Why is the isolationist economy bad

Globalization - a reversible story?

The current uncertainty about the neo-mercantilist turn in US economic and trade policy has raised fundamental questions about the future of the global economy. What does it mean when the world's largest economic nation questions, denies and announces that it will increasingly withdraw to itself in the future and that global economic exchange will primarily be measured by the advantages it brings to the USA ? The hitherto vocal critics of globalization should actually cheer, after all, it was Donald Trump who unceremoniously removed the American-European free trade project TTIP, which they had so much rejected, from the agenda and views the effects of globalization in the USA as critically as ATTAC has done so far has done especially for Africa and Latin America. But instead of being happy about the great willingness of the USA to take on positions critical of globalization, Katzenjammer is spreading. The globalization elites in the USA and Europe are suddenly in the same Trump-critical camp as their previous opponents, whose globalization criticism has become much quieter since Donald Trump seems to share it.

A kind of ball of paradoxes is performed, a wrong or at least completely shifted world emerges, in the background of which fear lurks, the fear that the USA could get out of the global economic division of labor, return to an incalculable isolationism and no longer care much about the rest of the world . But: Even if the speeches and arguments of the Trump administration, which have so far been the main topic, should be taken seriously, which is justifiably doubtful, the question arises as to whether what is perhaps desired can also be realized without further ado. Considerable doubts have already been expressed about this, which should be expanded here to include an economic-historical perspective. What lessons, or more cautiously, what messages does the history of the global economic division of labor have in store? And how can the currently rampant neo-mercantilist moments around the world be assessed in this context? The answer is not easy; it turns out to be ambivalent. On the one hand, it is not realistically conceivable for any participant to significantly limit the extent of global economic cooperation without suffering considerable damage themselves. On the other hand, what we now call globalization under the sign of free trade has never been undisputed, because not all global economic actors benefit equally from it, but there are winners and losers whose position on the global economy is closely related to its results The world economy was therefore always competitive. Only one thing is certain: a permanent withdrawal from the global economy was never an advantage. But let's take a closer look.

Historically, global economic isolation has only brought disadvantages

The history of global economic structures and connections goes back a long way. Basically, economy has been a "limitless" event from the start, in which political barriers always represented artificial obstacles, because the economic division of labor follows technical and geographical conditions much more than arbitrarily drawn political boundaries. On the contrary, one could even argue, with a certain right, that political structures could only have held their own if, at least for a longer period of time, they respected the constraints of interregional and international economic division of labor In any case, historically speaking, withdrawing from the global economic division of labor has never been a recipe for success.

The decline of China since the 17th century has a lot to do with its self-imposed economic isolation, 3 and neither in the interwar period nor in the larger framework of the Council for Mutual Economic Assistance (COMECON) after 1945 was able to oppose the major global economic structures to claim alone. The voluntary or forced exit from the global economic division of labor always had negative effects, be it because the isolation itself was expensive, be it because the technologically most favorable solutions were not always achievable and had to be laboriously substituted, or because of the own economy There was a lack of competitive markets in which asserting oneself was and is a key driver of increasing efficiency.

The history of the GDR's economy is a striking example of this. After 1950 it was torn out of its global economic context and its export had to be geared primarily to the import needs of its socialist partners, a technologically extremely regressive constellation, the full extent of which became apparent after the fall of the Berlin Wall. The GDR economy, valued as efficient up to October 1989, had in fact no competitive products on competitive markets. Its global economic isolation between 1950 and 1989 had no advantages in total, but brought many disadvantages, not least of which the local consumers knew how to sing a song.4 In short: the (permanent) exit from the world economy is not a serious option; its costs and economic consequences are ultimately unacceptable. Accordingly, the dissociation concepts favored by some development economists in the 1960s and 1970s were not seriously represented for very long; today they are basically irrelevant. 5

For free trade, their profiteers are

At the same time, global economic history is not a history of the unproblematic and always positively deepening international division of labor. Even if the global economic data, especially in the years after the Second World War, suggest such a development and the national division of labor has deepened in the historical trend and the exchange of trade, goods and knowledge has become more intensive, this process has always been extremely controversial and accordingly by no means linear. The great global orders since the high Middle Ages were always of limited duration, not because the advantages and benefits of such cooperation would have been fundamentally questioned, but because the respective orders did not benefit all actors equally. States were very much in favor of exchange relations when they could get the most benefit from them. If this was not the case, then there was a risk of conflicts that would be carried out to the bitter end. Because economic success, it became clear very quickly, enabled greater political and military leeway that other countries with less success did not have. The historically well-known disputes about the structure and volume of the global economic division of labor were therefore mostly less about the question of whether there should be something like cross-border exchange and more about the question of who benefited from it and in what way.

