manifesto in the run-up to this year’s annual meeting at Davos, Switzerland, in which he called for a contemporary equivalent to the postwar conferences that established the liberal international order.

“After the Second World War, leaders from across the globe came together to design a new set of institutional structures to enable the post-war world to collaborate towards building a shared future,” he wrote. “The world has changed, and as a matter of urgency, we must undertake this process again.” Schwab went on to call for a new moment of collective design for globalization’s alleged fourth iteration (creatively labeled Globalization 4.0).

Image result for the wef DAVOS

 

Schwab is not the first to make this kind of appeal. Since the financial crisis, there have been repeated calls for a “new Bretton Woods”—the conference in 1944 at which, in Schwab’s words, “leaders from across the globe came together to design” a financial system for the postwar era, establishing the International Monetary Fund (IMF) and the World Bank in the process. It was the moment at which U.S. hegemony proved its most comprehensive and enlightened by empowering economist-statesmen, foremost among them John Maynard Keynes, to lead the world out of the postwar ruins and the preceding decades of crisis. Under Washington’s wise leadership, even rancorous Europe moved toward peaceful and prosperous integration.

This is a story with wide support in places like Davos. It’s also one that deserves far more scrutiny. Its history of the founding of the postwar order is wrong; more important, its implicit theory about how international order emerges—through a collective design effort by world leaders coming together to reconcile their interests—is fundamentally mistaken. What history actually suggests is that order tends to emerge not from cooperation and deliberation but from a cruder calculus of power and material constraints.

 

Bretton Woods may have been a conference of experts and officials, but it was first and foremost a gathering of a wartime alliance engaged in the massive mobilization effort of total war. The conference met in July 1944 in the weeks following D-Day and the final Soviet breakthrough on the Eastern Front. As a wartime rather than a postwar meeting, disagreements were minimized. Though the conference was about the future order of the international economy and though the aim of the talks was to link national economies back together, the building blocks were centralized, state-controlled war economies. The Bretton Woods negotiators were government officials, not businessmen or bankers. As they had done since the collapse of the global financial system in the early 1930s, central bankers played second fiddle to treasury officials. The Americans who were bankrolling the Allied war effort called the shots.

Image result for Keynes and friends at Bretton Woods

The basic monetary vision of Bretton Woods was to create order by establishing fully convertible currencies at fixed exchange rates, with the dollar pegged to gold. But the tough conditions of the Bretton Woods monetary architecture set by the United States proved far too demanding for war-weakened European economies. When Britain, the least damaged economy in Europe, tried to implement free convertibility of pounds into dollars, its attempt collapsed at the first hurdle in 1947; the social democratic Labour Party government in London quickly moved to stop the subsequent drain of precious dollars by reimposing exchange controls and tightening import quotas. Meanwhile, the grand design for a free trade order embodied by the Havana Charter and the International Trade Organization fell afoul of the U.S. Congress and was thus stopped in its tracks. The General Agreement on Tariffs and Trade (GATT) was its cumbersome and slow-moving replacement.

The talk of a connection between the present and the Bretton Woods moment is legitimated perhaps above all by the claimed continuity of the IMF and the World Bank, which were duly set up in December 1945. But beyond institutional titles, this supposed continuity is largely false. Within a year of the founding of its key institutions, almost the entire global agenda of Bretton Woods was put on ice. Already in 1946 the Soviet Union absented itself from the formation of the IMF and the World Bank.

Image result for Milton FRIED

Milton Friedman

With the Cold War paralyzing the U.N. institutions that had originally been intended to frame Bretton Woods, what emerged under U.S. hegemony was a far narrower postwar order centered on the North Atlantic. The Marshall Plan of 1948 was not so much a complement to Bretton Woods as an acknowledgement of its failure. For true liberals in both the United States and Europe, who hankered after the golden age of globalization in the late 19th century, the resulting Cold War economic order was a profound disappointment. The U.S. Treasury and the first generation of neo-liberals in Europe fretted against the U.S. State Department and its interventionist economic tendencies. Mavericks such as the young Milton Friedman—true advocates of free markets in the way we take for granted today—demanded a bonfire of all regulations. They insisted that rather than exchange rates being fixed, currencies should be allowed to float with their value defined by competitive markets. In the 1950s, Friedman could be dismissed as eccentric.

