“Self-sufficiency and geographic proximity will be prioritized over global integration. There will be new winners and new losers, but it is worth noting that the model of capitalism we are envisioning here—one that does not feature obscenely overcompensated CEO pay coexisting with serf-like labor and the widespread offshoring of manufacturing—has existed in different forms in the United States from 1945 to the 1980s….”
New Fault Lines in a Post-Globalized World
The following essay was originally published in the Winter 2020 edition of American Affairs journal.
Click to read the article online.
|By Marshall Auerback and Jan Ritch-Frel
November 20, 2020The economic damage of the coronavirus pandemic has upended the global economic system and, just as importantly, cast out the neoliberal orthodoxy that dominated the industrialized world for the past forty years. But Covid-19 has only accelerated a process that was already well underway, impacting trade negotiations between China, the United States, and the European Union and spreading throughout the world’s largest economies. Although many defenders of the old order lament this trend, it is as significant a shift as the dawn of the era of global trade that began with the birth of the World Trade Organization (WTO).
Economists, politicians, and pundits are often tempted to see new economic patterns through the lens of the past. Thus, we are likely to hear that we are returning to nineteenth-century mercantilism or that we will see a revival of 1970s-style stagflation. But this historical view misunderstands our present moment; the motives now are different, and so are the outcomes.
Instead, what we are experiencing is the realization by governments of developed countries that new technologies enable them to expand or initiate new and profitable production capacity closer to or within their own markets. The savings in transportation, packaging, and security costs that come with domestic production, along with benefits to regional neighbors and to domestic workforces, will increasingly enable developed nations to compete with the price of goods produced through the current internationalized trade system. American politicians from Donald Trump to Elizabeth Warren are increasingly joined by a chorus of European and Asian politicians who see the long-term political benefit of supporting this transition.
Today, the “New World Order” looks old. Offshoring and global supply chains are out; regional and local production is in. Market fundamentalism is passé; regulation is the norm. National security considerations supersede untrammeled foreign investment flows. Public health is now more valuable than just-in-time supply systems. Stockpiling and building industrial capacity suddenly make more sense, which may have future implications for the recently revived antitrust debate in the United States.
Biodata will drive the next phase of social management and surveillance, with near-term consequences for the way countries handle immigration and customs. Health care and education will become digitally integrated, as newspapers and television were ten years ago. Health care itself will increasingly be viewed as a necessary public good, rather than (as has heretofore been the case in the United States) a private right predicated on age, employment, or income levels. Each of these changes will produce political tensions both within particular political constituencies and demographic groups and also in the society as a whole, as people adapt to the new normal.
This political sea change does not represent a sudden, total conversion to “socialism”; it is simply a case of minimizing future risks and accepting that old arguments can no longer be taken for granted. For example, as Michael Sandel has argued, one is inevitably led to query the moral logic of providing coronavirus treatment to the uninsured, while leaving health coverage in “normal periods” to the market.
Internationally, there will be many positive and substantial shifts to address global public health needs, just as accords will be struck in order to mitigate climate change. And it is finally dawning on Western and Western-allied economic planners that the military expenditures that have made so-called cheap oil and cheap labor possible are vastly higher than investment in advanced research and next-generation manufacturing, much of which (such as 3D printing) has the potential to unravel existing global supply chains.
This also means that the old division between the developed world and the emerging world, which long occupied scholars and policymakers in the post–World War II period, will become increasingly stark again—particularly for those emerging economies that have hitherto attracted investment largely on the grounds of being repositories of low-cost labor and commodities. These nations will now find themselves picking sides as they seek assistance in an increasingly divided and multipolar world.
The fault lines of the next economic era have already begun to develop, creating friction with the previous international structure of finance, trade, and industry. These tensions arise not only from elites and critical industries, but from the increasing instability of the global poor and working class. The proletariat has become the “precariat”: the quality of their employment has rapidly deteriorated as countless nations have sacrificed their manufacturing capacity—and with it secure blue-collar employment—on the altar of globalization.
In the United States and Europe, there is now a staggering number of service economy workers who will quickly be politicized by the shortfalls: these workers have seen a collapse in their income and have suffered failures in their access to education and healthcare. Various political policies and corporate tactics—union busting, pension fleecing, austerity budgets—have inflicted real harm on workers and have been implemented alongside the development of new technologies that concentrate wealth away from labor. The growing gap between the wealthy and the working class has created a circumstance where ownership and profit models must be revisited if any sort of social stability is to be maintained. The current crisis will likely prompt geopolitical and economic shifts and dislocations on a scale that has not been seen since World War II.
