Clashing Trade Theories and a Common Challenge
Justin Trudeau and Donald Trump appear diametrically opposed on international trade and paths to domestic prosperity, at least in rhetoric, and to some extent in real policy. Granted, they are proving more constrained than they would like: long-established bi-national associations, and enduring internal divisions, modify practice.
They also puzzle both friendly and hostile critics, not only due to their individual singularities, but because both international affairs and domestic economic developments have become more confusing over the last three decades. The wider publics in both countries probably remain more unsettled by rapid socioeconomic changes than by threats of nuclear incineration. And while both leaders can cite some good economic news at present, Trump especially, neither ‘market globalism’ nor ‘populist nationalism’ have been all that persuasively demonstrated as bringing joy to the majority of citizens.
Neither the Prime Minister nor the President are all that unusual among democratic political leaders in presenting ideological and over-simplified explanations of economic happenings. In fact, both are appealing to opposing arguments about the effects of trade barriers that have not changed a great deal in a century. But this makes it easy to forget that the rising levels of political discontent since the 1990s are not all that closely bound to trading relationships at all.
International trade certainly remains what both of them like making noise about. Trump has continued much of his election campaign rhetoric as First Tweeter. Trudeau favours gestures. Shortly after being elected, he changed the Foreign Affairs Department into a ‘Global’ one under Chrstia Freeland, although retaining a subordinate Minister for Trade and International Development.
He has also recently boasted that, while signing the Trans-Pacific Partnership accord, he has much improved on the version accepted by Stephen Harper, with more bells and whistles. More narrowly but more concretely, his government has had its spirits raised lately by an American regulatory body’s unanimous rejection of Boeing’s claim against Bombardier, which had been threatened with a 300% tariff. This was a defeat for Commerce Secretary Wilbur Ross, trying some real Trumpism. But a revised NAFTA remains in doubt, especially given Canada’s own traditional protectionism for auto firms and dairy products.
There may be many more examples of mixed Trudeauvian and Trumpian sound and fury signifying little, especially if the President’s domestic popularity remains low. But along with at least some kind of immigration restriction, protectionism has been so much of Trump’s message, along with a reduction in corporate tax rates, that major upheavals in Canadian government policy and business practice are bound to be coming. Elsewhere, leaders of other major trading nations, even of post-Brexit Britain, while not at all joining in protectionist enthusiasm, recognize the political force of disillusionment with ‘globalism’. Gloom at Davos may herald a real slowing down, even without any ‘Trump-lite’ conversions.
But the diverging paths of Trudeau and Trump may very well come to be the thesis and antithesis of a Hegelian triad, with a synthesis coming that surprises everyone. ‘Free trade’ and ‘protection’ do not exactly mean what they did in, say, 1911, or even as recently as the 1990s.
Not only is China now a giant imponderable, galloping automation and ‘blockchain’ transactions are re-revolutionizing the world economy. Neither the currently buoyant American stock market nor less exciting Canadian good economic news really promises an easy adaptation to this rising shock wave. Even possible more rapid economic growth, while improving short-term job prospects, does not meet this challenge. An overall worldwide transformation of the nature of work is coming, and the most unready institution facing it is modern capitalism itself.
The main present ‘entrepreneurs’ of capitalism are largely financial ones, billionaire individual investors and hedge funds, pressing impatiently on corporate boards and executives. They produce less of Schumpeter’s ‘creative destruction’ than destruction of a narrower kind, of continuity and internal company improvement, of special expertise, of customer and employee loyalty.
‘Financialization’ and constant mergers and acquisitions have been returning more and more revenue to shareholders alone, less and less to retained earnings for future growth, or for research and development. Cheap money has also encouraged more and more financing by debt.
Stagnation in productivity and growth has skewed rewards to investors, mainly money managers, at the expense of labour, a major cause of rising political anger. Corporate executives ‘love competition’ in rhetoric, but in practice fear the risks of innovation and the vetoes of their compliance officers. For all the publicity given to Silicon valley sudden billionaires, real individual entrepreneurial business creators have become very rare figures today.
The ultimate ‘owners’ have become invisible and unknown, and often create quite ‘un-entrepreneurial’ incentives for firms. A big ‘passive’ investor like Vanguard can own 5% of the whole S & P 500 largest firms list, and be the largest shareholder in giant conglomerates. And it diversifies its investments in a number of funds, with many of its millions of investors themselves aggregations like pension funds. Furthermore, many institutional investors hold stocks in competing firms, just to diversify risk. In the 1950s, they held only about 6% of company ownership, but they have held half or more for decades now, rising to two-thirds in some years.
Ageing populations entering long retirements will need more and more professional investment advice, but the managers of actual businesses, on the other hand, are constricted by more and more rules and guidelines provided by risk-averse remote owners.
Half a century ago, the institutions were often useful counters to inept inheritors of family firms, but they are now a major problem in their own right. Often, they act for investors not intending to stay long. Limiting the discretion of company CEOs on their own cash flows, they drive them to debt and equity capital markets to raise capital, and to apply Byzantine rules of governance. CEOs once had about half a dozen performance imperatives at most; today they are more likely to have three dozen or more. They also now average about 30,000 external messages a year, and spend well over a third of their time just writing reports and coordinating meetings.
Institutional money will remain necessary. Reform would probably require differentiating forms of ownership. Bombardier’s dual-class share ownership, long bemoaned by market analysts. now looks positively fashionable, lined up with other dual-share firms like Berkshire Hathaway, Google, and Facebook. Money managers dislike the device, but may have to accept it to reverse the stultifying power of the giant institutions. Another possible government measure would be to end the tax advantage of debt financing, presently a deductible cost in most Western countries, while returns on equity financing are not deductible. Such reforms may or may not restore business liveliness and innovation, but something along these lines will probably have to be tried.
The grimmest possibility is that, while technology advances and employments continue to disappear, managerial capitalism will continue a path of decline, ‘appetite for risk’ fading, the biological metaphor of growth replaced by the thermodynamic one of increasing entropy. Neither nationalist trade barriers nor globalism offer much to oppose this alarming possibility.