Covid Shows How Fragile & Wrong Neoliberal Trade Policies Are

Perot was right & so were Henry VII, Alexander Hamilton, and Deng Xiaoping -- It’s time for America to recover our gutted middle class & to ensure our national security

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Late last week Ryan Petersen, the CEO of Flexport, put together a truly fascinating twitter thread describing the massive bottleneck of containers at the Port of Long Beach, the nation’s busiest. 

“The ports of LA/Long Beach,” he wrote, “are at a standstill. In a full 3 hour loop through the port complex, passing every single terminal, we saw less than a dozen containers get unloaded. There are hundreds of cranes. I counted only ~7 that were even operating and those that were seemed to be going pretty slow.

“It seems that everyone now agrees that the bottleneck is yard space at the container terminals. The terminals are simply overflowing with containers, which means they no longer have space to take in new containers either from ships or land. It’s a true traffic jam.”

While the immediate bottleneck problem had to do with too many containers and not enough land on which to handle and store them (particularly empty ones), it highlights an even larger problem that goes back to a major change in US trade policy in the 1980s, a part of Reagan’s neoliberal revolution.

This issue of trade goes way, way back and it’s important to understand its history if we’re going to fix things here today. This is a longer read, but I promise it’s worth it.

Shortly after George Washington was elected president, he tasked his Secretary of the Treasury, Alexander Hamilton, with figuring out how to turn America into an economic powerhouse that could compete with the giants of Europe.  In 1791 Hamilton turned in his “Report on Manufactures,” borrowing heavily from King Henry VII’s “Tudor Plan” from the late 15th century.

Henry VII had transformed England from a provincial mud-streets, thatched-roofs backwater who’s main product was wool into an industrial powerhouse by encouraging exports of finished goods while using taxes to discourage the import of any finished goods that competed with products manufactured in England.

English traders could import raw materials to be transformed into finished goods in England’s early factories with virtually no import/export taxes (they’re called tariffs), and they could ship finished products out all over the world, again with no tariffs.  Cheap raw materials came into the country, English workers were paid a good wage to convert them into expensive finished products, and those products were sold around the world.

The profit from converting raw materials into finished goods was shared between the English workers and the factory owners: it turned England in an economic powerhouse in a few generations.

On the domestic side, Henry VII encouraged British manufacturing and profits by putting high tariffs on the export of raw materials that could be used by British factories and on the import of finished products from the rest of Europe that might compete with British-made goods.

British economist Adam Smith explained the process almost three hundred years later, in his 1776 book Wealth of Nations, when he noted that a tree limb lying on the ground is a raw material with little commercial value.  But if a workman applied labor to that limb, turning it into an axe-handle, it now had value that would last for generations and became part of the “wealth of the nation.”  

Additionally, if that axe-handle were sold overseas that money would come back to England from the sale and would continue to have made England one axe-handle richer, to be a part of the “wealth” of England for generations, even though it was sold overseas.

“By preferring the support of domestic to that of foreign industry,” Smith wrote, “he [a British merchant] intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an Invisible Hand to promote an end which was no part of his intention.”

It’s the one single reference in Wealth of Nations to the “Invisible Hand,” and was made in the context of the importance of a nation’s businesspeople supporting their own country’s manufactured goods rather than buying cheaper stuff from overseas. 

Hamilton proposed a similar program, which was largely implemented by Congress and President Washington by 1793, putting America on course to become the richest country in the history of the world.  His “American Plan” included:

  • “Protecting duties on those foreign articles which are the rivals of the domestic ones intended to be encouraged”

  • “Prohibition of rival articles, or duties equivalent to prohibitions”

  • “Prohibitions of the exportation of the materials of manufacturers”

  • “The exemption of the [raw] materials of manufactures from duty”

  • A system to regulate the quality of production for export: “Judicious regulations for the inspection of manufactured commodities”

  • And a banking system and navy to make trade easier and protect vessels at sea

From 1793 until 1981, Hamilton’s system made America — and America’s working class — the richest in the world.  We imported iron ore from overseas, for example, turned it into steel, made that into cars and washing machines and a million other things, and sold them all over the world. And the money from those exports came back to America, making us richer.

Our tariff system was so successful that it paid 100% of the cost of running the US federal government, from the salaries of Congress to the cost of the Army and Navy and everything in between, from the administrations of Washington to Lincoln.  From Lincoln to WWI, tariffs paid between two-thirds and half of the total cost of government. 

It’s why we didn’t even have an income tax until 1913, outside of a brief period during the Civil War. But the main benefit of Hamilton’s system wasn’t the tariff’s revenue: it was its power to encourage Smith’s application of labor to raw materials — manufacturing — that built the “wealth of the nation” of the USA.

Then came neoliberal “free trade” ideology as the centerpiece of the Reagan Revolution.  The CEOs of America’s manufacturing companies were looking at the high cost of their mostly-unionized American labor force and saying, “But I can get people in Mexico or China to make this same product for $2 an hour!”

A major campaign began to “liberalize” American trade policy, complete with think-tanks and people like New York Times columnist and billionaire Thomas Friedman, who argued that no two nations with a MacDonald’s had ever gone to war. Therefore, he said, we should simply throw open the doors of America to “free trade” imports while encouraging American manufacturing companies to move their production offshore.

As a result, we’ve lost 60,000 factories since the day Reagan was inaugurated.   Not jobs — that’s in the tens of millions, particularly when you count secondary jobs maintained in towns across America by the income of people with good union jobs — that’s factories that were simply abandoned or moved, brick-by-brick, from the US to Mexico, China, Vietnam or other low-wage nations.