The Death of “Chimerica” and the Rise of New Regional Production Blocs
One of the biggest casualties of the current order is likely to be the breakdown of “Chimerica,” the decades-old nexus between the American and Chinese economies, along with other leading countries’ partnerships with and dependence on Chinese manufacturing firms. While the geopolitics of blame for the origins and spread of Covid-19 continue to shake out, the process that saw a decrease in exports from China to the United States from $816 billion in 2018 to $757 billion in 2019 will accelerate and intensify over the next decade, along with a reduction in foreign direct investment (FDI). This is likely to be accompanied by the rise of regional trade blocs—notably in Asia, the Americas, and the European Union—as countries will increasingly come to recognize the inherent vulnerabilities of supply chains that are dispersed among too many far-flung parts of the globe.
In the regional bloc of the Americas, Mexico will likely remain a leading recipient of American FDI. It already has a $17 billion medical device manufacturing industry and is sure to absorb much more capacity in this sector from Chinese competitors. This change has already begun as a result of the recent United States-Mexico-Canada Agreement (usmca). The needs of the U.S. healthcare industry and other businesses in the face of Covid-19 pandemic have only accelerated the process, as the Washington Post reports: “As demand soars for medical devices and personal protective equipment in the fight against the coronavirus, the United States has turned to the phalanx of factories south of the border that are now the outfitters of many U.S. hospitals.” This increase in trade and investment between the two countries comes in addition to the thousands of assembly plants already in place in Mexico since the inauguration of the original North American Free Trade Agreement (nafta). Indeed, if jobs that had previously relocated to China continue to move toward Mexico and other Central and South American states, the resulting economic boost experienced in the latter will likely address many longstanding social and political tensions over immigration, management, currency imbalances, and black-market industries in the Americas.
The dissipation of “Chimerica” need not point to the armed conflict that some fear may be inevitable. It is likely, however, that a Cold War-style competition between the two powers may emerge as a new global fault line. In the words of David McCormick, Charles E. Luftig, and James M. Cunningham, “The economy has become the primary arena for great power competition given the integration of global markets, the emergence of transformational technologies and the pervasiveness of cyberspace.” But just as the Cold War did not preclude some degree of collaboration between the United States and the former Soviet Union, so too today there may still be areas of cooperation between Washington and Beijing, in fields such as climate policy, public health, advanced research, or weapons nonproliferation, albeit collaboration that is circumscribed by the geopolitical realities freshly exposed by Covid-19.
While this shift does not necessarily spell the sudden collapse of Chinese power or influence—it has a colossal and still-growing domestic market and is an international leader in a wide range of advanced indicators—its status as the world’s most desirable offshore manufacturing hub will face increasing challenges, as will the economic stability that came along with steady inflows of foreign capital. Additionally, Beijing is more likely to show a renewed susceptibility to domestic stress. The recent revival of last year’s Hong Kong protests in response to the introduction of a new national security law for the territory, along with the greater geopolitical profile accorded to Taiwan in the wake of its successful Covid-19 policy response, provides a hint of what is in store if the Chinese Communist Party leadership fails to respond adequately to the new realities it faces, including slower economic growth, decelerating foreign investment, and declining international prestige.
As investment flows turn back to industrialized countries, there will likely be a corresponding diminution of the global labor arbitrage emanating from the emerging world. In general, this will be a negative development for the Global South but a potentially positive one for workers elsewhere, whose wages and living standards have stagnated for decades as they lost jobs to competing low-cost overseas manufacturing centers. (The jobs that return will not be the same as those that were lost, to be sure, especially considering the decline of labor unions.) But, given that manufacturing incomes in general exceed those of the service industry, these jobs will almost certainly provide the workers of developed nations with more secure and better-paying employment.
National Security Concerns Drive Economic Nationalism
As each country adopts a sauve qui peut mentality, businesses and investors are drawing the necessary conclusions across the globe. Covid-19 has been a wake-up call, as countries trying to import medical goods to their domestic markets from existing global supply chains have experienced a shortage of air and ocean freight options. Even a long-time champion of globalization, former U.S. Treasury Secretary Lawrence Summers, has conceded, “In general, economic thinking has privileged efficiency over resilience, and it has been insufficiently concerned with the big downsides of efficiency.” Policy across the globe is therefore moving in a more overtly nationalistic direction to rectify this shortcoming.
