Economic Nationalism in a New Age for International Economic Law: Recalling Warnings of Ludwig von Mises and the Austrian School

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International economic law developments barely one month into 2017 have been nothing short of tectonic this side of the Atlantic. From US President Trump’s first executive action to withdraw the United States from the unratified Trans-Pacific Partnership; his subsequent announcement (later called mainly an option) to impose a 20% border tax on Mexican imports into the United States to finance a wall between the two countries; a declared initiative to renegotiate the North American Free Trade Agreement (NAFTA) that was signed under the administration of Republican President George Bush; unprecedented changes to the United States National Security Council removing the nation’s top military, intelligence, and security advisers to only permit regular attendance for White House chief strategist Steve Bannon and more limited attendance of the chairman of the Joint Chiefs of Staff and the Director of National Intelligence; threats of punitive tariffs against China and accusations of illegal currency manipulation; to last Friday’s latest executive order announcing a travel ban against individuals from seven predominantly Muslim states (approximately 218 million persons) and the 4-month suspension of any refugee entry, as a possible first step to a broader ban – it is becoming all too clear that barely ten days into the new presidency, the United States will not be above reversing, abandoning, disregarding, or defecting from any of the established rules and institutions of international economic law, through extraordinary actions and reversals that have scarcely any or no inter-agency vetting and consultation, and significantly, with the new president declining to divest himself from all business interests or to introduce transparency and consultation measures even as these political-security-economic policy reversals continue to be formulated with relative opacity. The Dow Jones industrial averages and NASDAQ composite index both dropped with the sudden rush to sell off US equities, and American private companies have taken to hiring crisis management and communication firms for the new age of undisclosed and sudden economic policy reversals, reviewing operations and mergers against possible charges of being “Anti-American”.

There is little surprise in the resurgence of economic nationalism around the world – most markedly in the United States and Brexit-era United Kingdom – following the 2008 global financial crisis. Previous eras of economic nationalism took place in the 19th century, the aftermath of the 1929 Great Depression, as well as the 1998 Asian financial crisis and its contagion effects on related economies. [See Sam Pryke, Nationalism in a Global World, Palgrave Macmillan, 2009, pp. 67-77.] The questions raised by Conservative British politician Sir Arthur Salter in the early 1930s remain just as apt for scholars, experts, politicians, decision-makers, and communities to ponder and debate in any era of economic nationalism:

The world is now at one of the great cross-roads of history. The system, usually termed capitalist but I think better termed competitive, under which the western world has made its astonishing progress of the last century and a half, has developed deep-seated defects which will threaten its existence unless they can be cured. We need to reform, and in large measure to transform, this system. We need so to improve the framework of law, of institutions, of custom and of public direction and control, that the otherwise free activities and competitive enterprises of man, instead of destroying each other, will inure to the general good. In the organization of industry, of credit, and of money, we need to supplement the automatic processes of adjustment by deliberate planning. This is the specific task of our age. If we fail, the only alternatives are chaos or the substitution of a different system incoherent with political and personal liberty, perhaps after an intervening period of collapse and anarchy.

Now in every aspect of this great task one fundamental issue constantly occurs. Upon what basis are we to plan, at what goal should we aim? Are we to move more and more toward a system of closed units, with political and economic boundaries co-terminous, each aiming at a self-sufficiency with no more than a minimum of external relations? Or are we to aim again at building up world trade within the framework of a world order? It is an issue which presents itself urgently to the world as a whole and to each nation. No complete realization of either ideal is of course practicable…

We must understand the real alternatives clearly. The choice is not, of course, between a complete suppression of international trade on the one hand and its complete freedom on the other. In any event some foreign trade will and must take place. No country, or even continent, is completely self-sufficient or will be content to forego everything which it cannot itself produce. Nor, even so far as self-sufficiency is aimed at and achieved, will it always be coterminous with that of political sovereignty. (Sir Arthur W. Salter, The Future of Economic Nationalism, 11 Foreign Affairs 1, Oct. 1932, pp. 8-20 at pp. 8-9.)