In the high and late Middle Ages, as part of the Euro-Asiatic exchange secured by the Pax Mongolica, this was already evident because the military strength of the Mongols enabled them to open up a trading area, from which they in turn benefited above all. The collapse of this trading system was less the result of attempts by other forces to eradicate Mongol dominance than the great plague crisis of the middle of the 14th century, when around a third of the population died in Europe alone.6 The peculiar dialectic of economic success and political strength became apparent at the latest when the small Netherlands successfully defied the Spanish world power in the 16th and 17th centuries, not least because of their economic strength

Since then, economic success has been firmly anchored as a political resource in the consciousness of the authorities, achieving it, asserting it and permanently asserting it against competition, a decisive motive for state action. And this is precisely where the ups and downs arise in the question of how far an open world economy is viewed as helpful or dangerous. It was and is indisputable that economic success, which corresponds to a strong position in the global economic division of labor, offers advantages, be it because of the increase in financial options, the mobilizable military resources or the population growth and their social security, to name just a few points. At least those states that felt strong enough for this were early representatives of a world economy that was as open as possible, first and foremost the republic of the Netherlands, which fell from Spain in the 17th century, whose economy was based on the openness of world markets due to the lack of a large territory and corresponding resources on which the Dutch could make perfect use of their nautical and commercial knowledge.

Here at the latest, however, the paradoxical effects of free trade from a political point of view became apparent, since the great success of the Dutch, who even supplied the English coastal towns with fresh fish of a quality and at a price that the English fisheries could not offer, envious of the plan shouted, who rejected the freedom of the seas precisely because it was alone or at least largely useful to the Dutch. For a long time this determined public opinion in Great Britain and was by no means harmless. In the 17th century, London repeatedly waged war against the Netherlands, which were far superior in European and world trade, and even pursued an aggressive economic nationalism (navigational acts), until finally at the end of the 18th century it successfully all competitors, from Spain to the Netherlands to France and the Indian textile industry, had moved out of the way. Only now, starting from a position of temporarily unassailable economic and maritime strength, became the unconditional protagonist of free trade, a standpoint that was at the same time the condition, expression and consequence of the global Pax Britannica that was linked to it

Shift in global structures

One can generalize these experiences to the effect that the advantages of the global division of labor are distributed differently, but this unequal distribution is by no means stable: The British example and the displacement of competition speak a clear language. This is where the real reason for state intervention lies: states that believe they will get away badly try to protect themselves, superior states aim to enforce free trade structures. In the entire, supposedly free-trade 19th century, there are also counter-movements against the English free-trade doctrine. Since the 1820s, the USA switched to a high protection tariff policy, which it adhered to undeterred until the Second World War, and its economic advancement was always secured against possible external competition. The US was also prepared to harm its trading partners if it believed it would benefit itself. Even during the Great Depression of 1930 they increased their tariff rates drastically, and Franklin D. Roosevelt abandoned the international monetary system, the gold standard, a little later in order to gain greater room for maneuver in economic policy. Trump’s neo-merchant cantilism is by no means without a role model.

It was only after 1945, when the USA had become the undisputed dominant economic power and with the Bretton Woods Agreement the framework for international trade and the monetary system, that it became the free trade factor that it was until recently. The Pax Americana, like the Pax Britannica of the 19th century, was certainly a versatile constellation, in whose free-trade framework many people could benefit.9 In the 19th century this was mainly the USA and Germany, while Great Britain slowly rose in the second half of the century In the context of the Pax Americana, Japan and the other Asian “tiger states” ultimately benefited above all from the opening of China and - quite traditionally - Germany, which is strong in exports.

