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Authors: Michael Lind

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Not content to sacrifice American industries to help Cold War allies prosper, the United States in the 1960s sought to use access to the American market to drive development in the postcolonial world. In 1963, President Kennedy called on the United States and its allies to open “our markets to the developing countries of Africa, Asia and Latin America.”
14
Kennedy warned an AFL-CIO convention in Dallas that protection of US industry risked “driving potential trading partners into the arms of the Soviets.”
15
In March 1964, a Johnson administration task force on foreign economic policy called for a “war on poverty—worldwide. . . . The whole country would be the gainer if, over time, we could shift resources away from textiles, shoes and other unsophisticated manufactures into more advanced items where we have a comparative advantage . . . [such as] capital, scientific and technological research, skilled and educated labor.”
16

One of the few government officials who dissented from the prevailing orthodoxy was George Humphrey, Eisenhower’s secretary of the Treasury. A veteran of the mining industry, Humphrey declared at a 1954 cabinet meeting, according to another participant, that “we were protectionists by history and had been living under a greatly lowered schedule of tariffs in a false sense of security because the world was not in competition. That has changed now and the great wave of competition from plants we had built for other nations was going to bring vast unemployment to our country.”
17

By the 1970s, America’s policy of tolerating foreign mercantilism was harming American industry. US manufacturers like Detroit’s Big Three automakers were being battered by imports from Europe and especially from Japan, which had devised a superior just-in-time (JIT) system of assembly-line production. America’s embattled automakers claimed correctly that they were excluded from the Japanese automobile market by various subtle forms of Japanese protectionism. But Japan’s discrimination against foreign imports was not the only reason for its success. Another reason that the US automakers suffered in competition with Japanese firms was a lack of scale. Even though they were smaller than the big American carmakers, the leading Japanese car companies made cars in plants that were much larger. In the mid-1980s, the average plant for GM and Ford produced 182,000 cars per year, while the average plant of one of the four largest Japanese car companies produced around 460,000 cars per year.
18

American industry had contributed to its own problems. While the Japanese improved production processes like JIT manufacturing, and while the Germans continued their tradition of fine craftsmanship, American manufacturers had rolled out shoddy (and, in the case of cars, dangerous and polluting) products and relied on advertising to inspire American consumers to buy the latest models. High oil prices following the OPEC embargo in 1973 damaged the US automobile industry by creating a market in the United States for fuel-efficient Japanese compact cars. The bitterly adversarial tradition of US labor-management relations made it hard for the United States to compete against Japanese companies with their paternalistic labor relations and against German companies in which codetermination by managers and workers was part of the law. An even more significant cost of increased foreign rivalry was the inability of business to pass on the costs of higher wages for workers to consumers, now that its profits were constrained by international competition.

The major industrial countries—the United States, the European Economic Community (EEC), and Japan, as well as Canada, Australia, Switzerland, Sweden, Norway, Austria, and Finland—grew at a rate of 4.9 percent a year from 1950 to 1970, compared to 2.6 percent a year from 1870 to 1913 and only 1.9 percent a year between 1913 and 1950.
19
In part because they were more advanced, the United States (3.5 percent) and Britain (2.8 percent) grew much more slowly than France and Finland (5 percent) and the former Axis countries Italy (5.6 percent), Germany (6.3 percent), and Japan (9.8 percent).
20
In the 1980s, this inspired the rueful quip, “The Cold War is over, and Germany and Japan won.”

EAST ASIAN MERCANTILISM: THE JAPANESE MIRACLE

Japan was the most important beneficiary of the US policy of tolerating mercantilist trade policies carried out by America’s Cold War protectorates. Without asymmetric trade between the United States and Japan, there would have been no Japanese economic miracle between the 1960s and 1980s. The average Japanese growth rate of 10 percent in the 1960s dropped to 5 percent in the 1970s and 4 percent in the 1980s, before plunging to 1.5 percent in the “lost decade” of the 1990s.

During US-Japanese trade negotiations in 1955, a Japanese negotiator remarked that “if the theory of international trade were pursued to its ultimate conclusions, the United States would specialize in the production of automobiles and Japan in the production of tuna; . . . such a division of labor does not take place . . . because each government encourages and protects those industries which it believes important for reasons of national policy.”
21
Following those negotiations, the United States granted $37.2 million in trade concessions and received only $6.4 million from Japan. While Japan, following classic mercantilist strategy, reduced its duties on raw materials and foodstuffs, the United States reduced its duties on Japanese manufactured imports like electrical products, apparel, and glassware.
22
In addition to making its own trade concessions to Japan, the United States offered access to the US market for other countries if they opened their own markets to Japanese exports.
23

Following the end of the US occupation in 1950, Japan carried out a long-term industrial policy, using methods such as direct subsidies, preferential tax policies and off-budget finance, channeled credit to targeted industries, controls on foreign exchange and imports, encouragement of domestic cartels, and informal bureaucratic guidance.
24
In agriculture and strategic manufacturing, Japan used tariffs, quotas, and informal barriers to limit imports. Money was funneled from Japanese consumers to Japanese corporations by markups over the world price for many items. In the 1990s, it was estimated that Japanese paid more than 600 percent of the world price for radios and televisions.
25
Credit allocation was another key element of Japanese mercantilist industrial policy. The Postal Savings Bank offered consumers poor returns on savings, while steering their deposits to Japanese manufacturing and infrastructure companies.