Disentangling from the postmodern international economic system altogether – as the United States now appears positioned to do by acting at will to disregard existing institutions and moving to abandon treaties that have long been executed and implemented – is indeed a radical step with a myriad of unforeseen consequences in the years ahead. A United States world power that withdraws to a foreign policy regime of “America First” ultimately rests on a philosophy of internally strengthening domestic markets, the means of production, and the competitiveness of labor within defined borders – a similar move espoused by the then newly industrializing countries (NICs) Japan and South Korea, and later China and several Southeast Asian new tigers, in the 1970s to the 1990s (Mark Selden, Economic nationalism and regionalism in contemporary East Asia, in Globalization and Economic Nationalism in Asia, Oxford University Press, 2012). The difficulty in this premise – as discovered by the same NICs themselves – is that economic nationalism itself is an unsustainable policy that will also inevitably lead to economic failure and international conflicts, as the famous Austrian economist and historian Ludwig von Mises cautioned and anticipated in 1943:

“Economic nationalism results in war if some nations believe they are powerful enough to brush away, by military action, the measures of foreign countries which they consider as detrimental to their own interests…

We have to realize that even protectionism cannot make government interference with business work and achieve the ends sought. All that it can bring about is to delay for a shorter or longer time the appearance of the undesired consequences of interventionism. Its failure must finally become manifest. The schemes to raise by decree or by trade union pressure the income of the wage earners above the height fixed by the unhampered market must necessarily sooner or later result in mass unemployment prolonged year after year; protection can only postpone this effect, but does not brush it away. But it is exactly this temporary adjournment which the supporters of interventionism aim at. It disguises the futility and ineptitude of their cherished policies. If the detrimental effects of their measures were to appear immediately, the public would more quickly understand their vanity. But as they are delayed, the champions of government control and trade unionism have in the meantime the opportunity to boast that the employers were wrong in predicting that the artificially raised wage rates and the burdens imposed upon business by discriminatory taxation and by labor legislation would make their plants unprofitable and hamper production.

Economic nationalism is the necessary complement of the endeavors to interfere with domestic business conditions….The tariff barriers against imports are especially nonsensical when erected by creditor nations. If the debtor nations in accordance with the terms stipulated pay interest and repay the principal of the debts and if they do not hinder the foreign investors taking out the business profits earned, their balance of trade must show an excess over imports, i.e., become favorable. Concomitantly the balance of trade of the creditor nations becomes unfavorable. The terms “favorable” and “unfavorable” are, of course, misleading. It is not unfavorable to be a rich nation and to receive large payments of interest, dividends, and profits from abroad. Great Britain was in the past century the world’s richest nation, not although, but because it had a very “unfavorable” balance of trade.

The United States, in the years of its glorious geographic and economic expansion, had offered very propitious investment opportunities for foreign capital. The capitalists of Western Europe provided a part of the capital needed for the construction of American railroads and for the building up of American mining and American processing industries. Then later the Americans began to repatriate the stocks and bonds owned by foreigners; these operations made the nation’s balance of trade active. With the First World War things changed. America became a creditor nation, the greatest capital exporting nation. Its favorable balance of trade—in the years 1916 to 1940 the excess of exports over imports was about 30 billion dollars—had now another significance; it was the outcome of the loans granted abroad and of investments in foreign countries.

But at the same time American tariff policy made the payment of interest and the transfer of dividends more burdensome to the debtor nations. The same policy was applied by the other creditor nations, for instance Great Britain, France, the Netherlands, Belgium, and Switzerland. The debtor nations were, it is true, not very enthusiastic about the payments they had to make; debtors mostly are not very anxious to keep to the terms of the contract. But the conduct of the creditor nations, which sensibly prejudiced their interests, provided them with an opportune pretext for refusal to pay. They took recourse to currency devaluation, foreign exchange control, moratoriums and some of them even to open repudiation and bankruptcy…

The truth is that modern nationalism is a corollary of the domestic policy of government control of business. It has been demonstrated that government control of business would manifestly fail already in the short run if the country is not isolated from the rest of the world. A government aiming at full regimentation of business must aim at autarky too. Every kind of international economic relations impairs its power to interfere with domestic business and limits the exercise of its sovereignty. The state cannot pretend to be an omnipotent god if it has to bother about its citizens’ ability to compete with foreign business. The outcome of government interference with business is totalitarianism, and totalitarianism requires economic self-sufficiency…Protectionism and autarky mean discrimination against foreign labor and capital. They not only lower the productivity of human effort and thereby the standard of living for all nations; they create moreover international conflict.

