Argument

If the United States Doesn’t Make The Rules, China Will

Progressives need to learn how to use American market power for good.

People take pictures during the opening ceremony for the Shanghai Stock Exchange's Sci-Tech Innovation Board in Shanghai on July 22, 2019.
People take pictures during the opening ceremony for the Shanghai Stock Exchange's Sci-Tech Innovation Board in Shanghai on July 22, 2019. STR/AFP via Getty Images

On Oct. 4, Houston Rockets general manager Daryl Morey tweeted his support for pro-democracy protesters in Hong Kong. In that moment, Morey placed in jeopardy the NBA’s success in cultivating an estimated 500 million Chinese basketball fans and may have derailed efforts by Tencent, its Chinese partner, to regain its luster. Tencent paid $1.5 billion for the rights to carry NBA games—games that it may no longer be able to broadcast.

Welcome to the world of Chinese market power. Beijing’s response to the NBA may appear particularly crude, but it fits a broader pattern. China routinely conditions market access, most notably by requiring foreign firms to partner in joint ventures with Chinese businesses. U.S. firms complain about how this requirement facilitates the theft of their intellectual property, but many simply cannot resist the allure of China’s large and growing domestic market.

Even with slowing growth, China’s market will remain a powerful force in international affairs. The Chinese internal retail market has already overtaken, or will soon overtake, that of the United States. But even the fact of such comparisons underscores the degree to which the U.S. market—clocking in at roughly $5.5 trillion this year—remains large and lucrative. The United States, however, is becoming less effective at using its market power to pursue crucial policy goals. Washington has, particularly under Republican leadership, degraded the regulatory infrastructure necessary to make the most of that market power. The result is that, in too many areas, Washington is starting to punch below its weight.

For progressives, in particular, reinvigorating U.S. market power holds the promise of transforming foreign economic policy. Since the end of the Cold War, globalization has helped lift hundreds of millions of people out of poverty. But in the United States, stagnant wages, growing inequality, and new economic competitors in Asia have led a number of prominent politicians on both the right and the left to sour on the whole project. Whether President Donald Trump, Sen. Bernie Sanders (to whose 2016 campaign one of the authors of this piece, Daniel Nexon, previously provided policy advice), or Sen. Elizabeth Warren, they often reach for a similar diagnosis: the failures of free trade. This leads some commentators to see little difference between the two sides, to argue that “we are seeing a new left-right axis emerge around protectionism and isolationism.”

It is true that Trump and the new conservative nationalists offer a crudely mercantilist economic policy based on old-fashioned tariffs. For them, the wealth of nations is a matter of trade deficits and surpluses: The greater the deficit, the weaker the country. In this vision, tariffs facilitate import substitution and force trading partners into better deals in which they agree to buy more U.S. goods. “Trade wars,” as Trump famously claimed, “are good and easy to win.” Most economists dispute the ultimate value of such an approach; Trump’s policies have already generated a wide range of negative spillovers, from trying to compensate farmers with massive bailouts to undermining relations with long-standing U.S. allies such as South Korea and Japan.

Trump has polarized discussions of international trade. Pundits do their part by framing the debate in terms of more or less trade. This presents Americans with only two choices: an open economy or protectionism. And if those are the only options, then it’s easy to treat Trump’s trade agenda as essentially the same as that of, say, left-wing Sens. Sanders and Warren. As the Fletcher School of Law and Diplomacy professor Daniel Drezner argues, “Warren’s trade policy would actually be more protectionist in its effects than Trump’s.”

Such framings are misleading. Across the ideological spectrum, the question is not whether the United States should engage in the international trading system but how it should pursue overseas economic relations. Even the Trump administration, for all the president’s own strange ideas about trade deficits, has pursued negotiations with the aim not of ending, but rather restructuring, the terms of bilateral and multilateral trade. Blending arguments from Treasury Secretary Alexander Hamilton up through President Ronald Reagan, Robert Lighthizer, who currently serves as the United States trade representative, argues for the strategic and pragmatic use of protectionism.