The reality of the liberal order that supposedly came into existence in the postwar moment was the more or less haphazard continuation of wartime controls. It would take until 1958 before the Bretton Woods vision was finally implemented. Even then it was not a “liberal” order by the standard of the gilded age of the 19th century or in the sense that Davos understands it today. International mobility of capital for anything other than long-term investment was strictly limited. Liberalization of trade also made slow progress. The gradual abolition of exchange controls went hand in hand with the lifting of trade quotas. Only when these more elementary limitations on foreign trade were removed did tariff negotiations become relevant. GATT’s lumbering deliberations did not begin making major inroads until the Kennedy round of the 1960s, 20 years after the end of the war. And rising global trade was a mixed blessing. Huge German and Japanese trade surpluses put pressure on the Bretton Woods exchange rate system. This was compounded in the 1960s by the connivance of U.S. Treasury and U.K. authorities in enabling Wall Street to sidestep financial repression and launch the unregulated euro-dollar market, based in bank accounts in London.

By the late 1960s, barely more than 10 years old, Bretton Woods was already in terminal trouble. And when confronted with demands for deflation, U.S. President Richard Nixon reverted to economic nationalism. Between 1971 and 1973, he unhitched the dollar from gold and abandoned any effort to defend the exchange rate, sending the dollar plunging and helping to restore something closer to trade balance. If our own world has a historic birthplace, it was not in 1945 but in the early 1970s with the advent of fiat money and floating exchange rates. The unpalatable truth is that our world was born not out of wise collective agreement but out of chaos, unleashed by America’s unilateral refusal any longer to underwrite the global monetary order.

As the tensions built up in the 1960s exploded, foreign exchange instability contributed to a historically unprecedented surge in inflation across the Western world. We now know that this era of inflationary instability would be concluded by the market revolution and what Ben Bernanke dubbed the “great moderation.” But once again hindsight should not blind us to the depth of the crisis and uncertainty prevailing at the time. The first attempts to restore order were not by way of the market revolution but by the means of corporatism—direct negotiations among governments, trade unions, and employers with a view of limiting the vicious spiral of prices and wages. This promised a direct control of inflation by way of price setting. But its effect was to stoke an ever-greater politicization of the economy. With left-wing social theorists diagnosing a crisis of capitalist democracy, the trilateral commission warned of democratic ungovernability.

What broke the deadlock was not some inclusive conference of stakeholders. The stakeholders in the 1970s were obstreperous trade unions, and that kind of consultation was precisely the bad habit that the neoliberal revolutionaries set out to break. The solution, as U.S. Federal Reserve chair Paul Volcker’s recent memoirs make embarrassingly clear, was blunt force wielded by the Fed. Volcker’s unilateral interest rate hike, the sharp revaluation of the dollar, de- industrialization, and the crash of surging unemployment dealt a death blow to organized labor and tamed inflationary pressure. The Volcker shock established so-called independent central bankers as the true arbiters of the new dispensation.

They put paid to what Margaret Thatcher referred to as the “enemy within.” But the global victory of the liberal order required a more far-reaching struggle. The world of the market revolution of the 1980s was still divided between communism and capitalism, between first, second, and third worlds. The overcoming of those divisions was a matter of power politics first and foremost, negotiation second. The United States and its allies in Europe raised the pressure on the Soviet Union, and after a period of spectacularly heightened tension, Mikhail Gorbachev chose to de-escalate, unwittingly precipitating the union’s collapse.

The truth is that the postwar moment that the Davos crowd truly hankers after is not that of 1945 but the aftermath of the Cold War, the moment of Western triumph. It was finally in 1995 that the Bretton Woods vision of a comprehensive world trade organization was realized. A sanitized version of this moment would describe it as a third triumph of enlightened technocracy. After Bretton Woods and the defeat of inflation, this was the age of the Washington Consensus. But as in those previous moments, its underpinnings were power politics: at home the humbling of organized labor, abroad the collapse of Soviet challenge and the decision by the Beijing regime to embark on the incorporation of China into the world economy.

