A Remarkable Resemblance: Germany from 1900 to 1945 and China today. Time for a NATO for trade?

• Author: Atkinson, Robert D.

The issue of China trade has taken up most of the trade policy oxygen for the last four years as the United States and China deepened their trade war, and it is unlikely that a new Biden administration will go back to a pre-Trump era vis-a-vis China trade. Yet crafting the right response to China's unrepentant "innovation mercantilism" is difficult because it appears the free world has never faced such an adversary before.

But in fact, the free world has faced such an adversary: Germany for the first forty-five years of the twentieth century. As noted development economist Albert O. Hirschman wrote in 1941, Germany was neither a free trader nor a protectionist. It was a "power trader" that used trade as a key tool to gain commercial and military advantage over its adversaries. Likewise, China's trade policy is guided neither by free trade nor protectionism, but by power trade, with remarkably similar strategy and tactics to those of 1940s Germany. Understanding how Germany manipulated the global trading system to degrade its adversaries' capabilities, entrap nations as reluctant allies, and build up its own industries for commercial and military advantage, just as China is doing, can shed light and point the way for solutions to the China challenge.

HIRSCHMAN'S ANALYSIS

Hirschman's first but largely forgotten book, National Power and the Structure of Foreign Trade, was published in 1945. It was the rise of Germany as an economic and military power, both leading up to World War I and again in the 1930s under Hitler and National Socialism, that led Hirschman to focus on the unique nature of German trade policy. From that experience, Hirschman wrote: "[I]t is possible to turn foreign trade into an instrument of power, of pressure, and even of conquest. The Nazis have done nothing but exploit the fullest possibilities inherent in foreign trade within the traditional framework of international economic relations."

Hirschman's key insight was that some countries-- in this case Germany under three very different government regimes from 1900 to 1945--focus not on maximizing free trade or even on protecting their industries, but on changing the relative power of nations through trade to achieve global power. Germany's policies and programs were designed not only to advance its own economic and military power, but to also degrade its adversaries' economies, even if that imposed costs on their own economy relative to a free trade regime.

As Hirschman pointed out, neither the free traders (such as the United Kingdom) nor the protectionists (the United States before President Wilson and the 1913 Underwood Tariff reductions) were interested in changing the relative power of nations. Free traders believed that trade was a welfare-maximizing, win-win process where all nations benefit, otherwise why would two parties engage in it? Protectionists assumed other nations would be protectionist and that only the distribution of activity would change, with nations getting more of some economic activity and less of other.

Hirschman argued that there were two main sources of Germany's trade power: the supply effect and the influence effect. For the supply effect, Germany concentrated imports on goods need for its war machine, redirected trade to neighboring friendly nations or subject nations, and sought to control oceanic trade routes.

Germany also engaged in substantial industrial espionage to boost its own supply capabilities. As New York Tribune journalist Stanley Frost wrote in 1919, "German inventions are to be kept secret--others are to be stolen. Trademarks are to be pirated." He also discussed how German engineers were sent oversees seeking work in foreign enterprises to engage in a "vast espionage system." And just as today's U.S. Department of Justice has opened hundreds of investigations into Chinese industrial espionage, the department also investigated Germany then. As Attorney General Mitchell Palmer wrote in 1919, "In many of the large German companies taken over by the Alien Property Custodian [set up when the United States entered World War I], it was found after investigation that espionage was one of the chief functions."

On the influence side, Germany sought two effects. The first was to make it more difficult for its trading partners to dispense entirely with trade with Germany, thus creating dependency. As Hirschman writes, "If [country] A wants to increase its hold on B, C, D, etc., it must create a situation in which these countries would do anything in order to retain their foreign trade with A." Hirschman notes that a dependent country has only two choices: dispense entirely with the trade they conduct with A, or replace A as a market and source of supply with other nations, something that is not always easily done, at least in the short term. Germany consciously sought to make countries dependent on its exports, including chemicals and machinery. It did this by directing trade to poorer nations, developing exports in articles that other nations were dependent on, introducing a wide disparity between patterns of production for exports and imports, and creating vested interests in trading partners and tying those interests to continued trade with Germany.

The second way to achieve influence was to make it more difficult for trading partners to shift trade, in part by driving the prices of their exports to Germany up, including through monetary manipulation and by focusing on promoting exports of highly different products not only to create dependency but to limit the ability of other nations to advance industrially.

As Hirschman writes, "It was one of the great principles of German foreign economic policy to prevent the industrialization of her agricultural trading partners." He went on to note:

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