The world is in a slow-motion panic, but this weekend’s meeting of G20 finance ministers in Baden-Baden, Germany is unlikely to resolve anything. Keep in mind that just eight years ago, the world economy’s major players conferred under the G7 logo (formerly G8, until Russia was expelled).
Expanding the club to include India, Brazil, South Korea, and other major developing countries was a response to the Great Recession but also a bow to reality. The world has changed since the post-war era (1945-1990), and it’s changed even more dramatically since the post-cold-war era (1991-2008). That’s part of the panic.
{mosads}For half a century, the world was divided neatly between the capitalist West and the socialist East. Free markets proved superior at the one thing that ultimately mattered — economic growth. The post-1991 era saw unprecedented growth rates in surprising places, from South and East Asia to Latin America and India.
Despite the global diffusion of economic growth, a mysterious slowdown of growth rates in more advanced economies seems to be permanent. For example, France’s GDP growth rate averaged 5 percent per year in the 1960s compared to just 1-2 percent in recent decades.
The one thing that hasn’t changed in roughly a century is that the United States remains the world’s leading economy. To be sure, China, with its massive population, is roughly equal in raw output, but American GDP per capita is four times higher.
The best international data for these types of comparisons have been carefully assembled in the Penn World Table, and it shows that none of the G20 economies have come closer than nine-tenths of the U.S. income level, as of 2010.
The productivity supremacy of the U.S. economy is vital context for the debut of Treasury Secretary Steve Mnuchin on the world stage. Mnuchin said the U.S. has no “desire to get into trade wars,” during an initial press conference after landing in Germany. That’s an interesting turn of phrase — desire.
He also sent clear signals that the U.S. believes the time has come for “fair” trade. That can be translated as hostility to what the administration perceives are mercantilist trading nations in Germany and Japan. Germany’s net exports are 8.7 percent of GDP, for example.
Mercantilism is an outdated economic strategy that motivated Adam Smith to write the Wealth of Nations in 1776. It’s important to understand that the foundation of the study of economics was based on Smith’s refutation of the very idea of trade surpluses as a key to prosperity.
Unfortunately, the lesson must be learned anew by every generation. Fortunately, there is internal tension at the White House over trade and globalization, which the Financial Times described as a “civil war” in an article last week.
Some Trump advisers are neo-mercantilists, but it turns out some recognize that the countries with trade surpluses have experienced sharper growth slowdowns in recent decades. We don’t know which side Mnuchin is on. But he has to wonder: if the United States is the strongest economy, maybe we should be cautious about changing our free-trade model.
Tim Kane is the JP Conte Fellow in Immigration Studies at the Hoover Institution at Stanford University. He is a veteran Air Force intelligence officer. His most recent book is “Balance: The Economics of Great Powers from Ancient Rome to Modern America” (Simon and Schuster), co-authored with Glenn Hubbard.
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