Since 2008, that new order has come under threat from its own internal dysfunction, oppositional domestic politics, and the geopolitical power shift engendered by truly widespread convergent growth. The crisis goes deep. It is not surprising that there should be calls for a new institutional design. But we should be careful what we wish for. If history is anything to go by, that new order will not emerge from an enlightened act of collective leadership. Ideas and leadership matter. But to think that they by themselves found international order is to put the cart before the horse. What will resolve the current tension is a power grab by a new stakeholder determined to have its way. And the central question of the current moment is whether the West is ready for that. If not, we should get comfortable with the new disorder.

Adam Tooze teaches history at Columbia University. His latest book is Crashed: How a Decade of Financial Crises Changed the World. @adam_tooze

Everything You Know About Global Order Is Wrong

 

The Case for Compensated Free Trade–The CFT Plan


November 17, 2018

The Case for Compensated Free Trade–The CFT Plan

by

https://www.project-syndicate.org/

Image result for dani rodrik trilemma

 

According to Harvard’s Dani Rodrik, the nation-state, democracy, and globalization are mutually irreconcilable: we can have any two, but not all three simultaneously. In fact, there may be a solution to Rodrik’s “trilemma.”

LONDON– Almost all liberals support globalization and oppose economic nationalism. They ignore the mounting evidence that, in its current form, globalization is dangerously incompatible with democracy.

Image result for dani rodrik the globalization paradox

In his 2011 book The Globalization Paradox, Harvard’s Dani Rodrik says that the nation-state, democracy, and globalization are mutually irreconcilable: we can have any two, but not all three simultaneously (he calls this a “trilemma”). All over the world, the “nation” has been revolting against globalization in the name of democracy.

That became clear this year when US President Donald Trump imposed the first of a widening set of tariffs against Chinese goods, with China retaliating in kind. Trump has also torn up two major international trade treaties and threatened to withdraw from the World Trade Organization.

The trigger for America’s turn to economic nationalism is its widening trade deficit – $566 billion in 2017, and growing – as the US economy recovers. But the deeper reason is the correct perception that the resulting current-account deficits are not “benign” when they are being financed by inflows of short-term capital, or “hot” money.

A current-account deficit means that a country is importing more than it is exporting. And those excess imports can lead to a net loss of “good” jobs. Six million manufacturing jobs disappeared in the first decades of the 2000s. The Rust Belt made Trump president. “It’s time to rebuild Michigan, and we are not letting them take your jobs out of Michigan any more,” he told cheering crowds in Detroit in 2016.

Trump’s protectionism also has a geopolitical root. Metal imports have led to the closing of many enterprises that might be needed for defense. China’s strategic “Made in China 2025” plan is a high-tech industrial policy aimed at transforming China into a dominant global leader in the industries of the future. It significantly relies on stealing advanced technologies from the United States. If MIC25 is successful, the US will have a depleted economic and political future.

In strictly economic terms, the political character of one’s trading partners should not matter. However, in a world of strategic competition, international commerce can be, and usually is, an instrument of policy, and its use in that context should not be denied simply because it breaches the sacred principle of free trade. As Friedrich List, the nineteenth-century pioneer of economic nationalism, pointed out, free trade assumes a peaceful world.

Selective tariffs can be useful for protecting defense-related industries or to prevent other countries from stealing cutting-edge technologies. But as an overall trade policy, tariffs are crude and inexact. The US will incur high costs and might end up without a substantially lower trade deficit or other meaningful benefits.

Is there a way to limit free trade that does not lead to trade wars? The economist Vladimir Masch has advocated an ingenious “compensated free trade” (CFT) plan as a way to achieve legitimate protectionist aims without disrupting the world economic system.

Under this plan, policymakers would establish a ceiling for the trade deficit each year and impose limits on trading partners’ surpluses. (Any products needed from a surplus partner would be exempted from the partner’s export limit.) In the US case, this ceiling would largely affect China, Mexico, Japan, and Germany, which contributed $375 billion, $71 billion, $69 billion, and $64 billion, respectively, to the overall trade deficit in 2017.

Under CFT, a trade surplus country can reduce its exports to the set limit. But it could also exceed its export quota if its government paid the partner government a fine equal to the value of the excess exports, either collecting the necessary sum from its export producers or using its currency reserves. (The receiving government could use the fines to enlarge its own investment programs.) But if the surplus country tried to exceed its export limit without paying the fine, its surplus exports would be blocked.

