By Nancy Spannaus

June 25, 2018—In his Report on the Subject of Manufactures, and elsewhere, American System founder Alexander Hamilton made it clear that the government’s responsibility in this area should be to foster technological advances and adequate supply in the industries crucial to the nation’s national defense and general welfare. This mandate would best be carried out by bounties provided to manufacturers, he wrote, but tariffs—also a crucial revenue source in the early republic—were also an acceptable measure to promote the development of the nation’s economy. (See my March 8 article on tariffs.)

The Tariff Debate: It's U.S. Credit Policy That Must Change!
A Chinese electronics factory, one of the targets of the new Trump tariffs.

The latest actions by the Trump Administration threatening punitive tariffs against China, especially on high-technology goods, shows that Hamilton’s lesson has either not been learned, or is simply being ignored. Indeed, the new tariffs are geared to penalizing the Chinese for doing exactly what Hamilton advised the young United States to do over 200 years ago. And unlike the steel and aluminum tariffs, which appear to have had a marginally beneficial effect in reopening some American facilities, these tariff measures are punishing China for technological advances, and doing nothing to spur our own advance.

Given the amount of international investment (including from the United States) in the Chinese high-technology exports that are being targeted, the new tariffs expected to go into effect on July 6 are doubly misguided. Globalization has created a situation where it is almost impossible any longer to talk about “American cars” or “Chinese electronics,” because of the financial and even physical supply-chain internationalization of the world economy.

The key to advancing U.S. high-technology industries, and reducing the current trade deficit, starts with recognizing that reality is the very opposite of what the Trump Administration, and many well-meaning advocates for U.S. manufacturing, are asserting. In its May 29 Factsheet, the Trump Administration declared that China’s policies of “dumping, discriminatory non-tariff barriers, forced technology transfer, overcapacity, and industrial subsidies” are “undermining American innovation and creativity.”  Not true! American innovation and creativity are being stifled by a virtually criminal U.S. credit policy.

In his papers on the establishment of the U.S. credit system, First Treasury Secretary Alexander Hamilton declared its purpose to be “the augmentation of the active or productive capital of a country.” To ensure that outcome, our national banking system, when operating under American System principles, has established rules and regulations which discouraged speculation, and promoted investment, including long-term investment, in the physical economy of the country. Today’s financial system, starting with a vengeance in the 1970s, actually pursues de-industrialization (the post-industrial society).  It subsidizes and promotes America’s major financial institutions in their pursuit of short-term, speculative, even usurious financial profit. Cheap credit is not available for long-term investment (and legitimate profit) in modernizing infrastructure, or R&D, for example, although stock buybacks and derivatives trading can flourish.

An exemplification of the problem is the composition of the Dow “Industrial” Index, which just dropped the industrial giant General Electric, but is replete with non-manufacturing companies.

If we want to get back on the path of rapid technological progress, we need the American System  policies of Hamilton, Lincoln, FDR, and JFK—policies that will cut off the speculators, raise productivity, and pump credit into the real economy once again.

The Role of the WTO

The Trump Administration’s approach, contrary to the arguments being made by many of its critics, ironically finds its grounding in the dominant global financial institutions of today, most specifically the World Trade Organization (WTO). The WTO was established as a formal treaty organization in 1995, with the explicit aim of promoting a global “free trade” environment.  Its charter outlines a set of detailed rules for international trade in a way that denies nations the sovereign right to restrict imports, and to subsidize their own industries, in the name of not causing “injury to the domestic industry of another Member.”

The Tariff Debate: It's U.S. Credit Policy That Must Change!
Headquarters of the World Trade Organization

Due to the resistance of major Third World nations such as India, these WTO rules are substantially looser in the case of agriculture—a tiny, but totally inadequate concession to the fact that nations should have food security. But in other economic areas, the WTO declares that its member nations may not carry out policies that represent “serious prejudice” to the industries of fellow members. Included in the category of prohibited activities are:

  • Subsidies to cover operating losses to an industry [no matter how vital for its population-ed.];
  • Subsidies to cover operating losses to an enterprise, except for a one-time reorganization;
  • Direct forgiveness of debt (to the government);
  • Policies that impede imports of products, undercut the prices of others, and increase world market share; and
  • Subsidies that are contingent on export performance or that promote the use of domestic over imported goods.

