Europe Needs Protectionism

15. 3. 2017

Why haven’t the political and economic rulers of the West decided to make a genuine diagnosis of the crisis, which started in 2007?

Right after the Great Recession of 2008 and 2009, a debate was launched in the media about the usefulness of protectionism. And it ended almost as quickly. Advocates of “happy globalization” simply announced that protectionist policy would be “retrograde and untimely.”

But the post-crisis reality does not abound in successes. The economic sky cleared briefly in 2009 but this did not translate into a permanent and strong economic rebound for which was everyone hoping. Just two years later, Europe again came to a standstill. The United States did not succeed in filling the chasm produced by the liquidation of almost nine million jobs. The BRICS, which were supposed to take the baton of rapid growth, are themselves in trouble. We are beginning to consider the possibility of a Chinese crisis, which would be a continuation of the American and European one.

A Crisis of Globalization

An error of judgment was made at the very start. The violent shock which set many Western banks atremble (or even toppled some of them), focused the attention of the world on the very risky practices of financiers on both sides of the Atlantic. Of course there were good reasons for that. We know how strong the obsession with quick profits was—it was this obsession, which drove banks and investment funds to reach for complex, unfamiliar and above all risky financial products. But these practices would not have developed on such a large scale (since the first decade of the 21st century) without a deliberate policy of stimulating the market of mortgages and consumption credits.

This experiment achieved the largest scale in the United States. It was also the American case which showed us what the ultimate costs were. And yet the brief success of the stimulus policy, imitated in many other countries— for example in Great Britain, Spain, Austria, Ireland or Hungary—on the one hand allowed governments to proclaim the viability of neoliberalism and on the other hand allowed economists to declare that the model of open economies proved to have been a great success.

It is undeniable that the political and economic rulers of the West have not decided to make a genuine diagnosis of the crisis, which started in 2007—precisely in order to avoid the necessity of changing the previously planned trajectory. But the crisis made us aware of the huge significance of wage deflation, a phenomenon which even earlier—although in a concealed manner—led to the breakdown of internal demand in economies based on free exchange.

The essence of wage deflation is obvious: human labor, regardless of where it takes place, is rewarded below what is deserved according to the criteria of efficiency and quality. The policy of stimulating demand with various means (above all through encouraging people to go into debt) produced a situation where the consequences of wage compression had not been felt for many years. These consequences were indirectly revealed through the debt crisis and the crisis of the Western banking system. But these crises concealed the original cause of the shock, that is wage compression. As a result, we got mired in an unending technical and moral debate on new regulations governing the financial system, imposed in order to avoid the return of the crisis, but the issue of its most important and objective cause is painstakingly omitted.

If it is true—and I believe it is—that wage deflation hampers or endangers a harmonious growth of the economies, then it unambiguously follows that today’s crisis in its deep layers is a crisis of globalization. Recent years prove that we have maneuvered ourselves into a dead end. It is impossible to build permanent growth on the quicksand of competition between all laborers of this Earth.

When Capitalism Is Rejecting Its Own Roots

We just recalled the basic rule allowing for stable development of competitive economies: increasing productivity and quality of labor must translate into increasing wages. Marx’s criticism of capitalism was founded on the opposite claim: he believed that exploitation by blinkered capital owners would intensify. But history of economy exploded the Marxist claims. Real wages started to grow long before the period of prosperity, the so called “Trente Glorieuses,” that is the thirty glorious years of uninterrupted development after World War II. Class struggle conducted in the name of clichéd slogans of improving the living standards of the workers precipitated progress. After the war Western countries, wiser thanks to the experience of the Great Depression, institutionalized social and economic mechanisms of regulation. For the first time class struggle was combined with class cooperation—to the great benefit of the economies.

In contrast to that, the neoliberal experiment started in the 1980s in the West is based on an unwritten assumption that wages are a random variable dependent only on the macroeconomic balance. This is reflected in the discourse of English and American economists, organizations representing employees and managers of central banks. The issue of wages never appears in their analyses, unless in a negative sense—their only worry is the inflationary effect of all wage raises, nothing more. As for the distribution of goods between various categories of workers, they rely on the job market. This resulted in a certain form of economic denial: it ceased to be obvious that demand for labor on the part of companies depends on demand for products on the market of goods and services.

