The U.S. trading system since the 1970s has screwed American workers. But the main culprits are the American capitalists who devised the system, not foreigners.
On April 2, as he imposed exorbitant tariffs that triggered a stock market collapse, Donald Trump said this: “For decades, our country has been looted, pillaged, raped, and plundered by nations near and far, both friend and foe alike. American steelworkers, autoworkers, farmers, and skilled craftsmen—they really suffered gravely. They watched in anguish as foreign leaders have stolen our jobs, foreign cheaters have ransacked our factories, and foreign scavengers have torn apart our once beautiful American dream.”
Trump’s tariffs, which are more about indiscriminate bullying than trade policy, set off reams of simplistic commentary praising the glory days of free trade. Yet we would do well to remember our history, or we could end up cherishing the kind of corporate globalization whose backlash paved the way for Trump in the first place.
The commentary has compared the recent stock market free fall to the abrupt market crash in the early days of the pandemic. But that’s the wrong comparison. The right comparison is to the last time that the stock market and the economy collapsed due to perverse policies. That would be the collapse of 2008, when the market lost 54 percent of its value.
Those policies included the deliberate wreckage of financial regulation so that insiders could get richer, as well as hyper-globalization. The architect of those policies was Robert Rubin with an assist from his deputy Larry Summers, and it’s instructive to compare Rubin with Trump.
As grifters, Donald Trump and Robert Rubin are two variations on the same theme. Rubin reaped immense personal benefits from financial deregulation and corporate globalization. Moving from Goldman Sachs to the White House to the Treasury and then to Citigroup, he epitomized the self-interested revolving door between Washington and Wall Street. Rubin did it with great politesse, always cloaking his maneuvers as public-mindedness. Trump is more coarse and more crude; the personal grifting is shameless and transparent.
Both versions corrupt democracy. We shouldn’t have to choose between these two forms of the private use of public office. Let’s see which produces more collateral damage for the economy.
CONTRARY TO BOTH TRUMP and the “bring back globalization” chorus, we have never had free trade. Here’s what actually occurred during the past 80 years.
Toward the end of World War II, the Roosevelt administration laid plans for a trading system unlike any the world had ever seen. Call it Globalization 2.0.
Unlike the earlier brand of globalization dating to the 19th century, it would be far from laissez-faire. The system would be spared the deflationary pull of the gold standard and private currency speculation. The idea was to enable the whole world to have something like the American New Deal, biased toward growth and broad prosperity, a blend of managed capitalism and social democracy.
The system’s rules, defined at the Bretton Woods Conference of July 1944, included a lot of public capital later enhanced by the Marshall Plan, fixed exchange rates, and controls on private speculation. Thanks to these rules, the British Labour government elected in July 1945 could build the world’s most expansive welfare state, despite the fact that Britain came out of the war with a debt-to-GDP ratio of about 240 percent. Had it not been for the Bretton Woods rules, deflationary demands of private capital markets would have crushed the pound and destroyed Labour’s program.
“The U.S. was the architect and leader of both the trading system and the alliance system—a geo-economic and geopolitical Pax Americana.”
The catastrophe of the interwar period, when leaders tried to reimpose something like the pre-1914 system, with finance in the driver’s seat and austerity enforced to reassure creditors, led to depression and fascism, just as J.M. Keynes had warned. That lesson was very much on the minds of the planners at Bretton Woods, whose leaders included Keynes himself.
Postwar globalization began unraveling in the inflationary 1970s. Nixon devalued the dollar and ended fixed exchange rates. Reagan and Thatcher then moved to undo regulated capitalism. The center-left leaders that followed them, notably Bill Clinton and Tony Blair, followed suit and doubled down on a corporate model of globalization.
Here’s the key point to keep in mind. Neither FDR’s Globalization 2.0, nor the neoliberal Globalization 3.0 that followed, was free trade. Each was managed trade, but they were managed to serve very different interests.
In both models, the system’s American sponsors indulged a great deal of outright mercantilism on the part of nations like Japan, South Korea, and later China. In the case of Japan and South Korea, turning a blind eye to protectionism was useful as a perquisite of Cold War alliance. Until the 1970s, the U.S. had such a huge economic advantage that accepting some mercantilism to help close allies prosper was no big deal.
Later, there were fortunes to be made on Wall Street doing deals with China, which was no ally but a terrific pool of very cheap labor for outsourcing by industry. So China, about as far from a free-trader as you could get, was admitted to the World Trade Organization in good standing. Mercantilism worked for Chinese development and for American capitalists. The only victim was U.S. domestic employment.
Globalization 3.0 offered something else. After the Trade Act of 1974, trade agreements could address “non-tariff trade barriers,” which inevitably would alter national policies around environmental protection, workplace safety, patent protections, procurement laws, digital rules, and a host of other policies. Lobbyists could now obtain things they could not pass through legislation in trade agreements, turning them largely into corporate favor factories. This was not free trade, but trade tilted toward the interests of large pools of private capital.
The rules of the WTO, heavily influenced by U.S. finance, were not free trade either. American financial companies engineered a new concept, previously unknown in trade law, called “trade in services.” The WTO rules, which took effect in 1994, required each nation to have light regulation of banks, and to open their markets to U.S.-based insurance companies and other “financial services” including tech.
The U.S. today runs a huge trade deficit with the rest of the world in manufacturing—about $1.2 trillion—but a surplus of $278 billion in services, notably profits from banking and investment banking. Guess which piece of this deal eviscerated the American heartland? Guess which one enriched Wall Street?