It is under this rubric that the Trump Administration—like others before it—takes aim at China’s subsidization of high-technology industries under its “Made in China 2025” program, and other active government support for industry. True, the Trump Administration has eschewed going through the bureaucratic procedures of the WTO to challenge China (and other nations), thus opening itself to attack for breaking the rules. But the rationale is strictly within the anti-sovereignty ideological constraints which have dominated world finance for decades.

Technological Apartheid?

There’s another aspect of the U.S. government’s attack on China which is especially troubling, and that is its singling out of its acquisition of advanced technologies for punishment. The Chinese openly aspire to that acquisition, dubbing it “technology transfer” from the historically more advanced industrial economies to a lesser-developed one. Such a transfer has long been the demand of Third World countries, who correctly see the denial of access to technologies such as nuclear energy, or even modern electrical transmission networks, as “technological apartheid.”

The Tariff Debate: It's U.S. Credit Policy That Must Change!
An American Iron Forge in the 18th century.

The policy of denying such advanced technologies to the poorer countries is simply a modern application of the imperial policy of the British Empire at the time of the American Revolution—when the Crown explicitly forbade its American colonies not only from producing and exporting goods such as iron, but also made it a criminal offense for Britons to provide knowledge of technologies such as modern looms to the Americans. The Americans of course strongly resisted such prohibitions, insisting it was their right as human beings to such fruits of scientific progress. What would today be called “industrial espionage” was standard American practice.

From a sane point of view, other countries’ acquisition of modern technologies is not a threat to the United States, or the European nations. The challenges of global development which face mankind call for lifting up all peoples to the highest level of technological and scientific development, and cooperation among them for what could be called the “common aims of mankind.” Establishing a monopoly on knowledge is not only impossible, but immoral.

Redefining the Goal

Perhaps the best place to start to resolve the trade/tariff problem is to redefine the desired goal for the U.S. economy.   Our aim, like that of American System proponents historically, should not be a “level playing field” for competition within today’s markets, but a qualitative leap in economic productivity which will put our nation on the path to economic prosperity, and expand the market as required by the need to raise living standards dramatically at home and abroad.

The Tariff Debate: It's U.S. Credit Policy That Must Change!
Former CEA head Laura Tyson at a forum on innovation.

Former head of President Clinton’s Council of Economic Advisors Laura Tyson, in an article in Marketwatch June 22, took at stab in this direction. Under the title “The U.S. Needs to Fight China with Its Own Aggressive Industrial Policy,” Tyson first concentrates on the self-defeating nature of the Trump anti-Chinese tariffs, citing the dominance of foreign-funded enterprises in the sanctioned Chinese industries, and calling upon her experience in producing a Special Report on Semiconductors (PCAST) during her Washington tenure.

But she then breaks from the free trade mold by addressing the issue of the WTO rules on subsidies:

“Finally, the PCAST report [see above-ed.] underscores the need for the U.S. to respond to China’s challenge in semiconductors with an industrial policy of its own. Such a policy should include lower business taxes, more funding for basic research and development, higher investment in talent development, and federal support for a series of “moonshot” programs in areas like biodefense systems, threat detection networks, and a distributed electric grid. (emphasis added)

“Ultimately, whether the U.S. semiconductor industry withstands the challenge that China poses will depend not on America’s success in curbing China’s progress, but rather on its ability to sustain and support innovation by U.S. companies.

“History is replete with examples of the Thucydides trap, tensions between rising and established powers escalate into military conflict. Rather than allow intensifying techno-nationalism to push China and the U.S. into this trap — with devastating consequences for the entire world — we need smart and calibrated policies for trade with China in high-technology products.”

Back to Hamilton

Tyson has put her finger on the button: The goal must be to promote scientific and technological progress here in the United States, not try to suppress it elsewhere. To do that, we need a credit policy according to Hamiltonian principles, and a crackdown, starting with Glass-Steagall, on the dominance of U.S. finance by the speculation-addicted megabanks.


The Tariff Debate: It's U.S. Credit Policy That Must Change!
Second Bank of the United States

Such a policy, including the establishment of a new National Bank for Infrastructure, will not only fit the bill in providing the needed credit for radically upgrading our industry, but will provide new means of cooperating with China, a major holder of U.S. government debt. That is because, under a Hamiltonian plan circulating on Capitol Hill, such an infrastructure bank can be best capitalized by trading U.S. government bonds for stock in a new national bank, under an arrangement where the U.S. government ensures the interest payments, and the debt becomes the basis for extending productive bank credit.

It’s time to discuss the real issue: Securing government-backed credit to rebuild our nation.

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