Let us briefly consider two closely interconnected phenomena, which gave rise to this historical change. They are, first, the growing influence of large stock market shareholders and second, borders more and more open to the flow of goods, regardless of the conditions in which they are produced. Stubborn sticking to the principle that shareholders are to be the only beneficiary weakens national economic systems, threatened with repeated crises. These crises give a second life to Marxist ideas. And yet corporations, asked to act only with the good of the shareholders in mind, gained new opportunities for development thanks to the globalization. This process is twofold: locating companies on emerging markets allows them to acquire new markets for selling their products and the use of cheap labor and cheap specialists allows them to bring profit margins up.

These two elements of globalization are not inseparable. What is more, we should contrast them with each other. Acquiring new markets is one thing and an opportunistic calculation aimed at reducing costs of labor regardless of the consequences is quite another. And yet these issues are deliberately interchanged in the propaganda of the eulogists of globalization. They still speak only about opening: let us take up the challenge and use the opportunities offered by globalization— this slogan is persistently repeated by economists, media and politicians holding neoliberal views (in a word, by everyone). The banal but crucial question if ability and talent is still rewarded with an honest wage is discreetly sidelined by the ideological and moralizing appeal to open to the others.

In this way the de-territorialized capitalism, systematically emerging since the 1930s, is rejecting the operating principles which brought success to its territorial predecessor. It also negates other founding principles of capitalism, as the examples of Foxconn and the Rana Plaza complex show.

As we know, the Taiwanese company Foxconn is a huge subcontractor of the American electronic industry. It built large production centers in China, where it uses cheap labor lacking any security but capable of reacting to sudden increases in demand for products very liable to shifts of fashion. Production methods are not far from slavery. But the cynicism of Foxconn and its large customers, such as Apple, has another, perhaps more important aspect: the customer placing the order is separated from the factory owner. Products are conceived in such a way that the low cost of making them would limit the risk of the commissioning company: the investment will easily be recuperated, for it assumes the use of cheap labor. Even if the introduction of the product ends in a fiasco, the company that invented it will not suffer any loses.

The Rana Plaza complex is another illustration of the perversions of de-territorialized capitalism. It is the name of a huge building close to Dhaka, into which textile workers making cloths for big Western brands such as H&M or Zara were squeezed. When this structure collapsed, 1100 people lost their lives. Rana Plaza is the opposite of what we used to call a “factory.” For the factory had been conceived as a place for labor based on rational principles. The employer— who was also the investor—tried to coherently manage parameters of production: receiving and processing materials such as raw materials and parts, internal transport, heating the building or quality control in the final stage of production. Moreover, the factory was changing in order to meet these parameters more efficiently. Even the textile industry, although it often requires only modest investments, was subjected to this evolution from the very beginning. But Rana Plaza was just a loose collection of workers and machines, without any rational organization of work or any concern for safety.

So we may formulate a claim that in its most radical forms de-territorialized capitalism undermines its historical foundations, that is risk-taking by the company and its shareholders combined with full responsibility for physical investments and labor force. Besides the obvious social regression, de-territorialized capitalism embodies a fundamental regression of responsibility.

What Kind of Protectionism?

Protectionist policy should be the answer to the contradictions of capitalism without territory. It is a mixed policy, which in contrast to the increasingly radical free-trade policy should combine opening borders with closing them. I will name some of its elements.

The necessary condition is freedom of investment in production. Every non-European company wanting to start working in the territory of the EU in order to develop its know-how should be able to do so, of course respecting legal regulations which are in force on this territory, including those regarding social security, sani- tary conditions or environmental protection. Protectionism must—and there is no paradox here—attract foreign investors.

Protectionism must be territorially defined in such a way that it would overlap with great regional blocks. The original Common Market proved the viability of open trade space, relatively wide but to the minimum necessary extent protecting companies from Western Europe. This principle should be employed again, this time in the extended space of today’s EU. Let us assume that on the EU market, differences in costs of labor may vary within in the one to three bracket but not more.

Protectionism must be subject to negotiations as far as possible. Instead of reiterating to our overseas competitors that we are taking up the challenge of free exchange, we must announce to them that we are always ready to start talks on the conditions of access to markets—in the informed interest of our societies. But we must add that we reserve the right to unilateral actions.

And finally, protectionism must be based on a catalogue of goods. This is a classic procedure. There are thousands of products in hundreds of sectors and subsectors. Regardless of any other factors we must consider protecting all branches of production in which we cope well. In my view we should start with what is today regarded as prospective sectors of industry: production of wind turbines, solar panels, touch screens, led lighting. We all understand that it is just the first stage. The debate has to start from scratch, ignoring the savage screams of the adherents of globalization.

Jean-Luc Gréau

French economist, author of La trahison des économistes Betrayal of the Economists, 2008) and La Grande Récession (The Great Recession, 2012)

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