The USA is currently experiencing what the British had to make before 1914, namely that of being the guarantor and anchor power of an order whose beneficiaries they themselves are not in the first place.10 This explains a great deal of Trump's rhetoric and his popularity in the USA where the losers of globalization are suspected. While North America accounted for almost 30% of world exports in 1948, in 2007 it was only less than 14%, while the Asian countries experienced a proportional increase in value from around 14% to 30%. Europe was not able to maintain its export share, which was more than 50% in 1973, but in 2007 it was still well above the values ​​of 1948 with more than 42 %.11 Such shifts hurt, especially when they are accompanied by a considerable structural change, at least subjectively thus perceived economic decline correspond.

Let's go back to the 19th century. The US was by no means the only protectionist. The states of the European continent only followed the English model for a while; In the last third of the 19th century, tariffs were increased almost everywhere, if only moderately, but at least: Many states did not want to be defenselessly at the mercy of the superior British economy. Joseph Schumpeter described this period as the neo-mercantilist phase.12 It is hardly surprising that different concepts of imperialism (Hobson, Luxemburg, Lenin), in which economic success and political expansion were thought together, were popular, especially since even Great Britain did not shy away from the use of armed force in order to assert his economic interests (opium wars, colonial wars, boer war, etc.). The First World War and its aftermath then brought the pre-war global economy to an end, indeed in a certain sense it can be seen as an attempt to stabilize the pre-war order against the emerging economic actors. Ultimately, that was not possible; Despite Germany's defeat, the result of the war was not a return to the Pax Britannica, but an ongoing dispute about dominance and gain, which was only achieved after the Second World War through the US dominance that was then achieved and the destruction of German and Japanese competition

The competition between states was by no means the only reason that shifted and shifted global structures, perhaps not even the most important. Rather, the global economic division of labor reflected and reflects fundamental economic data, the shifting of which can become a political problem. The competition between states is therefore not necessarily the cause, but also an expression of the economic structural change, which - mostly in vain - should be halted, regulated or intensified in one's own interest. Seen in this way, the respective large orders are at the same time promoters and victims of economic structural change, which has played a major role up to the present and continues to play today. Britain's global economic dominance was undoubtedly to do with the country's military successes against Spain, the Netherlands and France, and certainly also with the unscrupulous use of colonialist means, but it was above all a consequence of its strong position in the early days of the modern economy.

As the motherland of industrialization, which at the same time had essentially grown on its “own dung”, the country was quite unrivaled in the first half of the 19th century and dominated the global economic structures at will.14 But it had been drawing since the middle of the 19th century It is clear that with the new technologies (chemical, electrotechnical industry, mechanical engineering, precision mechanics and optics, etc.) and with the revolution in transport technology (railways, steam shipping) the weights have shifted. The USA and, in Europe, Germany were considerably more dynamic economically during the second industrial revolution, while the English dominance decreased, a shift in weight that undoubtedly exacerbated the conflict situation that then led to the First World War.

Similarly, the sharp fall in transport costs in the second half of the 20th century led to a significant shift in global location structures, from which China and East Asia are currently benefiting, while in the last third of the 19th century it was the overseas agricultural exporters who were most important The annoyance of their European competition flooded the European markets with cheap products (meat, grain, wool, etc.). After all, regional shifts owed to the different resource endowments played and continue to play an important role. Europe's rise has a lot to do with the easy availability of coal; The importance of crude oil, but above all the regional distribution of its deposits, can hardly be overestimated for global economic relations. Access to such resources is of paramount importance.Great Britain was only able to afford its free trade position and the associated trade deficits in Europe before 1914 because the current account with its own colonies more than compensated for these deficits because of their wealth of resources. Shifts in control and the type of resource use are therefore of great importance for the global configuration, but are usually difficult to calculate. 15

Greater intensification of the international division of labor

The ups and downs in the (institutional) handling of global economic structures therefore have primarily political causes, since the position in the world economy decides on political options for action, and the world economy - although it is itself much more economically, technically and geographically determined - always accordingly was and is a political issue. While from an economic point of view almost everything speaks for a deepening of the global economic division of labor, at least since David Ricardo's considerations on foreign trade theory, this has also been scientifically well founded, 16 the politically induced pendulum swings often pointed in the opposite direction. Closing and opening the world economy was therefore always related to political decisions. The great waves of globalization in the 19th century and since the end of the Second World War have always been an expression of specific political dominance relationships: Pax Britannica and Pax Americana. That was what was mentioned.