The Japanese government in 1960 declared that computing was a strategic industry. The Ministry of Trade and Industry (MITI) ordained that the role that the Pentagon played in the United States in procuring and promoting a computer industry would be played by Japan’s National Telegraph and Telephone Company (NTT), a government monopoly. The Japanese government pressured International Business Machines (IBM) into licensing all its technology to Japanese producers, and compelled IBM’s Japanese subsidiary to agree to export 60 percent of its production and to submit new models for approval to the government. In addition, the Japanese government imposed a 25 percent tariff on imported computers that included IBM computers produced inside Japan.
26

As a result of these mercantilist policies, Japan’s merchandise trade surpluses with the United States and other countries ballooned. Between 1980 and 1989, Japan accounted for 38 percent of the US current account deficit.
27
In 1975, the United States absorbed 12 percent of the world’s manufactured exports; by 1987 that had grown to 22 percent. Japan’s economy was half the size of the US economy, and yet Japan admitted to its protected national market only 2 percent of the world’s manufactured exports in 1975 and merely 4 percent in 1987.
28

One Japanese CEO explained: “We don’t export because it’s profitable. We export because it is national policy.”
29

EAST ASIAN MERCANTILISM: THE LITTLE TIGERS

The so-called Little Tigers—South Korea, Taiwan, and Singapore—employed variations of mercantilism as part of their own export-oriented strategies of national economic development. Emulating Japan, they exploited their importance to the United States in its Cold War competition with the Soviet Union and China in order to gain access to American consumer markets and American technology, while protecting their domestic markets and carrying out state-guided industrial policies.

The Korean “miracle” of the 1960s through the 1980s was an example of modern mercantilism in action. Like Japan, South Korea relied on one-way access to US consumer markets and technology transfer by US corporations. The US Agency for International Development (USAID) provided financial and technical assistance for transferring US technology to the newly created Chungju Fertilizer Company, created in 1960. When the first South Korean oil refinery was established in 1967 by the Korea Oil Corporation (KOCO), Dow Chemical, as part of a joint venture, agreed to share its technology, train Korean engineers, and use them to replace American engineers as soon as possible. All the American engineers were replaced by 1976, and then in the 1980s Dow sold off its interests in South Korea.
30

Like Japan, South Korea quickly moved up the value chain from garments to high-value-added industries like electronics and automobiles. South Korea became even more mercantilist following the ascension of the military dictator General Park Chung-hee in the 1960s. In the 1970s, South Korea reversed financial liberalization, so that its government-controlled banking sector could make “policy loans” to targeted strategic industries. The military government controlled foreign exchange, to the point of mandating the death penalty for foreign-exchange violation.
31

In addition to using the state-controlled financial sector to steer credit toward strategic industries, the South Korean government also used state-owned enterprises (SOEs) such as the nationalized steelmaker, POSCO. In South Korea, the equivalents of Japan’s
keiretsu
were the
chaebol
, or business families, several dozen large groups of companies. Before the 1997 Asian financial crisis, government-
chaebol
collaboration was central to South Korean industrial policy.

Taiwan, another former Japanese colony, also emulated Japanese mercantilism. Taiwan used tariffs, nontariff barriers, and channeled credit to promote targeted manufacturing sectors. Like other Asian mercantilist countries, Taiwan relied on a state-controlled credit system and lax intellectual-property protection.

As city-states, Singapore and Hong Kong were necessarily more open, lacking hinterlands and large internal markets of their own. They pursued different but equally mercantilist policies of export-driven economic development.

NIXONIAN
REALPOLITIK
: THE ROAD NOT TAKEN

Richard Nixon is often thought of as a precursor of Ronald Reagan, but that honor belongs to Jimmy Carter, whose administration first adopted economic neoliberalism and began the large-scale dismantling of the New Deal system. Nixon was the last New Deal president. The policies of the Nixon administration can be understood as an attempt to deal with the problems caused by the contradiction between the New Deal order at home and the global economy by sacrificing America’s post-1945 hegemonic grand strategy in favor of a more overtly nationalistic US foreign military and economic policy.

Nixon inherited a global system in which the bills were coming due for the obligations undertaken by his postwar predecessors. In his inaugural address, Kennedy had glibly declared: “Let every nation know, whether it wishes us well or ill, that we shall pay any price, bear any burden, meet any hardship, support any friend, oppose any foe, in order to assure the survival and the success of liberty.”
32
Nixon, presiding over the disengagement of the United States from the involvement in Vietnam that Kennedy had begun and Johnson had escalated, declared that in the future America’s allies would be expected to rely chiefly on themselves for their defense—the Nixon Doctrine. Nixon and his national security adviser, Henry Kissinger, argued that the bipolar world had been replaced by a multipolar world, in which the United States should pursue realist policies to maximize its own strategic interests.

Nixon’s foreign economic policy was a form of nationalistic Realpolitik
.
He found a like-minded ally in Treasury secretary John Connally, who once confided in his deputy Pete Peterson, “The foreigners are out to screw us.”
33
Unable to reconcile America’s role as global economic hegemon with its national interests, Nixon and Connally abandoned that role for American self-help.

In 1971, the United States experienced its first current-account deficit, earning less on the value of its exports than it owed on the value of its imports. Nixon retaliated against Japanese mercantilism by slapping a tariff on Japanese imports, an act remembered in Japan as the “Nixon shock.” Lacking enough gold to pay foreign claims, the Nixon administration suspended the convertibility of the dollar to gold, at first temporarily and then permanently in 1973. Freed from the gold standard, the United States devalued the dollar.

Like Franklin Roosevelt, who dismissed the gold standard as one of a number of “fetishes of international bankers,” Nixon was less interested in the global system than in American national interests.

Had Nixonian nationalism prevailed, the New Deal order might have been saved by a tailoring of America’s military and trade policies to domestic objectives. But beginning with Jimmy Carter and Ronald Reagan, the United States took a different path. Instead of modifying New Deal regulations, neoliberal Democrats and conservative Republicans alike dismantled them and replaced them in many cases with no regulations at all.

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