This “smart” protectionism has several advantages over crude tariffs. First and foremost, it would automatically prevent trade wars. Because CFT imposes limits just on the trader’s surplus, any attempt by the surplus country to decrease the value of its imports from the US would automatically decrease the value of its allowed exports.

Second, CFT would confront, in one stroke for each partner, government subsidies, price and currency manipulations, and the other dirty tricks of international trade. In contrast to prolonged and often fruitless haggling over trade treaties, results would be obtained immediately.

Third, by re-balancing the financial and trading arrangements of the global economy’s participants, CFT would represent a step toward addressing its current dysfunction. CFT is not a complete solution, because it leaves open the question of who should adjust to whom. A reformed global payments system, which mandates symmetrical adjustment of global imbalances, would need to tackle this issue.

Fourth, because of America’s leverage, its adoption of CFT would “nudge” reluctant trade surplus countries to accept such a payments system. Global finance would have to operate within the limits that a balanced payments system establishes.

Fifth, in terms of economic benefits to the US, implementing CFT would stimulate the return of off-shored enterprises and jobs, thus restoring the country’s industrial potential and social balance.

From a historical perspective, CFT essentially amounts to a unilateral activation of the scarce-currency clause (Article 7) of the Bretton Woods Agreement, which allowed the International Monetary Fund to declare “scarce” the currency of a country running a persistent trade surplus, permitting other members to discriminate against its goods. It is consistent with Article XII of the General Agreement on Tariffs and Trade (the WTO’s predecessor), which states that any country “in order to safeguard its external financial position and its balance of payments, may restrict the quantity or value of merchandise permitted to be imported.”

Inshort, CFT addresses trade deficits, overcomes the limitations of tariffs, fights trade manipulation, corrects current mainstream economic theory, and is a necessary step toward re-establishing a feasible global payments system. In a nutshell, it overcomes the Rodrik trilemma: one can have the nation-state, democracy, and globalization at the same time.

But only one nation-state, the US, has the clout to deliver this. By doing so, it would stop the global stampede to a virulent form of economic nationalism. For that reason alone, the Masch plan deserves serious consideration.

Lord Skidelsky, Professor Emeritus of Political Economy at Warwick University and a fellow of the British Academy in history and economics, is a member of the British House of Lords. The author of a three-volume biography of John Maynard Keynes, he began his political career in the Labour party, became the Conservative Party’s spokesman for Treasury affairs in the House of Lords, and was eventually forced out of the Conservative Party for his opposition to NATO’s intervention in Kosovo in 1999.

 

 

How to win the Cold War with China–Dr. Fareed Zakaria


October 15, 2018

How to win the cold war with China–Dr. Fareed Zakaria

https://www.washingtonpost.com

The Trump administration’s most significant and lasting decisions will be about U.S. policy toward China. Far more consequential than even the Supreme Court’s composition or immigration policy is whether the 21st century will be marked by conflict or cooperation between the two most prosperous and powerful countries on the planet. The last time there was such a question — when Britain confronted a rising Germany 150 years ago — it did not work out so well.

Image result for Trump vs China

Since the end of the Cold War, we have lived in an era of almost no genuine great-power competition, which has led to the emergence of a dynamic global economy and a huge expansion of international trade, travel, culture and contact. All this happened under the United States’ uncontested supremacy — military, political, economic and cultural.

That age is over. Twenty-five years ago, China made up less than 2 percent of the global gross domestic product. Today that figure is 15 percent, second only to the United States’ 24 percent. In the next decade or so, the Chinese economy will surpass the size of America’s. Already, nine of the 20 most valuable technology companies in the world are based in China. Beijing has also become far more active on the global stage, ramping up its defense spending, foreign aid and international cultural missions. Its Belt and Road Initiative, infrastructure investment in dozens of countries, will ultimately be at least seven times larger than the Marshall Plan, if not far more, in inflation-adjusted terms.

The Trump administration has many of the right instincts on China. Beijing has taken advantage of free trade and the United States’ desire to integrate China into the global system. The administration is right to push back and try to get a fundamentally different attitude from China on trade. But instincts do not make for a grand strategy.

Were Washington to be more strategic, it would have allied with Europe, Japan and Canada on trade and presented China with a united front, almost guaranteeing that Beijing would have to acquiesce. It would have embraced the Trans-Pacific Partnership as a way to provide Pacific countries an alternative to the Chinese economic system. But in place of a China strategy, we have a series of contradictory initiatives and rhetoric.