With the strong intensification of the global economic division of labor since the 1970s, however, another moment has arisen that has once again fundamentally influenced the situation. If one takes the increase in the global volume of trade and the corresponding exchange relationships made possible by the liberalization of world trade and the dramatic reduction in transport costs, the global economic division of labor is now so intense that the respective national borders have basically lost their importance from an economic point of view. But the consequences of this global economic integration are far more dramatic today than in the past, because the importance of entire regions is suddenly put up for grabs.

The world production of goods increased by almost 460% between 1960 and 2012, but the export of goods in the same period increased by 1570%, i.e. by more than three times as much as the production itself.17 The deindustrialization of many areas of Western Europe since the 1970s has nothing to do with that fewer industrial products would be consumed, on the contrary, their inexpensive and qualitatively satisfactory production is only now taking place in Asia, which has and still has the striking locational advantage of low wage costs, a factor that has gained decisive location importance in view of marginal transport costs.

For the European and American consumers of industrial goods this was and is an eminent advantage, since they participate so directly in the low wage costs in Asia. The job losses associated with relocation have long been masked by precisely these advantages of globalization, but at the moment, with weak production growth and continued strong growth in world trade, the subsequent problems are becoming serious challenges for the governments that are still responsible for their locations. It is hardly surprising that neo-mercantilist voices are emerging especially in the USA, whose own economic area is large enough to nurture the illusion of successful solo efforts, especially since, as we have seen, there is a long tradition of such measures. The corresponding announcements by the Trump administration in their own country are highly controversial, because the fact that the global economic division of labor has beneficiaries and losers differentiates less between the states involved than in these themselves. While industrial jobs are disappearing and entire regions are drawn into a downward pull cheap imports are an advantage for many consumers and undoubtedly an important factor for the economy as a whole. Dealing with the ambivalent side of globalization is therefore by no means easy. 18

Development of productive forces is required

In any case, things are not as simple as some programmers imagine. The current status of the world economy is not something arbitrary that can simply be done differently. For this, the volume and structure of the global division of labor are too differentiated, and the importance of global economic integration cannot simply be separated according to advantages and disadvantages. It may well, and it is even likely, that an economy that isolates itself will suffer greater macroeconomic damage than the resulting regional or social advantages. In addition: from a historical point of view, (neo) mercantilist measures were only helpful when they were supposed to provide temporary protection against superior foreign competition and enable the development of one's own economy in order to then be able to return to free trade under improved conditions. As long as it is not possible to develop one's own “productive forces” (Friedrich List) within the scope of such “educational tariffs”, 19 the importance of protectionist measures is usually counterproductive, as they punish one's own consumers without really helping the manufacturers.

The importance of (neo-) mercantilist measures has never really lasted long. Great Britain said goodbye to this in the first third of the 19th century, when the country felt strong enough for this, and the USA also broke its own protectionist tradition quite consistently after 1945 when it was no longer expected to be of any use. Neither London nor Washington wanted to give up the advantages of free trade; they only wanted an advantageous position for themselves, which, however, and this is the crucial point, they owed only to a very limited extent to their protectionism.

The secret of the British rise in the 18th century and the rise of the USA in the 20th century lay only partially in the political and military dominance, which helped, but was itself an expression of the superior productivity of the respective national economy. If economic history teaches one thing, it is that economic success is less a question of violence than the development of one's own “productive forces”. That does not have to mean simply letting globalization happen and foregoing any political shaping. In terms of Friedrich List20, however, the development of “productive forces”, for example through educational efforts and protection of the losers from globalization through welfare state measures, would be much closer than combating a global division of labor, the positive effects of which are generally undisputed.