Long viewed as major beneficiaries of globalization, several Asian governments are now manifesting distinct signs of economic nationalism. In Japan, the government recently announced its plans “to spend over $2 billion to help its country’s firms move production out of China,” according to Spectator Index. Additionally, Tokyo has also announced new restrictions on foreign investment which, at face value, seem to violate the provisions of the World Trade Organization agreement. Of course, the Japanese authorities have justified these restrictions on the vague grounds of “national security,” a term that is likely to take on a substantially different meaning in light of the coronavirus pandemic. Hence the country is unlikely to face any serious challenge from other WTO members; national-security exceptions have been around since the days of the General Agreement on Tariffs and Trade (GATT), the WTO’s foundational agreement governing international trade in goods. In prioritizing domestic industries and investment, Japan’s policy makers understand that there is little point in devising an economic reconstruction plan if there is nothing domestic left to reconstruct. The government therefore wants to avoid this scenario by tightening the investment screening regime around a dozen vital sectors (e.g., power generation, military equipment, computer software, and high tech), in effect prioritizing the claims of domestic manufacturers on national security grounds.
From Japan’s perspective, the new approach also entails limiting ties to China as part of its future global supply chain. Tokyo has begun discussions with India and Australia on launching a trilateral Supply Chain Resilience Initiative (SCRI) to reduce dependency on China.
This new posture favoring national security concerns in trade and economic policy is motivating a number of other countries to join Japan in reducing their dependence on Chinese manufacturing, particularly in the telecommunications and pharmaceutical industries. The government of Australia has banned Huawei from providing 5G equipment amid concerns that such equipment could allow Beijing to hack into the country’s power grids and other critical infrastructure. Canberra has also recently outlined additional prerogatives to scrutinize new overseas investment and even to force foreign companies to sell their assets if they pose a national security threat. These proposals come in the wake of an intensifying trade war between the governments of Beijing and Canberra, alongside “a dramatic increase in the number of foreign investment bids probed by Australia’s spy agency, ASIO, over fears that China was spying on sensitive health data,” as reported in Australian media. At the same time, Australia has seen an overhaul of thought with regard to manufacturing, which has historically not been a major sector of its domestic economy. The headlines from Australia are beginning to look a lot like the Area Development stories in the United States.
Likewise, India is phasing out equipment from Huawei and other Chinese companies from its telecoms networks, in part due to the recent escalation of its longstanding border dispute with Beijing. No formal edict has been issued, but industry executives have indicated that local telecom companies should avoid using Chinese equipment in any future investments, including in 5G networks.
Taiwan, which had been a net importer of surgical masks before the pandemic, created a state-led domestic mask manufacturing industry in just a month after registering its first Covid-19 infections last January. Taiwan’s President Tsai Ing-wen said Taipei plans to repeat that approach to foster other new industries. The country’s dominance in semiconductor chip manufacturing through the Taiwan Semiconductor Manufacturing Company is likely to make it a fulcrum point in the mounting concerns about the vulnerability of globalized supply chains and rising geopolitical tension between Washington and Beijing.
Similar concerns about foreign investment and global supply chains have intensified as a result of the coronavirus pandemic in North America. The Canadian government has recently announced plans to enhance foreign investment scrutiny “related to public health or critical supply chains during the pandemic, as well as any investment by state-owned companies or by investors with close ties to foreign governments,” according to the Globe and Mail. This attempt to disaggregate beneficial foreign investment flows from those deemed contrary to the national interest used to be a common feature of government policy in the post–World War II period. Canada established the Foreign Investment Review Agency in 1973 because of mounting concerns about rising overseas investment and the growing dominance of U.S. multinationals. Its provisions were repeatedly downgraded in subsequent decades as pressures toward globalization intensified, but its value is now being reassessed as a possible means of promoting national health policy and resiliency in manufacturing chains. Predictably, pharmaceutical independence is high on the list.
In Europe, member states have experienced competing pressures in recent years: on the one hand, the economic disruption and supply chain vulnerability that resulted from globalization have given the member states of the European Union cause to form a stronger regional bloc; on the other, economic and political nationalism is also on the rise within the several member states. In terms of trade policy, EU leadership has been publicly discussing additional subsidies and state investment in European companies to prevent Chinese buyouts or “undercutting prices,” a move that was supposed to represent a pan-European effort and lead to a strengthening of intra-EU cooperation. But the policy response to the pandemic has been increasingly driven at the national level and has highlighted internal divisions. Consequently, it is starting to fracture the EU’s single market, which has long been constructed on an intricate network of cross-border supply chains.