President Trump’s Trade Gangster–Peter Navarro

If there is one person in the White House whose ‘to do’ list you want to avoid, it’s Peter Navarro. They call him the ‘most dangerous’ man for the global economic order. He is radical, determined and wields enormous influence on US President Donald Trump– source–https://blogs.economictimes.indiatimes.com/letterfromwashington/peter-navarro-most-dangerous-man-for-the-global-economic-order/

In fact, the administration seems divided on the broader issue of U.S.-China relations. On one side are people such as Treasury Secretary Steven Mnuchin, who want to use tough talk and tariffs to extract a better deal from China, while staying within the basic framework of the international system. Others, such as trade adviser Peter Navarro, would prefer that the United States and China were far less intertwined. This would undoubtedly mean a more mercantilist world economy and a more tense international order. There is a similar split among geo-politicians, with the Pentagon being more hawkish (not least because it ensures huge budgets) and the State Department more conciliatory.

Vice President Pence recently gave a fiery speech that came close to declaring that we are in a new Cold War with China. An outright labeling of China as the enemy would be a seismic shift in U.S. strategy and would certainly trigger a Chinese response. It could lead us to a divided, unstable and less prosperous world. Here’s hoping the Trump administration has thought through the dangers of such a confrontational approach.

Image result for mike pence

History tells us that if China is indeed now the United States’ main rival for superpower status, the best way to handle such a challenge lies less in tariffs and military threats and more in revitalization at home. The United States prevailed over the Soviet Union not because it waged war in Vietnam or funded the contras in Nicaragua, but because it had a fundamentally more vibrant and productive political-economic model. The Soviet threat pushed the United States to build the interstate highway system, put a man on the moon, and lavishly fund science and technology.

The former head of Google China, Kai-Fu Lee, has written an important book arguing that China is likely to win the race for artificial intelligence — the crucial technology of the 21st century. He points out that China’s companies are highly innovative, its government is willing to make big bets for the long term, and its entrepreneurs are driven and determined.

Tariffs and military maneuvers might be fine at a tactical level, but they don’t address the core challenge. The United States desperately needs to rebuild its infrastructure, fix its educational system, spend money on basic scientific research and solve the political dysfunction that has made its model less appealing around the world. If China is a threat, that’s the best response.

America’s Neville Chamberlain


August 5, 2018

America’s Neville Chamberlain

 by

US President Donald Trump’s attempts to flex America’s muscles with the use of tariffs harks back to one of the darkest periods of modern history. During the Great Depression, the governments of Britain and France pursued a similar policy, unwittingly alienating would-be allies and strengthening Nazi Germany.

Image result for America's Neville Chamberlain

 

PRINCETON – When countries get nervous about their security, they often insist that they need to reduce their dependence on foreign products, shorten supply chains, and produce more goods domestically. But does protectionism really improve security? Now that the world is hovering on the brink of a full-scale trade war, we should examine some of the arguments made in favor of protectionism, and then revisit the largest trade war of the twentieth century.

There tends to be a great deal of duplicity in debates about trade. Import tariffs and other similar measures are often presented as convenient foreign-policy tools for serving the general good. But if one looks past the rhetoric, it is obvious that such measures really just reward particular constituents, and amount to an unfair form of taxation.

US President Donald Trump would argue that a trade war is a means to an end. To his mind, tariffs are a reasonable response to unfair currency practices and national-security threats. But, of course, there is also a domestic political calculus: namely, tariffs will help specific producers and constituents by making their competitors’ goods more expensive. The problem is that tariffs inevitably force domestic consumers to foot the bill for that subsidy, by paying higher prices.

Image result for America's Neville Chamberlain

There is nothing new in Trump’s assertion that, “Trade wars are good, and easy to win.” And that means we can test his claim against the historical record. When Neville Chamberlain was serving as Britain’s Chancellor of the Exchequer in 1932, he reversed his country’s century-old position as a champion of free trade. Worried about Britain’s longstanding trade deficit, he announced a new “system of Protection,” which he hoped to use “for negotiations with foreign countries which have not hitherto paid very much attention to our suggestions.”

