State-led capitalism is coming to Washington

Washington’s leadership is being challenged in a way that was unthinkable a decade ago, thanks to China showing that free markets are not critical to economic growth, writes the University of Auckland's Nicholas Borroz

Donald Trump’s trade chief criticised the World Trade Organization this week, shortly after Goldman Sachs warned about a potential US exit from the North American Free Trade Agreement (NAFTA). After pulling the United States out of the Trans-Pacific Partnership (TPP), last month Trump complimented China, which he had formerly called a “currency manipulator”, saying “who can blame a country for being able to take advantage of another country for the benefit of its citizens?”

All this is surprising coming from the President of the United States, a country that has long advocated the spread of free markets.

As American as apple pie, neoliberalism is a defining ideological element of Washington’s global leadership. Free markets naturally emerged as a counterpoint to the Soviet Union’s command economy during Cold War competition. When Washington defeated Moscow, the separation of business and government – crystalised as the Washington Consensus – spread the world over. WTO membership skyrocketed and International Monetary Fund (IMF) structural adjustment programs proliferated.

But this is changing. State-led capitalism is coming to Washington.

And who can blame Trump?

Countries using state-led capitalism are dominating international politics. Whereas after the Cold War, countries clamoured to establish their neoliberal credentials, now they are rushing to sign up to China’s Belt and Road Initiative (BRI) and its Asian Infrastructure Investment Bank (AIIB). Washington’s leadership is being challenged in a way that was unthinkable a decade ago, and this is because China shows that free markets are not critical to economic growth.

China is the most cited example of state-led capitalism nowadays, but it is in fact expanding on well-established models already developed in East Asia. Singapore’s status as a regional business hub and Japan’s influence in Southeast Asia, for instance, are both prime examples of previous government coordination with national businesses to advance foreign policy agendas. Singapore and Japan also show that state-led capitalism need not necessarily be tied to any particular political system, such as China’s one-party rule.

If the United States is to hold its own and retain a position of global leadership, it may need to play by the rules of a new game. Herds of cats do not fare well when everyone else is coordinating for long-term gain.

State-led capitalism, whether it be in East Asia or any other region of the world – Russia and Saudi Arabia are prominent instances – allows governments to cooperate with market actors and incentivise them to pursue long-term goals. Such political support insulates businesses from risks associated with projects that would otherwise be unprofitable in strictly market terms. Though there are cases in which Chinese companies are investing in developing countries for purely commercial reasons, there is no doubt that easy government money from Beijing often sweetens deals and in the process cements countries’ alignment with China.

Critics sometimes overemphasise the “hive mind” nature of state-led capitalism, especially with regards to China; state-owned enterprises are not necessarily drone bees beholden to a queen. But it is clear that close private-public relations can certainly allow for coordinated group efforts.

In liberal market economies, on the other hand, guiding businesses is like herding cats. There is an inherent tension between public intervention and free markets, and governments are limited in openly discussing how they constrain private sector behaviour. In these markets, also, companies are more individualistic and are less often grouped into cooperative collectives. Meeting short-term profitability and pleasing shareholders reign supreme. Quarterly earnings cause myopia; even if Washington wanted to enter into backdoor alliances with companies to pursue long-term objectives, companies might not be interested because of market pressures.

Of course, this is not to say Washington is averse to using state intervention. The state’s support of national security technology development – the military-industrial complex is not a myth – and bailouts of Wall Street financiers are two examples of how this occurs at home.

In terms of statecraft abroad, the “free” trade agreements Washington creates in fact privilege and thereby incentivise commercial activity in certain countries. Sanctions, as well as anti-money laundering and anticorruption regulations, make certain countries off-limits to investors. These measures, particularly the punitive ones, are often framed as protecting political liberty or economic freedom in other countries. Cool analysis, though, shows plenty of despicable regimes are not put off-limits, revealing the political considerations behind these regulations.

So, Trump is doing nothing qualitatively new. What is different is how explicit his rhetorical support is for state intervention in markets. After his election in 2016, he called the CEO of United Technologies to stop a plant being closed in Indianapolis. In early 2017, he threatened to slap a “big border tax” on companies manufacturing in Mexico instead of in the United States. More recently, he claimed Apple’s CEO Tim Cook “promised me three big plants – big, big, big”.

The efficacy of these personal interventions is questionable. But Trump’s language and behaviour reflects a willingness to explicitly intervene in market activity. And perhaps he is justified in thinking and speaking this way. If the United States is to hold its own and retain a position of global leadership, it may need to play by the rules of a new game. Herds of cats do not fare well when everyone else is coordinating for long-term gain.

If Washington no longer cares to promote the free market, what then of neoliberalism’s other adherents? What of the WTO or the IMF? There is a dramatic potential for systemic change, and this is not just because state-led capitalism is becoming more attractive to developing countries. The appeal of state-led capitalism is penetrating the heartland of neoliberalism itself.

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