In response to French finance minister Bruno Le Maire’s rallying cry to the nation’s supermarkets this past March to “stock French products,” French supermarket chain Carrefour has already moved to source 95 percent of its fruits and vegetables from within the country. Le Maire also cited pharmaceuticals, the automotive sector, and aerospace as three economic sectors where the country needs to reassert sovereignty—i.e. localize production in France. Going further in a national TV interview, the finance minister said that it was “unacceptable for France to rely on China and South Korea for 80 percent of its electric battery supply, praising a new France-based battery-making facility that would come onstream in 2022.” He also approvingly cited French pharmaceutical manufacturer Sanofi for saying recently that it intends to “re-localize” some of its production back to France. French president Emmanuel Macron has likewise called for France’s “health sovereignty” after the coronavirus exposed the reliance of his country on imported medical supplies. His agriculture minister Didier Guillaume told political news channel Public Senat that “while France could not be self-sufficient in all food products, it would look at being more autonomous in areas such as plant protein,” according to a recent Reuters report.
Even Germany, which has a vibrant export sector that has long made it a beneficiary of globalization, has indicated that it wishes to move more in the direction of economic independence. In a recent interview with Der Spiegel, the country’s economy minister, Peter Altmaier, said he wanted “to support pharmaceuticals companies that are dependent for key reagents on imports from Asia to rebuild their production sites in Europe.” In broader terms, part of the government’s overall response to the Covid-19 pandemic has featured €400 billion in state guarantees to underwrite the debts of companies affected by the turmoil. A goal of this package is to prevent a “bargain sale of German economic and industrial interests,” according to Altmaier.
Considerations of economic nationalism are also driving a shift in Britain’s negotiating stance in its current Brexit trade negotiations with the EU. The UK clearly has chosen to prioritize national sovereignty over frictionless free trade with its former single-market partners, even at the cost of a so-called hard Brexit—which at this writing appears to be the likeliest outcome of the negotiations. The EU’s single market rules preclude state aid to specific industries if it undermines the operation of the single market. But the UK’s chief negotiating officer, David Frost, has made it clear that the ability to break free from the EU’s rulebook was essential to the purpose of Brexit, even if that meant reverting to the less favorable WTO trade relationship that exists for other non-EU countries. James Forsyth, a columnist for the Spectator, notes that this freedom has taken on a new importance in the wake of a global pandemic: “EU law . . . denies to member states what one cabinet minister refers to as the ‘geostrategic premium’ of encouraging domestic production of personal protective equipment. In the single market, the NHS cannot buy solely from British suppliers to try to build up a domestic manufacturing base; it has to accept bids from any company based in the EU.”
“Buy American” Becomes Bipartisan
Over the past forty years, this kind of overt economic nationalism, especially regarding domestic manufacturing capabilities, has generally been eschewed by the U.S. government—at least until Donald Trump entered the White House. In part, the unique, hegemonic position of the United States made it seem unnecessary.
But national security considerations have still occasionally superseded America’s default stance in favor of global free trade. Such considerations lay at the origin of Sematech, a government-industry consortium created in the 1980s to successfully revitalize American semiconductor manufacturing, after the Pentagon deemed it to be a strategically key industry. The Sematech consortium represented a great success in national industrial planning, as it enabled the United States to reestablish its global dominance in high-end semiconductor production and design. Another example, even more germane to the current pandemic, is a new ventilator developed entirely in New York in less than a month.
Today, formulating sensible economic-nationalist policy also entails examining why American companies went offshore in the first place, and under what conditions they might be likely to return. Research and development tax credits alone are unlikely to induce the requisite shift, as these can easily be matched by other governments. The state can and must drive the reshoring process in other ways: local content requirements, tariffs, quotas, and/or government procurement requirements. And with a budget of over $750 billion, the U.S. military will likely play a role, as it too ponders disruptions in equipment procurement from overseas supply chains.