As the Council on Foreign Relations noted, “U.S. manufacturing employment dropped from 26 percent of the workforce in 1970 to 8.5 percent in 2016…”

Keep in mind, manufacturing is the single most effective way to build the “wealth of a nation.” Even when products are sold overseas, that wealth always comes back home.

When Reagan was sworn into office, Sam Walton’s slogan for his Wal-Mart chain was “100% Made In America!”  Today, it might as well be “Nothing but cheap junk made in China, where we send all your wealth except what we can skim off the top!”

While America, Chile, Russia, Argentina and a dozen other nations were experimenting with (and being devastated by) Milton Friedman’s neoliberalism, China’s Deng Xiaoping decided instead to adopt Alexander Hamilton’s plan.  

I spent a month in China in November 1986, and it was deeply impoverished, just beginning to recover from Mao’s revolution and the famines that brought. It was that decade that they rejected Friedman’s advice and went with Hamilton.

The tallest building in Beijing, where I lived and studied, was a 10-story Hilton (as I recall) hotel; the air was thick with smoke from millions of tiny coal fires people used to heat a single room in their homes; standing in Tiananmen Square I watched a river of black bicycles flow past every day on the major highway nearby.  Every ten minutes or so a single black limousine would pass.

But that was 1986 and this is now, after China’s 35 years of using Hamilton’s “American Plan.”  China’s rejection of neoliberalism and adoption of Hamilton’s plan transformed that nation into the world’s second richest in fewer than 30 years: the most rapid transformation in the history of the world. 

And, as we buy Chinese goods, they get our dollars.  Dollars that eventually must return to America in the form of what’s called “direct foreign investment.”  In other words, they’re taking our money for the products they make and then buying our country with it.

Have you seen what housing prices are doing?  Foreign purchases of US housing were over $11 billion and made up 4 percent of all sales last year.  It’s slowed down a bit recently: it was over $100 billion a year through most of the previous decade.  In just 2017 and 2018, Chinese buyers alone picked up over 80,000 US residential properties.

Foreign buyers now own 30 million acres of American farmland (an amount that has doubled in the past 2 decades).  Remember the massive Smithfield Foods, where Donald Trump ordered meat packers to go back to work even thought there was a pandemic?  It’s Chinese-owned.

Fully 40 percent of the asset value of all companies in America is foreign owned: that’s the “wealth of nations” outside our country being used to buy our country.  Chinese own over $1 trillion in US Treasuries, our national debt.

We’ve moved so much manufacturing to China that we can’t make much of anything — from missiles to cars to airplanes — without Chinese parts. 

And this doesn’t begin to touch the damage China could do to America if they were to decide, for example, that they’d cut off all exports and begin to dump our treasuries because we were defending Taiwan — an increasingly likely scenario.  If you think we’re having a crisis today, imagine if within two months every Chinese product was gone from every American store.

Reagan, Bush and Clinton’s implementation of Milton Friedman’s neoliberal “free trade” agenda has gutted the American middle class, sold off our companies and real estate to foreign interests, and is now causing “supply chain disruptions” that threaten any semblance of an economic recovery.

There’s too much finished product coming into America and not enough leaving our factories for foreign shores: this is called our trade deficit.  To quote NPR’s Planet Money headline, it’s “Too Much Import, Too Little Export.”

As noted in Forbes: “So, we send dollars abroad to pay for those things made by foreigners. Very few of them set fire to those dollars, they near all use them to do something with.”

Our trade deficit last year was over $610 billion and averaged around $700 billion a year in the lead-up to the Great Recession of 2008.

In 1975, we had a $16 billion trade surplus ($81.5 billion in today’s dollars).  We had a $13 billion trade deficit when Reagan came into office in 1981.  By the time he left office in 1988, the cumulative trade deficit for his presidency was $685 billion ($3.4 trillion in today’s dollars).

That deficit was offset by foreign entities buying US real estate, US companies, US land, US securities, and US debt.  That made a lot of already-morbidly-rich asset-selling Americans a lot richer, but what did it give average workers?  Bupkis.  Less than bupkis, actually: fewer than half of Americans are even in the middle class anymore.

I realize that Donald Trump said many of these same things.  In that, he was just echoing the message that nearly won Bernie Sanders the Democratic nomination in 2016 and keeps Sherrod Brown comfortably ensconced in his Senate seat from Ohio. 

While neoliberalism was brought to America by Reagan, Clinton jumped on the bandwagon, too, so opposing it has been an uneasy task for both Republicans and Democrats for the past three decades. Trump’s willingness to challenge that neoliberal consensus and speak the truth (in his own confused way) had to account for far more than just his Electoral College margin of victory in 2016.

Nonetheless, even though most Americans don’t know the gory details or history I’ve laid out here, they do know that we used to make things in America and it made us rich, and we no longer make much here (outside of guns and military weaponry) and it’s making us poor.

Back in the day when neoliberals were leading the free trade charge with Tom Friedman’s book The Lexus and the Olive Tree: Understanding Globalization we at least had a robust discussion of its impact.  Ross Perot took almost 20% of the vote for president in 1992 because American voters were so horrified about the “giant sucking sound from the south” he accurately predicted would happen if neoliberal trade policies were put into place.

Perot, it turns out, was right.  As were Henry VII, Alexander Hamilton, and Deng Xiaoping.  

Now that the Covid pandemic has exposed the fragility of this insane system, it’s time for America to revisit that conversation, both to recover our gutted middle class and to ensure our national security. 

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