The Global Third Way Forget the protectionism versus free trade debate. The world is following China into a new era of the "power trade." Washington, D.C, call your office!

• Author: Atkinson, Robert D.

"What is the right strategic response to China's unrepentant "innovation mercantilism"? One reason it has been difficult for U.S. policymakers to craft an answer that inspires confidence is that, viewed only in the present context, it has been too easy to believe the United States has never before faced such an adversary. But as I argued in the previous issue of TIE, it has: Germany for the first forty-five years of the twentieth century.

Germany then was neither a free trader nor a protectionist--it was a "power trader" that used trade to gain commercial and military advantage over its adversaries. Likewise, China's trade policy today is guided neither by free trade nor protectionism, per se, but by the power trade formula, with an overarching strategy and discrete tactics remarkably similar to Germany's in its late-Empire, Weimar Republic, and Nazi eras. Understanding how Germany manipulated the global trading system in that period 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 today--can point the way toward appropriate policy solutions to the China challenge.

One potential solution that will not be available as a practical matter is meeting China's power trading strategy with an equal and opposite power trading strategy. The approach will need to be more nuanced than that. In this article, I describe how the United States also practiced power trade for much of the Cold War era, but not to boost its economy (which it did in some cases and didn't in others), but to achieve over-arching foreign policy goals, the most important of which was to assure global security and constrain the Soviet Union. But today, America's relative economic and technological strength is so diminished from where it was even twenty years ago that power trade premised on leveraging U.S. economic competitiveness to achieve broad foreign policy goals is no longer sustainable. President Donald Trump understood that, but shifted not to a new form of power trade, but to protectionism. The Biden administration needs to renew America's role as a power trader, but with a new focus of maintaining its relative lead, economically and technologically, over China. Doing so will require changes in the strategy and organization of U.S. trade policy.

POWER TRADE

A principal reason why it is often so difficult to make sense of trade policy, especially U.S.-China tensions, is that the prevailing narrative--and the policy options that go with it--is binary: We have either free trade or protectionism. The "trade war" with China under President Trump certainly wasn't principally about defending free trade from Chinese corruption; it must have been an unbridled exercise in protectionism, because that is the only other option policymakers seem capable of imagining.

Yet throughout the twentieth century, some nations have adopted an alternative to both free trade and limited trade (protectionism): "power trade." This is the use of trade and trade policy designed first and foremost to increase national power and decrease the power of adversaries. The recognition of this third pole--something original free trade theorists such as Adam Smith and David Ricardo understood--brings in political economy and the interests of the state, and recognizes trade as more than disembodied transactions between free and willing buyers and sellers in different nations with the state as either facilitator or inhibitor.

It is time for the United States to adopt this national power approach to trade policy, or rather to revive it--for it is a lost intellectual tradition of trade that dates back to noted development economist Albert O. Hirschman in the 1940s. In his first book, National Power and the Structure of Foreign Trade, Hirschman wrote that the rise of Germany as an economic and military power showed that "it 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." China has emulated Germany, and more, in its practice of power trade, using export controls, foreign infrastructure financing, producers' subsidies, theft of intellectual property, forced technology transfer, manipulation of international standards, import bans, and a host of other "power" tactics designed to dominate key global industries and intimidate other nations.

Neither free trade nor protectionism (including complete decoupling) will be effective in preserving America's lead over China. The United States needs to embrace a new form of power trade, one focused first and foremost on limiting China's technological rise, while advancing ours.

THE U.S. PRACTICE OF POWER TRADE IN THE POST-WAR ERA

Prior to World War II, American trade policy was premised on protectionism, especially when northern Republicans were in the White House seeking to advance industrial interests over agrarian interests. Indeed, as one 1930 article noted, "Until within a year or two only the economist and the Democrat dared to raise voices in seemingly unpatriotic and sacrilegious opposition to the protective tariff. Most others worshiped at its shrine." (1)

But with the emergence of a Democratic majority after 1932, later compounded with the rise of the American industrial and military might after the war, protectionism was rejected for a more confident...