Yesterday’s post mentioned the ‘beggar-thy-neighbour’ policies pursued by Germany, which have supported export-led growth, at the expense of its eurozone neighbours, and more recently the wider global economy. The Trump administration has criticised German trade policies and has vowed to use protectionism to promote US industry. It is possible that this will create employment in the short run in particular industrial sectors, but the effect on the US economy overall will be more complex. Other nations could retaliate and the resultant shrinkage in world trade could ultimately undermine global economic growth, albeit unevenly.
In a world with persistently sluggish growth in demand, such as we are continuing to witness in the wake of the financial crisis, there is thus a greater potential for conflict over international trade. Things have not entirely mirrored the 1930s, when the Great Depression gave rise to substantial protectionism in many nations, but the pressure to adopt nationalist policies in the absence of global cooperation is still strong.
For those who are unfamiliar with the term ‘beggar-thy-neighbour’, below are some relevant quotes from two Keynesian economists. The potential for conflict over international trade features prominently in Keynesian theory with its emphasis on the importance of aggregate demand.
“In a world with inadequate aggregate demand and involuntary unemployment, countries often seek to run trade surpluses in order to boost their own output and employment. Since not all countries can run surpluses at the same time, the countries that succeed in obtaining them effectively compel other countries to run deficits, which saddle the latter countries with lower national incomes and higher unemployment rates than they would otherwise have. Thus, export-led expansion in some countries comes at the expense of import-imposed contraction in other, or – in Robinson’s adaptation of Adam Smith’s famous remark – export-led growth is a ‘beggar-thy-neighbour’ policy. This analysis of conflictual trade relations stands in marked contrast to the conventional view of largely harmonious trade relationships – a view that ignores the existence of demand-side limits to global exports and allows for conflict only over the barter terms of trade.”
Robert A. Blecker (2012), ‘International Economics’ in The Elgar Companion to Post Keynesian Economics (2nd ed.), p. 305-6
“In times of general unemployment a game of beggar-my-neighbour is played between the nations, each one endeavouring to throw a larger share of the burden upon the others. As soon as one succeeds in increasing its trade balance at the expense of the rest, others retaliate, and the total volume of international trade sinks continuously, relatively to the total volume of world activity. Political, strategic and sentimental considerations add fuel to the fire, and the flames of economic nationalism blaze ever higher and higher.
In the process not only is the efficiency of world production impaired by the sacrifice of the international division of labour, but the total of world activity is likely to be reduced…
From an un-nationalist point of view all [these sorts of policies] are equally objectionable, since each is designed to benefit one nation at the expense of the rest. But there are circumstances in which a limited indulgence in them cannot be regarded as a crime. First of all, they may be justified by the plea of self-defence, and secondly they may be used merely to cancel out a benefit to the rest of the world that would otherwise result from the policy of one nation.”
Joan Robinson (1937), Essays in the Theory of Employment, p. 227-8