In order to win, you have to gain an advantage. To have stability, you must maintain balance. This thinking is based on some kind of Chinese proverb that the Chinese government practices. Simply stated, Ying and Yang. If you’re getting bullied, step up and meet the aggression head on with your own. If that bully starts bullying everyone else in class and everyone has the same mindset, every classroom would become a war room of throwing slugs. Yes, this is precisely what happens in many poor schools :/ Newton’s Third Law of Motion states that for every action in nature, there is an equal and opposite reaction. I think, in our individual lives and in geopolitics, we all practice Newton’s Third Law of Motion to stay competitive.
Today, I want to talk about tariffs and how I view international politics as a game of war even though we’re at peace. I hear from my liberal friends and conservative economic nerds telling me Trump’s tariffs won’t work. And they could be right; but, to my liberal friends, I think there’s a bias that anything Trump does is bad to you. And, to my economist friends, there might be some bias toward free market conservatism. I want to paint a picture of how we got to the state of the world today, and why Trump 2.0 is happening from a global perspective.
The World Isn’t Stable Anymore
In order for revolution to be successful, the rising separatists must have an equal and growing force of aggression with the regime. In all revolutions, either the military support for the regime folds or the separatists have enough force, including foreign reinforcements, for the regime to accept defeat. When Hitler’s Germany was rising, the British and French did not simply practice appeasement because they were afraid; rather, because they were afraid, they used appeasement to buy time before the inevitable war. They knew war was coming, so before 1939 both countries, and eventually the U.S., had been building up their forces and drawing plans.
In the same way, when one power grows in aggression, an opposing power must meet that aggression. This not only applies to war but also to global economics. Before the first tariffs by President Trump, Americans thought the world mostly practiced open, free trade. But Trump’s broadside tariffs uncovered to many Americans that the world had long since abandoned that ideal in order to get ahead and benefit its own nation. Of course, Trump is not the first president to warn about this. Obama had warned about it long ago, but China was not seen as a threat by Americans while the Middle East wars were ongoing and taking up most of the political spotlight.
“It took Britain half the resources of the planet to achieve its prosperity; how many planets will a country like India require?”
In the 20th century, led by economists who believed in free trade and free markets, America as the economic superpower charged everyone else to do the same accordingly. Now, we are the last to have truly practiced this experiment.
I think many of my friends believed the world was mostly stable, especially after the Soviet Union collapsed or after the U.S. left Vietnam. I think that’s a purely American perspective, because America was the only economic and political superpower for a good period of time. In fact, the thought of stability might even just be a younger generation phenomenon, where stability equated to security; because of America’s superpower position economically, politically, and militarily, the tides were calm in our history books. If anything happened, we might not have learned about it, or we might have thought of an incident like Black Monday as a small hiccup. But that thought about stability has never really been true, at least economically. Japan was seen as an economic threat at the same time the Soviet Union was collapsing. The OPEC embargo caused a crisis in the idea that other countries could wage war by simply strangling one key resource supply.
China is the foremost example of a well-planned, strategically incentivized, wasteful but powerfully growing economy. It unleashed the perfect storm against the 20th century global economic model of free trade, and many nations are now following in its protectionist footsteps. I’d like to equate the global era of non-violence and peace between great powers to the free, open trade policy that America brought in the 1950s. In that sense, I equate the aggressive nature of China’s economic and geopolitical policy of closed border and protectionist trade policies to an economic declaration of war.
But it is a subtle war, and not quite a war in the literal sense. First, an economic war is much better than having lives lost through pure violence. Second, having no protectionist policies does not make much sense for nations; not because open trade and no barriers were purely a pipe dream, but because governments are run by people for people, so it makes sense that tariffs were eventually set up, including in European nations against the U.S. The idea of free trade was one of global cooperation, but it was bound to end after people forgot why it was set up in the first place. Domestic policies are meant to better a nation and its people, and China’s government had done very well to develop its nation. But China’s industrialization was so rapid that it upended the world model. The illusion of stability was lost; China was speeding ahead of everyone so rapidly that now everyone has to compete at that aggressive pace, first by buying time through protectionist trade policies. Competition is amazing within a country because competition spurs innovation. Competition between countries can still better industries globally, but it also raises tensions in world politics. And world politics is way messier than corporations competing, because that introduces armies, propaganda, prejudice, racism, and, inadvertently, a lag in competition in private markets due to protectionist policies.
America practically ran the world, and there was stability because America, well, ran the world. The Soviets were extremely shuttered out of global economic development. Whoever wasn’t with America lost out on tons of innovation. I don’t want to get into why China won so easily, because it’s due to tons of different factors, including a motivated workforce, how their government is structured, and their policies. My point with this post is not about how China is winning economically on the world stage. Rather, it’s to paint how the world got America, and even free market bulls, to become a protectionist nation under Trump 1, Biden, and Trump 2. Though other nations had some form of protectionism and tariffs to kickstart their nation, China was far more aggressive. In that sense, they declared economic and global political war.
What America Can Do
Governments that spend a ton not on helping old industries through subsidies, but by subsidizing new industries that otherwise couldn’t survive. An American equivalent is fracking and solar. It’s not true that America was a totally liberal economic order; when they saw weakness, they combated it. For example, America subsidized fracking for national security against OPEC once the shallow oil spots in America were depleted. Without the assistance of federal government subsidies, these industries would’ve taken way longer to develop into profitable industries. America still operates more on free market capitalism than on a strategic public-private intertwining of partnerships and free markets.
America subsidizes corn and soy farmers. It subsidizes elderly healthcare. We subsidize to help people live because politically we can’t bear the thought of someone dying when we could’ve done something about it. This is great, because in China a single hospital visit could kill my girlfriend’s grandma from debt sorrow. On the other hand, China subsidizes to help industries grow.
What China has done masterfully — and note, as an undemocratic country interested in bettering people’s lives but also ensuring the prosperity of the CCP itself — is strategically invest and create incentivization structures to kickstart multiple industries. The United States relies heavily on private investors. Today, we complain that VCs keep investing only in software, but VCs in China do the same. In fact, they don’t really invest in Chinese companies either. The difference is who’s funding these new industries. In China, it’s provincial governments. They promote politicians based on how much they can develop their province, so those provincial politicians are, in essence, investors with politics involved. In America, we used to rely on banks making high-risk loans. Those were too risky, so we regulated banks out of doing that. But American banks once did what China’s provincial governments now do: invest in local businesses that are high risk for not returning money. It’s not the fault of VCs that the way they must structure their business pushes them to invest mostly in software. They simply have to find unicorns, and software is the easiest way to get there. America does not have investment vehicles that are survivable because of regulation. We’ve begun deregulation a little bit such as private credit, an unregulated field that can only really be played by large firms with long credit history, which still leaves out thousands of Americans who have a great idea that isn’t software.
America needs to do two things:
- Use the weight of federal and state tax revenues to help build new, small, risky businesses.
- Deregulate investor protection laws, including bank regulation meant to protect deposit holders.