HAVE “AMERICAN STEELWORKERS, autoworkers, farmers, and skilled craftsmen,” among many others, “suffered gravely”? Absolutely. But Trump is wrong when he says that “foreign leaders have stolen our jobs.” It was American corporate executives, Wall Street financiers, and American political leaders of both parties who did the deed. Trump can thank those leaders for putting their profits ahead of their country, because the popular backlash put him in office.
Both brands of postwar globalization came bundled with American hegemony. The U.S. was the architect and leader of both the trading system and the alliance system—a geo-economic and geopolitical Pax Americana. Trump seems quite willing to throw that over, too. But in favor of what?
Trump seems to think that ad hoc dealmaking, for his own personal benefit and for some version of a self-sufficient America, will be the successor system. But there are just too many variables, even for a consummate dealmaker like Trump. Is Russia friend or foe? How do we trade off economics against geopolitics? Do we trash Taiwan economically because of its industrial policies, or help Taiwan fend off China? What to do when Europe makes a defensive economic alliance with China? And in the meantime, the sheer uncertainty will keep crashing the economy.
But as perverse as Trump’s program is, it resonates with the reality of many working people. During his Rose Garden speech, Trump called up an autoworker identified only as Brian.
“I grew up just north of Detroit, Michigan, in Macomb County,” Brian began. Macomb is the iconic blue-collar county, studied for decades by our colleague Stan Greenberg as the home of the “Reagan Democrats,” a key swing constituency in the 1980s. “My entire life, I have watched plant after plant after plant in Detroit and in the metro Detroit area close,” Brian said. “And Donald Trump’s policies are going to bring product back … there’s going to be new investment … and the UAW members, and I brought 20 of them … sitting right over here, we support Donald Trump’s policies on tariffs 100 percent.”
Brian’s speech shows that blue-collar workers respond to policies that claim to support their interests. But Trump’s tariffs will not bring much auto production back to the U.S. Ever since NAFTA, U.S. auto companies have treated all of North America as “national.” They rely on transnational supply chains that will not be domesticated anytime soon, least of all in a climate of extreme economic uncertainty.
Trump’s ignorance about how trade actually works is rivaled only by the sheer ignorance of a great deal of mainstream commentary. Tom Friedman wrote for The New York Times that “previous presidents understood that if the world grew steadily richer and more peaceful, and if the United States just continued to get the same slice of global G.D.P.—about 25 percent—it would still prosper handsomely because the total pie would grow steadily.” Note that Friedman glosses over who in the United States prospered.
Here’s Eduardo Porter in The Washington Post: “Nixing globalization will, in fact, stymie the main forces undergirding the innovation that has fueled the nation’s remarkable run of prosperity: its ability to draw investment capital and top talent from around the world—which has propelled productivity growth way ahead of its peer nations.” Is Porter remotely aware that there were two very different brands of globalization? And we had a “remarkable run of prosperity” for whom? Not for working people who shifted their allegiance to Trump.
Our former Prospect writing fellow, the eminent University of Chicago historian Tara Zahra, got it mostly right in an extended piece for The New York Times. Different versions of globalization had winners and losers. But you have to know the history to locate the current debates in any context. Most writers in the mainstream press are either ignorant of the history, or just begin with the simple premise that free trade is good and that what we had before Trump was free trade.
IF YOU WANT A SYMPATHETIC ASSESSMENT of what Trump thinks he is trying to do, Robert Lighthizer, Trump’s top trade official in his first administration, can offer one. Lighthizer, who knows the details of trade far better than Trump, has long been a supporter of a higher universal tariff—maybe a base of 10 percent like Trump’s, though not as high as some of the individual tariffs that Trump imposed.
Lighthizer’s point is that for a variety of reasons, the U.S. has a trade deficit with the rest of the world of over a trillion dollars. The reasons include the mercantilism of other nations and an overvalued dollar. Raise tariffs, Lighthizer explains, and that will reduce imports. Reduce imports and domestic production will start to make up the difference.
In principle, that’s not crazy. But the adjustment will not happen overnight, especially when Trump’s policies are so chaotic that potential domestic producers can’t plan and won’t commit. In the meantime, the sheer chaos can crash the economy, overwhelming the potential benefits.
It’s definitely possible to increase the domestic share of manufacturing. But that takes careful planning, and years if not decades. The guy who was on track to do just that was named Joe Biden. But Trump, out of personal animus toward Biden, is tearing up everything Biden created. An explosion of manufacturing construction is being rolled back as plants are canceled, and Trump is defunding programs that once boosted U.S. manufacturing.
In addition, Lighthizer’s own work in Trump’s first term belies the idea of a universal tariff as a cure-all. As Trump’s trade chief, Lighthizer did not use universal higher tariffs. Instead, he enlisted Trump to raise tariffs on China, the world’s prime mercantilist offender, and only after extensive investigation and negotiation. Biden, resisting the importunings of globalist Democrats, retained Trump’s tariffs. The U.S. trade deficit in goods with China declined from a peak of $419 billion in 2018 to $295 billion in 2024.
There are now two opposite perils. One is that Trump will stay the course, and further crash the economy. The other is that the alternative to Trump will be seen as simple-minded “free trade,” something that never existed except in textbooks.
Tragically, under Biden we were on a path back to the kind of global economy that allowed plenty of trade and plenty of room for national economic policies, and the U.S. had begun a renaissance of domestic manufacturing. But that takes time, patience, deep knowledge, and real patriotism—the antithesis of Trumpism.
To read the full article as it was posted by The American Prospect, click here.