There are nations which for lack of adequate resources cannot feed and clothe their population out of domestic resources. These nations cannot aim at autarky, but by embarking upon a policy of conquest. With them bellicosity and lust of aggression are the outcome of their adherence to the principles of government control of business. This was the case with Germany, Italy, and Japan. They said that they wanted to get a fair share of the earth’s resources, thus they aimed at a new distribution of the areas producing raw materials. But these other countries were not empty; their inhabitants were not prepared to consider themselves as an appurtenance of their mines and plantations. They did not long for German or Italian rule. Thus there originated conflicts….

Every nation has to choose. The United States too. The alternative is: unity among the peace-loving nations or return to the chaos out of which new conflict will originate. But unity is incompatible with protection. Every day experiences anew that the good neighbor policy among the American republics comes into collision with economic nationalism. How should Latin America and the European democracies enter into a close political collaboration with the United States if their citizens suffer from American foreign trade policies?

If economic nationalism is not abandoned the most radical disarmament will not prevent the defeated aggressors from entering anew the scene of diplomatic intrigues, from building up new blocks and spheres of interest, from playing off one nation against the others, from rearming and finally from plotting new attacks. Economic nationalism is the main obstacle to lasting peace.”

The main difficulty with economic nationalism – at least as currently espoused this side of the Atlantic – lies with identifying its real beneficiaries. While many sectors can applaud the United States’ withdrawal from the Trans-Pacific Partnership or its planned renegotiation of NAFTA, there is also no determined operational policy in place for consultation with all affected local communities and private sector stakeholders to ensure the fairest representation of interests in the new era of economic nationalism. The premise of economic nationalism is that the State somehow fully capsulizes, considers, and protects all interests in the calibration of normative choices taken by political leadership. History has shown that well that the State is not as reliable an agent either for dislocated, disadvantaged, unrepresented, and disregarded local communities directly impacted by international and domestic economic rules – who are often rule-takers rather than rule-shapers. In an era where the current architecture of the international economic order will soon be redrawn by many States and globally influential players with evanescent and non-transparent policies, and who all use different bases for leverage in the negotiating table – including a newly economically nationalist United States – economic nationalism ultimately acts as a deceptive panacea for neglected local communities who, in the end, have naught to do but again repose faith in the ability of politicians to represent them.

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Kriangsak Kittichaisaree says

January 31, 2017

Aloha Diane!

There are two main issues here. Economic nationalism -- the American voters have decided to elect D. Trump as their President and economic nationalism was clearly one of his campaign promises. Free trade lost in Nov. 2016 and one reopen the debate of free trade v. economic nationalism re; US policy now. That's one downside of democracy.
However, any action taken by the US Administration must comply with existing US law, esp. the US Constitution, as well as with applicable rules of international law (e.g., pacta sunt servanda and termination of treaties).

Kriangsak Kittichaisaree says

January 31, 2017

Typo: one cannot re-open the debate ...

Diane Desierto says

January 31, 2017

Many thanks Kriangsak. Economic nationalism in and of itself, of course, is not an illegal policy. What is quite astonishing is the pace and manner in which this policy is being carried out - there have been few legal justifications articulated publicly for some of the recent measures taken to effectuate the policy of economic nationalism (e.g. renegotiating NAFTA, imposing a 20% border tax on Mexican imports), while some have already been challenged for their unjustified discriminatory impact before domestic courts (e.g. five federal judges have issued orders to stay the enforcement of the executive order imposing the travel ban).

Paul Su says

February 1, 2017

Aloha professor!

This is Paul Su. Thanks for the wisest warn to the world.

Still remember to sit in the classroom and discuss the TPP and its exciting changes last year. Now, we see some changes make us surprised but not hopeless. There are still nations trying hard to step into or keep the door open for a fair, nondiscrininal, and effective international trading system, for example, Taiwan.

Hope you may visit us soon.