By John Hulsman and Boris Liedtke
In today’s post-industrial economy, it is evident that world politics is under radical restructuring. More precisely, as the authors argue, the model of nation-state has come under attack from below – in the form of a deteriorating level of trust by the people towards their elected or unelected representatives – as well as from above, by failing to provide appropriate answers to an ever more globalised world. With the nation-states’ apparent inability to withstand 21st century challenges, how then can our modern world move forward?
“The life of the nation is secure only when the nation is honest, truthful, and virtuous.”
– Frederick Douglass, Speech given on the 23rd anniversary of the Emancipation Proclamation, 1885
In the spirit of the words of the great American abolitionist, we aim to be ruthlessly honest and truthful, even if this journey leads us directly to the great conundrum of our multipolar age: The nation-state simply isn’t working very well anymore — especially in terms of delivering effective policy governance, even as its staying power seems beyond dispute.
It is this paradox that explains much of what ails our present world, why “nothing seems to be working”. And indeed, the present record of the nation-state, undoubtedly the dominant present vehicle for global governance, seems to have missed the mark at every turn. Recently, there has been a collapse of nation-states in the developing world, creating governance black holes that have led to catastrophe in places like Somalia, Iraq, Syria, and the Democratic Republic of the Congo (DROC).
These nation-states have failed in their basic function of being able to keep internal order, largely because politically their governance structures are not a representation of the political realities on the ground in each country, meaning they have come to be little more than geographical expressions, not nation-states imbued with the political power to effectively promote internal stability.
However, it is also in the supposedly well-governed developed world that the nation-state has showed its recent glaring inadequacies. Be it the Lehman Brothers Crisis (which unleashed the global Great Recession), the endless, endemic euro crisis of the European Mediterranean countries, or the calamity of America’s adventurism in Iraq – replete with botched intelligence and botched post-war planning – the nation-state seems to be showing its age, not delivering on its grandiose claims to facilitate both global governance and political and economic stability for its people.
We shall argue that the model of the nation-state has come under attack from below – in the form of a deteriorating level of trust by the people towards their elected or unelected representatives – as well as from above, by failing to provide appropriate answers to an ever more globalised world.
But if the nation-state does seem to have flatly failed lately at every turn, nor is it about to be replaced. Contrary to the fevered imaginings of European Federalists, the nation-state cannot simply be wished away as an annoying anachronism of a bygone age.
Rather, the dirty little secret at the heart of our new era is that all the rising powers — be they China, India, South Africa, Indonesia, or Brazil — are more sovereigntist, more nationalistic, more wedded to jealously preserving their national prerogatives than is even the United States, long the bane of post-national dreamers. Instead, it is the supposedly modern, post-nationalist European experiment that seems to be in terminal decline. Both intellectual defenders of the nation-state and its critics seem to be largely wrong at present. For as of now, we live in a bewildering world, where the nation-state is both not working very well and isn’t about to be replaced.
The Thirty Years’ War and the Crucible of the Peace of Westphalia
Historians and Political Scientists have long agreed that the Thirty Year’s war – ending in 1648 with the Peace of Westphalia – was the pivotal moment when the modern nation-state was born. The religious struggles of the previous 100 years or so – following the Reformation – were largely fuelled by the attempt of feudal Catholic Europe, with its religious world view, to adapt to the multiple challenges posed by the Renaissance.
The concept that “Man is the Measure of all things” was new, revolutionary thinking that manifested itself in the arts, politics, science and education. Despite attempts by the church and the political elite to retain its dominance in the feudal religious world through force, violence, and reconciliation culminating in the charnel house of the Thirty Years’ War – the end result was instead a new world order whereby human international interactions became governed no longer by the Church but increasingly by the Nation-State.
Replete with botched intelligence and botched post-war planning — the nation-state seems to be showing its age, not delivering on its grandiose claims to facilitate both global governance and political and economic stability for its people.