But while Trump focuses on specific sectors and corporate interests, progressives in the Democratic presidential primary race favor approaches that protect U.S. workers by improving conditions abroad. Thus, Warren calls for the United States to use its “leverage to force other countries to raise the bar on everything from labor and environmental standards to anti-corruption rules to access to medicine to tax enforcement.” Sanders similarly wants a “complete overhaul of our trade policies to increase American jobs, raise wages and lift up living standards in this country and throughout the world.” Another Democratic candidate, Pete Buttigieg, puts it bluntly, “Globalization is not going away. So we must insist on policies that ensure that working families in cities like mine can play a more appealing role in the story of globalization than the role of victim.”

Unfortunately, the focus on tariffs and trade agreements obscures a key promise of progressive foreign economic policy. Progressives can, and are already starting to, offer a larger strategy for securing key goals—one that turns globalization itself into a source of strength. As Warren argued in July, the United States enjoys “enormous leverage because America is the world’s most attractive market.” By conditioning access to that market, Washington can influence not only international negotiations over standards and the terms of trade but also the decisions made by firms themselves. Rather than employ such regulatory standards as forms of stealth protectionism—ones that allow corporations to extract rents from American consumers—progressives can use them to help craft a more just and sustainable global economy.

Companies that do not want to lose access to a market have strong incentives to meet regulatory standards. They are also more likely to push for similar rules at home, because harmonization standardizes production costs and eliminates competitive pressure from domestic manufactures. But this is not simply a matter of market size. To really affect the global economy through such standard-setting, a government requires the necessary regulatory expertise to identify and enforce market rules. Quality regulators understand the key pressure points for firms, as well as how they might try to evade penalties. These rules define not only the terms of competition but also exit options. The United States possesses both one of the largest markets in the world and extensive experience in the creation and enforcement of market regulations. This makes it a true market great power.

For the last 20 years, Washington has largely used this power to advance a neoliberal agenda of open markets, intellectual property protection, deregulation, and the use of sanctions to advance national security goals. As a result, Washington has usually played only a secondary role in addressing critical challenges, such as the threat posed by climate change, economic inequality, corporate tax evasion, and offshoring.

Things could be very different. A progressive administration could get started right away, using executive action, as well as reentering the Paris climate agreement and reinstating President Barack Obama-era tailpipe standards, which shape not only U.S. auto- manufacturers but also their global competitors, which want access to the U.S. market. The U.S. Treasury Department’s Office of Foreign Assets Control could bolster these efforts through what are known as green sanctions, targeting carbon-intensive sectors. Such sanctions would raise the cost of financing carbon-intensive sectors in the United States and, because of the central position of U.S. banks in the global economy, would raise these costs worldwide.

On the fiscal side, market power could be turned to end global tax evasion. Warren, for example, has proposed a country-by-country minimum tax, which would prevent firms from hiding their cash in countries with zero corporate tax. Instead, firms with U.S. sales would have to pay the difference between the foreign tax rate and that in the United States, guaranteeing that corporations pay their fair share. To avoid future regulatory whiplash, Congress could legislate stronger parameters for using standards to combat climate change, money laundering, offshoring, and other major challenges.

There are two standard objections to marrying more aggressive standard-setting to market power. The first argues that any attempt to do so will drive wealth out of the country—advocates of low taxes routinely raise this objection whenever anyone suggests raising taxes on the rich. But policymakers can manage this problem by setting the terms of exit. As of now, too many anti-tax and pro-deregulation politicians find it useful to invoke the specter of capital flight to block progressive policies, all the while opposing steps that would keep it from happening in the first place. In short, people can only hide their money in Panama or the Cayman Islands—or, for that matter, Delaware—because the U.S. government allows them to. If Washington can decouple Iran’s economy from the global financial system, it certainly could do the same for tax havens.