National security considerations in the semiconductor industry have been revived in the wake of the Trump administration’s growing dispute with Chinese 5G telecommunications equipment maker Huawei. The U.S. government is working to limit Huawei’s access to technology and to global markets. The Commerce Department has now mandated that any semiconductor chip manufacturer that uses any U.S. equipment, IP, or design software will require a license to ship its products to Huawei. This decision has forced the world’s biggest chipmaker, the Taiwan Semiconductor Manufacturing Company (TSMC), to stop taking fresh orders from Huawei, as it uses U.S. technology in its own manufacturing processes. According to Reuters, “The administration will also add 38 Huawei affiliates in 21 countries to the U.S. government’s economic blacklist, the sources said, raising the total to 152 affiliates since Huawei was first added in May 2019.” As in the case of TSMC, many Asian, European, and domestic Chinese chip developers may all have to abide by the rules if their chip development involves U.S. software or technologies. The number of firms affected by this rule is potentially vast, including mobile chip developer MediaTek, image sensor provider Sony, sensor supplier STMicroelectronics, as well as key memory chip manufacturers Samsung Electronics, SK Hynix, Kioxia, and Nanya Tech. Paradoxically, the Trump administration has exploited preexisting global supply connections in the furtherance of a more robust form of economic nationalism.
These efforts in trade policy are being mirrored at the legislative level. The U.S. Congress is taking concrete steps to bring semiconductor manufacturing back home, with the introduction of Senator Tom Cotton’s new bill supporting the domestic production of semiconductors, the American Foundries Act of 2020. This bill proposes spending up to $25 billion in three major categories: $15 billion for commercial microelectronics manufacturing, $5 billion for defense microelectronics grants, and a final $5 billion on R&D spending to secure U.S. leadership in microelectronics. Support for the bill is notably bipartisan: Cotton’s proposed legislation has been cosponsored by Senate minority leader Chuck Schumer (D), as well as Senators Susan Collins (R), Kirstin Gillibrand (D), Josh Hawley (R), Angus King (I), Jack Reed (D), James Risch (R), and Marco Rubio (R). Likewise, President-elect Joe Biden has unveiled a “Buy American” economic recovery plan, calling for the U.S. government to spend $400 billion on American products and services to increase demand and $300 billion on research and development for new technologies. The proposal also calls for tighter enforcement of existing “Made in America” laws to make it more difficult for companies to exploit loopholes.
The same attitude is now visible with regard to the pharmaceutical industry, and will likely work to the detriment of China and India, as we have already seen in other parts of the world. In July, Senator Elizabeth Warren introduced the sweeping Pharmaceutical Supply Chain Defense and Enhancement Act, demonstrating that the U.S. political establishment is beginning to reach a consensus on issues of economic national security—it is no longer the sole province of Trump’s “America First” campaign. “To defeat the current Covid-19 crisis and better equip the United States against future pandemics, we must boost our country’s manufacturing capacity,” Warren said, characterizing the result of decades of policy to offshore economic production as an “overreliance on foreign countries.” Warren’s warnings take on new force in light of Beijing’s threat to restrict American access to medical supplies in retaliation for intensifying U.S. regulations on Huawei.
Rethinking the WTO?
Naturally, if the United States pursues policies of this nature, it will reinforce the actions already undertaken in other parts of the world, which in turn will accelerate the trend toward regionalization in trade. What is more striking in the context of U.S. policy is that this reassessment of the benefits of globalization is running in parallel with a reconsideration of the global institutions that fostered and facilitated the drive toward globalization in the first place. The latest example of this new attitude can be seen in Senator Josh Hawley’s call for the abolition of the World Trade Organization in a recent New York Times op-ed.
But it may not be necessary for the American government to go that far: the problem is not so much the overall WTO treaty as the Trade-Related Investment Measures (TRIMs) within it. These are regulations that explicitly prohibit local content requirements, prioritization of domestic firms for public works procurement, foreign exchange restrictions (particularly important for emerging economies that are now totally reliant on the U.S. Federal Reserve to secure access to U.S. dollars to help fund their economic development needs), and export restrictions. In short, TRIMs must be abrogated if countries are serious about reestablishing domestic manufacturing capability.
But TRIMs are only annexes to the main WTO accord and therefore can be abrogated without eliminating the main agreement itself. This means that removing TRIMs does not necessarily presage a return to some kind of “law of the jungle” with respect to global trade. The current pandemic has offered proof of this: virtually all of the TRIMs, especially the export restrictions, have been routinely broken as nations have scrambled for vitally needed medical supplies. Yet the world’s global trading system has not collapsed into a total free-for-all.