Before this development, the Western feudal world lacked the technology, communications, and structure to allow the implementation and projection of power and state control much beyond the immediate reach of the local nobleman, i.e a day’s travel on a horse was the limit for effective “state” control. The population lived locally with the church being the only supra-national institution to deal with the few supra-national topics of its age. Yet the Renaissance and the resulting advances in technology and organisations allowed for state control to be expanded far beyond a day’s travel. Times had changed and the old structure of the Western world had come under pressure.
This dramatic change evolved out of the desperate attempt of the Peace of Westphalia to see to it that nothing like the Thirty Years’ War was ever to happen again. It is hard to adequately describe what a calamity the war was for the people of Central Europe, and especially Germans nestled in the Holy Roman Empire. It amounts to one of the bloodiest conflicts in all of human history, with an estimated eight million casualties of its ceaseless slaughter.
Overall, depletion of the local German populations typically ranged from a decrease of 25–40%, underscoring what a staggering calamity the war amounted to. Given the many great powers that joined the fray as the war proceeded (Sweden, Spain, France, Austria), in many ways the Thirty Years’ War amounts to the first true world war of the modern era. And just as was true following the carnage in 1918 and 1945, in 1648 diplomats assembled, determined to prevent such a disaster from happening again.
The war’s genesis began as the staunchly Catholic Ferdinand II, the newly crowned Holy Roman Emperor, tried to impose Catholic conformity on his largely Protestant northern German princes, who had long enjoyed the freedom to govern their own territories based on their different religious views. This attempt to re-assert religious conformity was ultimately quashed.
The Peace of Westphalia recognised this cardinal error. It changed the basic relationship between rulers and subjects. Up until now in the feudal world, people tended to have overlapping (and often competing) political and religious allegiances and loyalties.
The basic European feudal structure saw supranational problems dominated by (and managed by) the Church. Its other salient feature was the great relative power of local princes, who in this fragmented age were largely left to their own devices by any nominal king above them. Think of the powerful, largely autonomous Dukes of Normandy (such as William the Conqueror) and their relationship with their only nominal overlords, the Kings of France, and you will get the point.
The Peace of Westphalia recognised this cardinal error. It changed the basic relationship between rulers and subjects. Up until now in the feudal world, people tended to have overlapping (and often competing) political and religious allegiances and loyalties.
However, changes in technology and human philosophy made the alterations to the nation-state system in the Western world not only possible, but necessary. After the acceptance of Westphalia, this system dramatically changed, as far more local uniformity (compared to any overarching power in Rome) became the norm, as the local princes decided on the religious and political tenor of those they governed. Protestant princes in the Holy Roman Empire came over time to exercise primary control over their charges, and to set the religious and political tone for their fiefdoms (not the Holy Roman Emperor).
If the Princes were Protestant, their states were thought by all to be so as well (and vice versa for Catholics). Other Catholic and Protestant princes never again to such a large extent attempted to interfere with the domestic internal workings of another state, in an effort to avoid a further cataclysmic war; the concept of state sovereignty had been born. Allegiances in the Holy Roman Empire were no longer decided by a mix of the supra-national centre in Rome, and by the many local German traditions of the empire either, as had been the case up until 1618.
Instead, while there was less uniformity at the supranational level, as the success of Protestantism led to the diminution in the power of the Vatican, there was far more uniformity at the local level. Nationalism emerged with the victory of the regional princes, just as supranationalism and localism waned. Our modern state system had been born, with the nation-state in the driver’s seat.
Countries and the relationship among them governed the world in the next 350 years. The world started to increasingly function along national borders with national taxes, national laws, national conscriptions, national education, languages largely along national geographies, national governments, national elections, and national representations in multi-national organisations. Colonisation and imperialism ensured that by the early 19th century pretty much every inhabitable spot on the Earth and every human being belonged to a nation and frequently identified with it.