Economic history has largely confirmed Friedrich List, who was in favor of an open world economy, but also wanted the respective national economies to be well prepared for this.21 German economic history shows that this works well. The main protagonists of the local protective tariff policy before 1914 and in the 1920s were always those sectors that had problems in the face of economic structural change, which they sought to solve at the expense of the general public. Heavy industry, the textile industry and, above all, agriculture have been demanding protective tariffs since the 1870s in order not to allow superior foreign competition to enter the German market, thus imposing higher prices on German consumers than necessary, but not even scared of dumping exports abroad back. In order to enforce these special interests, these branches of industry also pursued a rude economic nationalism, which had the “protection of national labor” on the banner, but only its own wallet in mind.

These "old" industries wanted guarantees of survival against superior competition, which did not stop their decline, but delayed structural change and poisoned the domestic political climate. One can put it to a polemical point: The structural problems of the Ruhr area are so great to the present day because the area was politically pepped up and then kept at a level with subsidies, especially customs protection, that would never have been able to establish itself with free world markets. The consequences were all the more severe when the protection ceased to exist and gigantic industrial ruins were left behind.22 And the history of the industrial companies in the GDR after 1990, or rather their settlement, was above all a catching-up structural change that became necessary due to the isolation from the world market.23 Here it was not a question of List's educational tariffs worth considering, but rather a disastrous social protectionism as a result. That should be considered in the USA. Because the successful industries, and there are numerous examples of this in Germany in particular, have adapted to global competition with which they have been coping well since then. Protective tariff claims from here are not known.

  • 1 Generally on this A. Iriye, J. Osterhammel (Ed.): Geschichte der Welt, so far 4 volumes, Munich 2013-2016.
  • 2 R. C. Allen: Global Economic History. A Very Short Introduction, Oxford 2011.
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  • 4 A. Steiner: From plan to plan. An economic history of the GDR, Munich 2004.
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  • 8 As an overview C. Kleinschmidt: Economic history of the modern times. The world economy 1500-1850, Munich 2017.
  • 9 S. L. Engerman, R. E. Gallman (Eds.): The Cambridge Economic History of the United States, Vols 2. and 3, Cambridge 2000.
  • 10 T. ten Brink: Cooperation or Confrontation? The Rise of China in the Global Political Economy, PPIFG working paper, No. 2011.7, Cologne 2011.
  • 11 W. Fischer: The world economy in the 20th century, Göttingen 1979; WTO: World Trade Report 2015.
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  • 13 R. Findlay, K. H. O'Rourke: Power and Plenty. Trade, war, and the World economy in the Second Millennium, Princeton 2007, Chapters 7-9.
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  • 19 F. List: The National System of Political Economy. Translated from the French manuscript and introduced by G. Fabiunke, Berlin 1961.
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  • 21 K. Tribe: The Reason of List. National economy and the Critique of Cosmopolitan Economy, in: K. Tribe: Strategies of economic Order. The German Economic Discourse 1750-1950, Cambridge 1995, pp. 32-65.
  • 22 W. Plumpe: Ruhr Area Subsidy Ruins? A polemic, in: P. Friedemann, G. Seebold (Hrsg.): Structural change and cultural life. Political culture in Bochum 1860-1990, Essen 1992, pp. 439-449.
  • 23 K.-H. Paqué: The balance sheet. An economic analysis of German unity, Munich 2009.

Title: Globalization - a Reversible History?

Abstract: A global labor division with a corresponding exchange in trade has always existed, ultimately for reasons of pragmatism; the volume and structure of this labor division did particularly depend on technical and economic conditions. Today, low haulage makes the division of labor exceedingly intense, supported by the unprecedented reduction of trade barriers in the post-war period. The latter phenomenon had always been controversial, as impacts of global trade on welfare were, and still are, unequally distributed. The winners seek to secure their advantages, while the losers try to defend themselves against competitors. There are two lessons to be learned from historic experience: On the one hand, that a limitation of global labor division is altogether unfavorable; first, that the costs resulting from an occasional limitation are only acceptable under the premise that the time gained is used for structural reforms that allow the return to the global division of labor. A permanent exit from global economy, however, has (thus far) never turned out to be successful.

JEL Classification: F10, F60, N70