Chamberlain concluded that it was only “prudent to arm ourselves with an instrument which shall at least be as effective as those which may be used to discriminate against us in foreign markets.” In the event, he was paving the road to World War II. His trade policy weakened Britain and strengthened Germany. And in a mere six years, his appeasement policy toward the Nazi Germany regime would reach its pinnacle with the 1938 Munich Agreement, which Hitler discarded six months later by destroying the rump Czechoslovakia and bringing it under the control of the Third Reich.

The interwar years were dominated by the fear of a German nationalist resurgence. For Western powers, containing Germany would require either an alliance system or a more ambitious collective-security pact. France preferred the former option, and advocated an arrangement in which its alliance with Poland, plus the “Little Entente” of Czechoslovakia, Romania, and Yugoslavia, would contain both Hungarian and German expansionism. Great Britain favored the second option, and saw the League of Nations as the most effective instrument for defending territorial integrity.

The lesson of the Great Depression is clear: trade wars intended to strengthen national security actually undermine it. This is especially true in the case of defensive alliances, because trade barriers force allies to forge closer ties with the very revisionist power that was supposed to be contained.–Harold James

Both approaches crashed in the Great Depression, owing primarily to France and Britain’s own protectionist policies. Both countries shifted abruptly to a policy of high tariffs and import quotas that gave preference to products from their overseas empires. The result was that Czechoslovakia’s industrial producers and Romanian and Yugoslav agricultural exporters could no longer sell to Western Europe. Instead, they became increasingly dependent – economically as well as politically – on Nazi Germany. Likewise, Poland, after fighting a customs war with Germany in the 1920s and early 1930s, entered into a non-aggression pact with the Nazi regime in 1934.

Through all of this, the League of Nations and other multilateral bodies tried to organize conferences and summits to halt the slide toward protectionism. But those talking shops all failed.

During the Great Depression, accusations of currency manipulation formed the primary impetus for protectionist measures. One hears the same sort of rhetoric today from Trump, both when he criticizes the US Federal Reserve for tightening monetary policy and when he claims – falsely – that China is artificially depreciating the renminbi.

The lesson of the Great Depression is clear: trade wars intended to strengthen national security actually undermine it. This is especially true in the case of defensive alliances, because trade barriers force allies to forge closer ties with the very revisionist power that was supposed to be contained.

Precisely this scenario is playing out today. Trump’s protectionist rhetoric is a response to the dramatic rise of China. But by launching a tariff war that also affects the European Union and Canada, Trump is making China look like a more attractive partner than the US. To be sure, Trump and European Commission President Jean-Claude Juncker have now reached a preliminary agreement to de-escalate the US-EU tariff fight. But Trump has already roiled the transatlantic alliance. Like Germany’s neighbors in the 1930s, Europe and Canada may feel as though they have no other choice than to seek out a more open – or at least more stable – partner.

Trump’s trip to Europe last month went a long way toward destroying the alliances that have maintained global stability since the end of WWII. And his self-abasing press conference with Russian President Vladimir Putin had more than a whiff of Chamberlain-style appeasement. If Trump actually wanted to make China more attractive to the world, then he could do no worse than to continue his war on free trade and the multilateral institutions that arose from the ruins of 1945.

Image result for Princeton's Dr Harold James

Harold James is Professor of History and International Affairs at Princeton University and a senior fellow at the Center for International Governance Innovation. A specialist on German economic history and on globalization, he is a co-author of the new book The Euro and The Battle of Ideas, and the author of The Creation and Destruction of Value: The Globalization Cycle, Krupp: A History of the Legendary German Firm, and Making the European Monetary Union.

 

Should Economists Make Moral Judgments?


May 26, 2018

Should Economists Make Moral Judgments?

At least since the days of John Maynard Keynes, professional economists have not had to worry too much about the moral implications of their technical work. But that is quickly changing with the global march of illiberalism, and economists now must ask themselves hard ethical questions before dispensing policy advice.

Image result for John Maynard Keynes

 

BUDAPEST – I recently attended a PhD seminar in labor economics at the Central European University in Budapest. In it, we considered whether the Hungarian government’s scheme to focus on long-term unemployment is working efficiently, and we raised a host of technical problems for the doctoral candidate to address.