The second stems from neoliberal ideology: the idea that such efforts undermine market efficiency. The contemporary rise of rentier capitalism, however, underscores that, in practice, neoliberalism tends to shuffle the deck chairs of regulatory capture rather than deliver libertarian utopias. Markets will always be distorted—the question is, who benefits? Such abstract arguments also ignore the degree to which the United States already sets transnational standards through its market power. As we noted earlier, the United States has successfully pushed intellectual property rules globally, for example, that generate tremendous wealth for content owners in Hollywood and the pharmaceutical industry. Pitting no regulation against too much regulation creates yet another false choice. Standards can be more or less progressive and more or less effective. The experience of the interwar period, the postwar period, and, most recently, the Great Recession all demonstrate that well-regulated markets, especially when guided to produce social goods, are the most stable and sustainable.

Washington is not the only player in international standard-setting. Other major economic great powers know this game very well. In areas such as trust-busting, environmental protections, and digital privacy, U.S. companies must comply with a variety of European Union rules. In many cases, these rules have precisely the effects one would expect: They change the practices of firms in their operations beyond EU borders, leading to global standardization of their operations.

In a meeting between Microsoft CEO Satya Nadella and Canadian Prime Minster Justin Trudeau, for example, Nadella urged Canada to forgo Canadian-based rules and adopt European privacy standards so as to minimize Microsoft’s corporate compliance burden. On the aggregate, however, America’s roughly $5.5 trillion market means that it is, and will continue to be, an economic leviathan. Even as U.S. GDP growth slows, its overall economy will hardly be dwarfed by China’s in the immediate future.

Moreover, activating market power through regulations and standards has major advantages over the more ham-handed approach represented by tariffs. In trade wars, differences in relative market size and specific patterns of bilateral trade play a central role in the shape of the ultimate bargain. When it comes to standard-setting, the absolute market size of key sectors or platforms takes on comparatively more importance. In typical trade negotiations, the locus of bargaining is government-to-government. In standard setting, it’s often government-to-firm—at least in the absence of major disputes over whether the standard is in fact a stealth nontariff barrier. In other words, the power of U.S. rules resides in the fact that companies themselves want access to American consumers, the U.S. financial system, or other critical U.S. markets.

The rise of Chinese economic leverage, including through market power, is profoundly reshaping international politics. But one of the major threats to U.S. market power comes not from the relative decline of the overall economy when compared to China or other fast-growing countries, but instead from the Trump administration’s assault on American regulatory infrastructure. The Trump administration threatens U.S. regulatory expert capital through its efforts to hollow out American regulatory agencies to facilitate their (further) capture by corporate interests. More broadly, the administration has actively politicized regulatory agencies to provide cover for presidential and corporate interests, compromising those agencies’ ability to provide impartial oversight of market rules. Consider the U.S. Federal Aviation Administration’s attempt to keep the Boeing 737 Max flying—even as the plane was dropping out of the sky—or the infamous National Oceanic and Atmospheric Administration diagram that Trump modified with a sharpie to cover for a mistaken tweet about the path of Hurricane Dorian.

Progressives will have their work cut out for them at home when it comes to restoring and expanding U.S. market power. But internationally, they will be pushing on an open door. When it comes to many progressive concerns, America’s European allies are already there. In addressing climate change, digital policy, and antitrust policy, politicians in European capitals share many similar sensibilities. While a revised trans-Atlantic trade pact might be useful, a market-power strategy that focuses on harmonizing and improving regulatory standards does not require cumbersome international trade agreements or the likely impossible hurdle of Senate ratification—and the combined might of U.S. and EU standards would put huge pressure on other markets.

The Trump administration pushes walls, tariffs, and trade wars. It seeks to damage the EU and other allies rather than reinforce their sometimes superior standards. It undermines the goodwill needed to advance more ambitious anti-corruption, environmental, antitrust, and privacy efforts. Progressives have an opportunity to leave behind the unproductive debate about whether trade is good or bad. Instead, they can use U.S. market power to shape the global trading system to work better for ordinary Americans without resorting to Trump-style protectionism—by turning globalization and interdependence toward progressive ends.

 

 

 

Abraham Newman is the director of the Mortara Center for International Studies and a professor in the Department of Government and the School of Foreign Service at Georgetown University.

Daniel Nexon is an associate professor at Georgetown University specializing in international security and international-relations theory. Twitter: @dhnexon

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