A recent issue of The Economist took as its theme “the return of economic nationalism.” Contributors analyzed the efforts in various countries to extricate themselves from the difficulties they face as a result of the financial crisis. Conventional fiscal and monetary policies have been rolled out one after another, but thus far have failed to stop continual downward revisions to the economic outlook.
Now, voices in the US — the world’s biggest economy — are calling for “buy American” policies to rescue the US’ traditional manufacturing industries. These proposals have prompted strong protests and threats of retaliation from the US’ trade partners in the EU. If the tussle continues, the global economy so painstakingly built and valued by countries around the world could unravel.
Economic nationalism, or economic patriotism, as some prefer to call it, is an ideology of trying to protect an economy by encouraging the consumption of domestic products, giving jobs to the country’s own workers and facilitating the formation of domestic capital. Measures employed to achieve this purpose may include raising tariffs or restricting labor migration. As to whether such measures really help a country’s economy, most academics do not seem to think so.
The simplest line of argument against economic nationalism is that it a reaction against globalized commerce and runs counter to one of the basic theoretical principles of international trade — the law of comparative advantage.
Like political nationalism, economic nationalism generally raises its head when a country is in crisis. A typical illustration is the 1930 enactment by the US Congress of the Smoot-Hawley Tariff Act in response to the financial crash that struck the US in 1929. In one stroke, the Act raised import tariffs on more than 900 categories of goods.
The intention was to protect US-made products. In reality, however, this xenophobic policy not only failed to help the US to get over the 1929 crash, but caused the recession to spread and deepen into the Great Depression that lasted throughout the 1930s.
No wonder, then, that economists take such a negative view of economic nationalism.
But if we define economic nationalism more broadly, we find that it can indeed lift a country out of crisis and has even spurred the growth of developing economies.
The Chinese government’s manipulation of the yuan’s exchange rate is an obvious example.
Promoting exports by devaluing the nation’s currency is one strategy of economic nationalism and is a way for one country to shift its troubles onto others.
In the current financial crisis, it is one of the policy options available to central banks in Asian countries. That is why a race to devalue has recently taken hold in Asia. South Korea is one of economic nationalism’s most devoted adherents. Thanks to the patriotic sentiments and buying habits of South Koreans, the country’s products are supported by high demand on the home market. This has allowed South Korean manufacturers to accumulate sufficient capital to launch themselves in overseas markets, and so we have seen the rapid rise of brands like Samsung, Hyundai and LG.
Taiwan has already inadvertently opened the door of economic nationalism by joining in the Asian devaluation race. Now, calls to “buy American” have been raised in the US, which is the nation’s main trade partner. Taiwan is a country whose economic development depends on import and export trade, so it stands to suffer a heavy impact if protectionism takes hold in the US.
Meanwhile, China has implemented a policy of “sending home electric goods to the countryside” and has promised to buy US$2 billion worth of Taiwan-made display panels.
These moves seem to have boosted share prices of companies in that line of business. We should be aware however, that behind China’s economic nationalism there may lie a deeper nationalism of a political nature.
When it transpires that devaluation does not deliver the hoped-for results for Taiwan’s economy, the government should consider a policy of purchasing Taiwan-made products and employing Taiwanese workers.
If it issues a second round of consumer vouchers, the government should consider the option of limiting them to use on Taiwan-made goods to help the economy get through this crisis.
Louis Liu is an assistant professor at Tamkang University’s Department of Public Administration.
TRANSLATED BY JULIAN CLEGG
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