The reestablishment of domestic content rules might require U.S. multinational firms to operate in foreign markets through local subsidiaries with local content preferences and local workforces. This would mean a return to a global trade system more like that of the 1920s, in which, for instance, Ford UK was a mostly local British company, which operated independently from Ford USA but with shared profits. That may seem strange given recent practices, but it is not historically anomalous: during much of the post-1945 world, America emphasized free trade mostly in raw materials, not finished goods. The U.S. only adopted one-way “free trade” with its Asian and European allies later as a Cold War measure, in order to accelerate their development and keep them firmly secured within the American orbit. In responding to both the changing state of global markets and the stresses of the coronavirus pandemic, policymakers should not operate under the false historical assumption that our current system, dominated by integrated multinational firms, is somehow natural or inevitable.
Automation as Labor-Enhancing, Not Labor-Destroying
Even if we assume a new trade framework that eliminates the WTO TRIMs, and thereby facilitates local content requirements and other measures to encourage the revitalization of manufacturing in developed countries, we must realize that these countries will also have to embrace a higher degree of automation in the workforce. As Dalia Marin writes, redomiciling will likely accelerate the adoption of robotics and other forms of increased mechanization, with particular concentration “in the sectors that are most exposed to global value chains. In Germany, that means autos and transport equipment, electronics, and textiles—industries that import around 12 percent of their inputs from low-wage countries. Globally, the industries where the most reshoring activity is taking place are chemicals, metal products, and electrical products and electronics.”
Policymakers will have to approach the issue of increasing automation from two principle angles. First, on the ownership side, careful attention must be paid to automation technologies from the outset, because they are able to concentrate wealth at a previously unseen scale—one that would make Andrew Carnegie and John D. Rockefeller blush. Governments will have to contemplate rules to limit stock buybacks and other practices that can vastly magnify the profits of a an increasingly small ownership class. It will also be necessary to consider alternative ownership structures, such as Germany’s codetermination (which involves the right of workers to participate in the management of the companies at which they work), in order to ensure a better distribution of wealth and profits among shareholders and workers.
Along similar lines, France’s budget minister, Gerald Darmanin, recently suggested that President Emmanuel Macron’s government should expand the use of mechanisms created by former French President Charles de Gaulle in the 1960s to distribute more capital and profits to workers and to redomicile domestic supply chains. Darmanin’s proposals echo the ideals of the American political economist and noted economic nationalist, Seymour Melman, much of whose work largely focused on domestic production and worker-centered economics. Melman contended that the more decision-making power management gave to workers on the shop floor, the better management could maximize the productivity of capital and thereby augment corporate profitability. That is because well-trained and well-motivated workers are better able to prevent problems in production lines from happening in the first place and will react quickly if problems arise.
Antitrust regulation and enforcement may have some role to play here as well, but in general a size-neutral form of oversight and regulation is likely to be more effective in achieving a better balance of income distribution, as well as ensuring an industrial policy consistent with a broader public purpose. This is especially the case in markets characterized by economies of scale and/or network effects.
On the labor side, machines can either replace labor totally (e.g., washing machines replacing domestic labor), or they can complement labor, allowing one worker to be more productive (as in the case of partly robotic, partly human assembly lines). In the case of the latter, automation can also mitigate considerable health risks to workers, as the heavy automation in Denmark’s own meatpacking industry illustrates: among the eight thousand employees of Denmark’s leading meatpacking company, fewer than ten workers have tested positive for Covid-19, and none of its slaughterhouses has had to close or slow down production. In both the replacement and the complementary models of automation, jobs (or unpaid household labor) are lost, but the mechanisms are different.
The development and adoption of robotics in manufacturing should be directed not toward simple labor substitution but toward tasks that humans cannot perform. The proper metric for evaluating the potential and effectiveness of robotics should be profits generated per worker, as opposed to profits secured via labor elimination costs.
In order to maximize the benefits of automation, it is necessary to reestablish the link between real wages and labor productivity, which was, as the economist Bill Mitchell has argued, vital to the economy for much of the post–World War II period: “Real wages grew in line with productivity growth which was the source of increasing living standards for workers and allowed them to maintain growth in consumption expenditure commensurate with the growing output of the economy.” That link has been largely severed over the past forty years, as business’s attacks on labor and unionization intensified. Furthermore, if productivity-lowered prices give consumers more discretionary income, and they spend it on labor-consuming services, new jobs will be created in labor-intensive sectors or household activities that cannot be automated.
