How Far Can Politics, Economy Be Separated?

The relationship between politics and economy is not so simple that it can be explained just by referring to what is known as “the separation of politics and economy,” even during periods of peace without countries at war nor international strife. Countries’ political and economic dynamics are driven by their people’s discontent with the prevailing state of things and anxiety about the future. As such, there always are factors that are prone to trigger conflicts of interest between countries.

The more countries become friendly to and dependent on each other in terms of ideological alignment or trade expansion, the more they become susceptible to doing harm to each other, as in the hedgehog’s dilemma. The border conflict of 1969 between China and the then Soviet Union and Japan-U.S. trade frictions in the 1980s, for example, show how fragile bonds between even friendly countries are.

In liberal democracies, public sentiment materially influences politics. When outward flows of advanced technologies grow to the extent that they threaten not only the domestic labor market, but also the rate of self-sufficiency in food and energy supplies and national security, the public has to choose between prioritizing its nation’s economic interests and national security.

Britain’s Brexit vote to quit the European Union and the election of Donald Trump as president of the United States can be said to have reflected each population’s political decisions, encouraged by anti-globalism movements, to put a brake on the policy of accentuating the pursuit of economic benefits. The COVID-19 pandemic, which upended our lives in recent years, and Russia’s invasion of Ukraine have helped sharpen criticism of the consequences of economic globalism that optimistically takes “the separation of politics and economy” for granted.

Trump, citing the need to safeguard U.S. national security and domestic employment, implemented protectionist trade measures in rapid succession, including raising tariffs on imports from China and other countries. He was criticized for employing an anachronistic mercantilist trade policy. His trade policy approach was similar to what 18th-century European countries sought as their national goals for maximizing trade surpluses with territories under their colonial rule.

Warning by Adam Smith

There was an era when there was a consensus that bolstering foreign trade was the best means to promote nation-to-nation and people-to-people exchanges. Adam Smith, in his book “The Wealth of Nations,” however, severely criticized the mercantile system for encouraging the accumulation of gold and silver by amassing trade surpluses with a combination of export subsidies and import tariffs.

There is no certainty that foreign trade would raise domestic employment, while it enables privileged merchants and large manufacturers to grossly enrich themselves, he said. As a result, he contended, foreign trade would create conflict and animosity between the rich and people on the street who were forced to buy imported goods at prices inflated due to high tariffs.

Smith was exceptionally insightful in that he warned that growth in foreign trade would result in economic inequality at home. He argued further that although foreign trade could potentially serve as “a bond of union and friendship” among nations, it would spawn a remote cause of war because a nation would be able to prosper only at the expense of its trading partners, a situation that would make them jealous.

About 250 years on, the 21st-century global economy emerged with a new form with China integrated into it. China, for its part, has subsequently become a trading powerhouse to be seen, in Smith’s words, as a “source of discord and animosity.”

The political circumstances and technological levels of products shipped abroad nowadays are different from those in Smith’s times. Nonetheless, there is one aspect that is common to the two otherwise separate periods — the awareness among people in both periods that “the separation of politics and economy” is problematic, considering that the evolution of globalization would lead to inequality and political instability at home.

In fact, the pandemic caused trade contraction in value terms in the short run, slowing the movement of capital and people. This does not mean, however, that the historic economic transition that has been taking place continuously, albeit at a slow pace, is over.

In 2021, a year after the worldwide turmoil caused by COVID-19, global trade recovered.

Manufacturers of communications and precision equipment and automobiles, which suffered from semiconductor shortages due to pandemic-triggered supply chain disruptions, posted a quick recovery in exports in value terms. Likewise, energy suppliers saw their exports in value terms rebound by large margins in 2021 and 2022 thanks to sharp price rises.

Global trade statistics show that the pandemic caused greater damage to trade in services such as tourism and transportation than trade in goods. However, in the first quarter of 2022, the former’s trade ballooned by nearly 90% from a year earlier.

Though non-political shocks such as the COVID-19 pandemic indiscriminately affect all parts of the world and temporarily knock the economy off course, post-shock recovery tends to be considerably quick. In comparison, the impact on global trade of lingering political rifts and wars occasionally threatens to seriously alter the world’s economic structure itself.

The Russian invasion of Ukraine that began in February 2022 has prompted a number of countries to rush to cut off trade with unfriendly ones as a national security consideration. The United States, for example, hardened its policy of delaying the pace of China’s technological advance by regulating China-bound shipments of dual-use goods that can be used for both commercial and military applications. Many countries across the world are now changing their trade policies, not only to protect their advanced technologies but also to secure energy and food imports.

Exclusion of China

After the Trump administration in 2018 imposed additional tariffs on imports from China, U.S.-China trade shrank in the short run, but, at the same time, the higher import duty increased upward pressure on inflation in the United States. The current U.S. administration of President Joe Biden was consequently compelled to choose between protecting workers in the U.S. manufacturing sector and bringing down inflation.

Washington has seen imports from China revert to growth over the past year with the United States registering an all-time high bilateral trade deficit.

From a national security perspective, the Biden administration now gives more weight to the issue of how it should regulate China-bound exports of dual-use goods, such as chips, that can be used for military purposes as well, than to protecting jobs within the United States from being lost to competitive imports from China.

In 2022, the World Trade Organization’s dispute settlement panel disapproved of Washington’s justification of invoking the abovementioned tariffs on imports from China, ruling that the U.S. action had not been “taken in time of war or other emergency in international relations” as stipulated in the code of global trade governance. In a related development, the Biden administration enacted the CHIPS and Science Act, including government subsidies to attract foreign semiconductor manufacturers’ investment in the United States. Lately, it is focusing on entering into international trade agreements aimed at the exclusion of China, stepping up measures to create a robust international network of supply chains and prevent Beijing’s military conversion of advanced technologies.

In a nutshell, the United States, with China in mind, has been reinforcing its political and trade policy approaches with a view to establishing a global cooperation framework that prioritizes trade and a network of supply chains with its allies and partner economies with a “friendshoring” mindset.

Economics can offer a clear explanation about benefits from free trade and globalization. Yet how should people in a country that is economically prosperous thanks to free trade deal with a situation in which they encounter troubling difficulties, including the worsening of income inequality within it? Without due scrutiny on this particular issue, the future of free and multilateral trade cannot be so bright.

Takenori Inoki

Inoki is a professor emeritus at Osaka University, where he also served as dean of the economics department. He was a specially appointed professor at Aoyama Gakuin University from 2012 to 2016. Prior to that, he served as director general of the International Research Center for Japanese Studies from 2008 to 2012.

(The original Japanese article appeared in the Oct. 29 issue of The Yomiuri Shimbun.)