But I came away disturbed by the experience, wondering whether professional economists (particularly in the West) need to reassess the moral and political context in which they conduct their work. Shouldn’t economists ask themselves whether it is morally justifiable to provide even strictly technical advice to self-dealing, corrupt, or undemocratic governments?

To be sure, reducing long-term unemployment would alleviate a social evil, and possibly ensure a more efficient use of public resources. Yet improved economic performance can shore up a bad government. This is precisely the dilemma confronting economists across a range of countries, from China, Russia, and Turkey to Hungary and Poland. And there is no reason to think that economists in the “democratic heartland” of Western Europe and North America won’t face a similar dilemma in the future.

 

Over time, economists have offered three different moral or political justifications for their technical work. The first, and simplest, justification simply assumes that the “powers that be” (the ultimate recipients of their work) are “benevolent despots” in the mold that John Maynard Keynes described (though Keynes did not consider the British bureaucrats of his time to be despots).

Image result for milton friedman

In the 1970s, this defense was challenged by economists at the other end of the Western political spectrum, who pointed out that bureaucrats were a supplier lobby like any other. As such, they will always have an interest in expanding their own individual and collective importance, regardless of whether it maximizes social benefits. This assumption led economists to become “intervention skeptics” who preferred market-based solutions for any problem where the need for regulation was not obvious.

Between these two positions, most economists have been content to ply their trade on the assumption that, however self-interested bureaucrats might be, they are subject to oversight from democratic politicians whose own self-interest is to get re-elected by keeping voters satisfied. So long as the economist’s technical solutions to policy problems are offered to officials with democratic legitimacy, according to this view, there is no cause for political or moral concern.

In fact, even economists in communist dictatorships could proffer their best technical advice with a comparatively clean conscience, because they were convinced that introducing more market-mediated outcomes would inject efficiency into planned economies and increase the sphere of individual freedom. This was true even in the Soviet Union, at least after Nikita Khrushchev’s accession to power in the 1950s.

But now, for the first time in many decades, economists must consider the moral implications of giving good advice to bad people. They are no longer exempt from the moral quandaries that many other professionals must face – a classic example being the engineers who design missiles or other weapons systems.

Image result for The IMF Building in Washington DC

 

The new moral dilemma facing economists is perhaps most stark within international financial institutions (IFIs) such as the International Monetary Fund, the World Bank, and the World Trade Organization, where economic mandarins with significant influence over public policy earn their living.

After the fall of Soviet-style communism, the IFIs admitted Russia and the other former Soviet republics (as well as China) on the assumption that they were each on a path to embracing democracy and a rules-based market economy. But now that democratic backsliding is widespread, economists need to ask if what is good for authoritarian states is also good for humanity. This question is particularly pertinent with respect to China and Russia, each of which is large enough to help shift the balance of world power against democracy.

That being the case, it stands to reason that democratic countries should try to limit the influence of authoritarian regimes within the IFIs – if not exclude them altogether in extreme cases. But it is worth distinguishing between two kinds of international institution in this context: rule-setting bodies that make it easier for countries with hostile ideological or national interests to co-exist; and organizations that create a strong community of interest, meaning that economic and political benefits for some members “spill over” and are felt more widely.

Image result for the world trade organization

Among the IFIs, the WTO is an example of the first type, as is the United Nations among international political institutions. The European Union, on the other hand, is the preeminent example of a true community of interests. And the IMF, the World Bank, and many UN agencies lie somewhere in between.

From this categorization, we can derive guidelines for economists to follow when advising authoritarian regimes. Advice or scholarship that allows authoritarian governments to avoid conflict with other countries would be morally acceptable in most cases. After all, as Winston Churchill famously observed, “jaw-jaw” is better than “war-war”. A good example would be research into how best to share scarce freshwater among Middle Eastern countries.

On the other hand, economists need to take great care when providing advice or conducting research with clear policy implications for authoritarian governments. Economists should not be in the business of helping authoritarian regimes advance nefarious ends on the back of stronger economic growth or resources saved. That probably means not giving advice to Hungarian Prime Minister Viktor Orbán on how to reduce long-term unemployment.

Needless to say, every case will be unique, and economists will have to decide for themselves. As in the past, some may even embrace authoritarianism. But for the profession as a whole, the moral consequences of translating economic analysis into practice can no longer be ignored.