As the coronavirus pandemic is illustrating, a viable industrial ecosystem cannot work effectively if it is dispersed across too many geographic extremes or if there are insufficient redundancies built into the transportation networks that bring goods back to the domestic market. Proximity becomes a significant competitive advantage for manufacturers and a strategic advantage for governments. Likewise, regionalization facilitates better consultation between business and labor, whereas globalization disperses decision-making and leads to poorer outcomes—witness the current travails of Boeing as one classic illustration. In his final work, After Capitalism: From Managerialism to Workplace Democracy, Seymour Melman observed that the more that automation is implemented in consultation with the workforce, as opposed to being imposed by management, the better the factory and the better the economy performs. In addition, the more competent the engineers and managers of industrial firms are at organizing production, the better the economy of the country as a whole performs.
But this also entails an expanded role for government in the planning process. The U.S. is still a leader in many high-tech sectors but is suffering the consequences of a generation-long effort to undermine the government’s natural role as an economic planner. In effect, we need a revival of “Tripartism”—what Michael Lind describes as “the collaboration of labor, business, and government in the national interest.”
North and South
What about the rest of the world? Many of the developing nations of the Global South do not have close geographic proximity to wealthy domestic markets or abundant supplies of the key commodities required for twenty-first-century manufacturing needs, or even well-developed manufacturing bases. Most have hitherto been recipients of significant foreign investment solely on the grounds of their cheap labor pools. These countries have faced immediate, enormous pressure as a result of the pandemic due to the collapse in global trade and have experienced severe capital flight that is sure to grow if the virus spreads and lockdowns continue, all while their often underfunded and inadequate healthcare systems attempt to cope with the disease at home.
In the meantime, the multitrillion-dollar market for emerging market debt, both in sovereign bonds and in commercial paper, is perpetually at risk of freezing up in response to shocks, as occurred earlier this year. In many developing countries, the government, through state pension funds and sovereign wealth funds, has become the ultimate buyer for many of the newer asset-backed securities, which had only recently revived after the 2008 financial crisis. This has become a potential new stress point in the $52 trillion “shadow banking” market. The U.S. Federal Reserve has sought to ease the funding stresses of many developing countries by offering liquidity swap lines to their central banks. It has also broadened primary dealer collateral acceptance rules and set up commercial paper swap facilities, all of which have eased short-term funding pressures in the economies that have incurred substantial dollar liabilities. As central banks in the emerging world then start to lend on those lines to their own domestic commercial banks, the shortage of dollars in offshore dollar funding markets should begin to be alleviated. Some easing of stresses can now begin to be seen—notably in Indonesia, which is an exporter of resources more than a cheap labor price economy.
In previous emerging-markets crises China was able to buttress the economies of developing countries through massive investment and development programs such as the “Belt and Road Initiative.” Now, however, Beijing itself is likely to be buffeted by the twin shocks of declining global trade and a reversal of foreign direct investment, which already fell 8.6 percent in the first two months of this year. Over the longer term, many other countries face challenges that are similar in nature to but more severe in extent than China’s: collapsing domestic currencies, widespread debt defaults, and eventually capital controls are likely to become the norm. Possible harbingers of this trend can already be seen across the globe: Argentina, a serial defaulter, has failed to pay its debts again; South Africa has seen its bonds downgraded to junk status; Turkey’s currency and banking system remains vulnerable. The so-called “brics” economies—Brazil, Russia, India, China, and South Africa—are all sinking like bricks. Coronavirus (and likely future pandemics) will likely create additional stresses for any developing economies that depend on their labor price advantage in the international marketplace to survive.
By contrast, countries like South Korea and Taiwan have had a “good crisis.” Both have vibrant manufacturing sectors and have established successful multiparty democracies. Foreign investment in South Korea continued to grow in the first quarter of this year, as it rapidly moved to contain the spread of Covid-19 through an extensive testing regime, while keeping its economy open. Similarly Taiwan, by activating a national emergency response system launched in the wake of the 2004 SARS virus, has mounted a coronavirus intervention of unprecedented effectiveness. The results speak for themselves: as of mid-October, South Korea has registered a mere 444 deaths, while Taiwan, a country of 23.8 million people, has had an even more astonishingly low total of 7 deaths—this despite far more exposure to infected Chinese visitors than Italy, Spain, or the United States.
