A FUNNY thing happened at this weekend’s G20 summit in Germany: the global community quietly abandoned its 70-year, post-war commitment to free trade. Translated, that means the United States is returning to protectionism – a move that will force other countries to follow suit. Hardly the best moment in recent history for the UK or Scotland to be exiting the European Union, the world’s biggest free trade area.
Finance ministers from the world’s 20 largest economies turned up in Baden-Baden at the request of the new US administration to discuss Trump’s call to reconfigure the global trading machinery that has been in place since World War II. The US delegation was led by Trump campaign funder, now Treasury Secretary, Steven Mnuchin. He told everybody how badly poor, little America had been treated by its trading partners and insisted the usual references to opposing “all forms of protectionism” were struck out of the official communique.
Mnuchin made it plain Trump’s America First policy means an end to the rule-based approach to policing international commerce that has been developed since 1945. Forget all that pathetic Brexit rhetoric about negotiating free trade deals that suit both parties. Trump and Mnuchin made their personal fortunes by using aggressive foreclosure practices to squeeze value out of distressed properties they had acquired. Post-Brexit UK is about to find itself treated in the same fashion.
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The current global trading regime emerged out of the debacle of the Depression and World War II. As unemployment soared in the 1930s, countries closed their borders to trade in order to protect local jobs. They also began a round of tit-for-tat currency devaluations in order to artificially cheapen their exports. Soon trade wars became hot wars. Nazi Germany invaded Russia to create “Lebensraum” (room for expansion) and get oil in the Caucuses. Japan bombed Pearl Harbour and invaded petroleum-rich Dutch Indonesia, partly because America had imposed an oil embargo.
This catastrophic experience (and 100 million dead) led the victorious Allies to create a global economic infrastructure based on free trade. All exchange rates were fixed against the US dollar and the International Monetary Fund (IMF) established to lend governments foreign currency. Another organisation – later renamed the World Trade Organisation (WTO) – was created to police free trade and stop cheating. Local free trade areas were encouraged, which led to the creation of the European Common Market 60 years ago.
As a result, global trade rebounded and with it global economic growth. Across the major industrial economies, growth averaged five per cent per annum throughout the 1950s and 1960s. Living standards rose dramatically. This was a golden age – though we should remember that there were strong industrial trades unions and social democratic governments at hand to ensure redistribution of income. Yet one country did badly during this early post-war period: the UK.
The Brits claimed to be cheerleaders for free trade since the early 19th century. They believed in it so much they sent gun boats to impose it on everyone else. For instance, the disgusting opium wars were fought to make China buy British drugs grown in Indian for silver, which was then sent to the bankers in the City of London. (Little has changed: in 2012 the HSBC bank was fined £1.2 billion for money laundering for drugs cartels.) Britain’s interest in free trade was skin deep. Once they faced real industrial competition from America and Germany, the Brits retreated into their protected Empire, rather than modernise their industry. After the Great War, the big (and servile) Clydeside industrialists dumped new technologies like motors and aircraft, cut wages, and demanded even more tariff protection from London. World War II proved a turning point. The Brits “won” as a junior partner of the Americans, thus preserving the City, the landed aristocracy and the Tory establishment. But the US demanded in return all the UK’s foreign investments and the liquidation of the colonies.
During the 1950s and 1960s, as Europe and Japan rebuilt themselves, a bankrupt Britain found itself plunging down the economic league tables. Unwilling and unable to modernise, Scottish heavy industry imploded. Clyde shipbuilding collapsed in the middle of the biggest ever global ship-building boom — while the small independent nations of Scandinavia went through an industrial revolution. So much for our “precious” Union.
Faced with economic doom, a desperate British Establishment negotiated its way into the EU in 1973. Edward Heath, who did the deal, came from a wing of the Tory Party wary of the Americans. He was right to be wary. In the early 1970s, Washington was beginning to regret the economic revival of Europe and Japan, which it had sponsored only as a bulwark against the Soviet Union. President Richard Nixon moved swiftly. He unilaterally scrapped the global system of fixed exchange rates so America could devalue the dollar and undercut European and Japanese goods. He also recognised Mao’s China, the start of today’s dominant US-Chinese trading bloc.
The last generation has seen the US recover economic hegemony. This is the neo-liberal era. The rhetoric has been about free trade but the reality is different. These days, free trade is really about free movement of capital. Wall Street has used its political clout to offshore cheap manufacturing to Asia and centralise the massive returns to the US banking system. By 2007, the sheer scale of footloose capital in Wall Street (and its City of London tax haven) was finding it harder to identify new investment outlets – leading to ever riskier financial gambling and the inevitable banking crisis.
ENTER Trump and his wing of domestic American capitalism. They have a solution to the global financial instability induced by Wall Street. They don’t want imports, they want to stimulate domestic production and boost exports. They don’t want free trade, the want a protected US market. Hence Mr Mnuchin’s ultimatum to the G20. Which brings us back to Brexit.
The Brexiteers are blindly obsessed with the notion the UK can suddenly become a great exporter because Donald Trump will do an advantageous free trade deal with the UK. Naively they think that undermining the EU — just when Europe is facing US ambitions to the West and Putin’s Russia to the East – will get a good Brexit deal. Sticking with the insane economic logic of Brexit will be disastrous for Scotland. We have to maintain access to EU markets, especially if the world starts to break into separate trading blocs as a result of Trumpism. Of course there are issues to deal with. Being inside the EU could mean Scotland having to apply the common external tariff to imports from post-Brexit England, inviting retaliation from south of the Border. That could be resolved if Scotland followed the Norwegian example and was inside the Single Market but outside the EU customs union allowing the retention of free trade with England. That would allow us to escape the Common Fisheries Policy as well.
But the message of the G20 meeting is clear. Trump has torn up the existing rules-based global trading system. A hard Brexit will leave rUK trade at the mercy of the sharks. Scotland must protect its own interests by taking economic decision-making back into its own hands.