Of course, the very success of Taiwan’s response revives another potential fault line, namely the tension between Taiwan and mainland China underscored by the latter’s “One China” policy. It is noteworthy that, before the coronavirus pandemic, the WHO would not formally acknowledge Taiwan in its monitoring of global disease. It “even refused to publicly report Taiwan’s cases of SARS until public pressure prompted numbers to be published under the label of ‘Taiwan, province of China,’” according to Dr. Anish Koka. At the very least, Taiwan’s divergent approach and success at fighting the pandemic might bolster its pro-independence factions. The question of whether foreign nations will uphold Taiwan’s sovereignty in the face of Chinese pressure is increasingly thorny, given Beijing’s growing military capacities. This will present an ongoing diplomatic challenge to Western parties that seek to increase engagement with Taipei without heightening tensions in the region.
A Recalculation of “Economic Value”
To be sure, this is not the first time that the sacred tenets of the global economic framework have faced a crisis that seemed as if it would usher in a new era. The same thing happened in the aftermath of the financial crisis of 2008. But that crisis was largely seen as a problem confined to financial markets, a product of faulty global financial plumbing that was barely even understood; today, by contrast, we seem to be witnessing a widespread social collapse directly impacting the “real economy.” The world is now pervasively affected by a lockdown that has not only put the entire global economy into turmoil, but that also was imposed in the context of widespread political and social upheaval and against the backdrop of a faux recovery whose fruits were largely limited to the top tier. A collateralized debt obligation is not intuitively easy for the layman to grasp. By contrast, being forced to stay at home, deprived of vital income and isolated from loved ones, while healthcare workers perish from overwork and lack of protective gear, is immediately and viscerally understood by the public and is perceived as a crisis of a different magnitude.
In time, the pandemic will subside and the lockdowns will cease. But even as we reintegrate, it is hard to envisage a return to the “old normal.” Trade patterns will change. Self-sufficiency and geographic proximity will be prioritized over global integration. There will be new winners and new losers, but it is worth noting that the model of capitalism we are envisioning here—one that does not feature obscenely overcompensated CEO pay coexisting with serf-like labor and the widespread offshoring of manufacturing—has existed in different forms in the United States from 1945 to the 1980s and still exists in parts of Europe (e.g., Germany) and East Asia (e.g., Japan, South Korea, and Taiwan) to this day.
To be sure, the discussion has changed for the better, but the national election campaign has largely precluded the United States from taking as many dramatic changes as some of its foreign counterparts. Likewise, various industry groups continue to resist and lobby for to the old status quo ante. In addition, China’s Ministry of Commerce has reported that foreign investment inflows in September jumped 23.7 per cent from a year ago, and the government is using every tool available—direct subsidies, currency devaluation, loan bailouts (and other indirect subsidies)—to revive exports, recover growth, and fill disruptions from Covid-19-induced supply chain gaps. Beijing has been successful: Chinese GDP growth is accelerating again.
Considerably more policy effort will be required for the United States to catch up to China and the rest of the world and to avoid falling into familiar, unhealthy patterns. The former CEO of Intel, the late Andy Grove, warned almost a decade ago that Silicon Valley risked “squandering its competitive edge in innovation by failing to propel strong job growth in the United States,” according to a New York Times op-ed by Teresa Tritch written shortly after his death. Grove’s observations can be extended well beyond high tech. Absent a more broadly-based manufacturing scale-up, America will continue to lose high-paid, highly skilled jobs, along with the ability to sustain dominance in new technologies as the economy’s capacity to innovate dissipates and IP theft accelerates. All of which has both long-term economic and national security implications for the country.
While economists often fret about the costs and inefficiencies of reshoring, they seldom consider the more overwhelming costs associated with the problems cited by Grove. Covid-19 has highlighted America’s vulnerabilities and a belated policy response has begun. The road back to manufacturing relevance is a long one, but it must be sustained. Simply restoring the status quo ante risks exacerbating longstanding existing weaknesses and vulnerabilities. Economic warfare could well degenerate into military conflict if the early efforts are not sustained. There are costs associated with failure that must remain at the forefront of future policy planning, no matter who is governing the country in the years ahead.
Marshall Auerback is a researcher at the Levy Economics Institute of Bard College, a fellow of Economists for Peace and Security, and a regular contributor to Economy for All, a project of the Independent Media Institute.
Jan Ritch-Frel is the executive director of the Independent Media Institute.