People were born with a national passport, attended national education that formed their opinion, engaged in national military service where they fought other nations, attended nationally-funded Universities, paid nationally-imposed taxes and adhered to national laws until they passed away. Even in death, the nation-state was inescapable through the national process of death certification and taxes.
The institution of the nation-state served humanity well throughout these 350 years. The increasing living expectancy, the possibility by billions to enjoy leisure time instead of fear (due to increasing internal domestic political stability), the economic and population growth, the advancement of knowledge and science, and the incredible output of old and new forms of art all make a testimony to the strength of the world order birthed at Westphalia. Life was certainly no longer “solitary, poor, nasty, brutish or short”.
At the end of this period, following the triumph of nationalist America over the supranational Union of Soviet Socialist Republics (USSR), there was such confidence in the nation-state that it inspired utopian-based thinking that humanity might have reached the end of history – “the end point of mankind’s ideological evolution and the universalisation of Western liberal democracy as the final form of human government.”
The nation-state’s zenith has passed
However, mankind’s political, scientific or technological progress “operates on the principle of escalation. Technology solves problems but it also gives rise to new ones. The more technology we have at our disposal, the more technology we need to deal with the consequences. We invent ever more sophisticated techniques of food production, only to follow up with ways to contain overpopulation… Just as one can plot man’s scientific evolution as linear progress, one can explain it as a series of emergency measures to deal with the disastrous consequences of the previous big invention.”
The nation-state solved many problems that the old world order was incapable of dealing with – following the Thirty Years’ War there was never again a major religious war in Europe – but in doing so created new ones.
The same thought applied here to science and technology can and should be applied more broadly. The success of the nation-state has given rise to new challenges for which the nation-state structure can no longer provide acceptable answers. As a result, we must conclude that “Modern history condemns us to a permanent rat race against the consequences of our own creativity. We progress but only toward an ever-larger need for progress. To stop that progress is ultimately to doom humanity.”
The thought, which the architect Reinier de Graaf so eloquently applied to technology, must equally apply to the international political sciences that govern our world order. The nation-state solved many problems that the old world order was incapable of dealing with — following the Thirty Years’ War there was never again a major religious war in Europe — but in doing so created new ones.
The success of the nation-state has inevitably led to supranational problems, which it is simply not very well equipped to solve. National conflicts that have become global world wars need to be governed by international alliances. Commerce creating incredible wealth for nations encompassing the entire globe have to be dealt with through trade agreements and world organisations composed by nations.
Unprecedented travel and migration have to be governed by international civil conventions and universal declarations made by nations. National economies allowing mass consumption is causing industrial pollution that threatens our global environment which in turn have to be dealt with through climate agreements negotiated and signed by representatives of nations. However, these global solutions based on nations’ interactions are increasingly hijacked by more myopic national state self-interests, thus failing to provide long-term sustainable solutions.
Challenges to the nation-state then, largely emanate from its own historical success. Advances in technology, made possible often by the nation-state itself, through the 20th century and into our present day through radio, television and later computer technology – and in particular the internet – has brought an unparalleled transparency.
For our discussion, the most important implications of this transparency are twofold. Firstly, transparency has made it clear to all the differing living standards of the world. Secondly the human fallibility and foibles of our elected or unelected political elite are on display as never before.
The former has had and will continue to have wide ranging global implications. Specifically, this has already contributed to West’s victory in the Cold War (no one wanted to live in East Germany as opposed to Swinging London) three decades ago and is certainly a big factor behind the present immigration pressure which the U.S.A. as well as Europe and parts of Asia are experiencing. It is unsurprising that a newly-awakened rest of the world wants to personally share in the paradise that is the successful developed world.
The fact that people in Syria, Mexico, parts of China, and the rest of the underdeveloped world can obtain a direct glimpse of the consumer boom of the Western world or coastal China via the small screens of their internet-connected phones or simply via TV is no longer unknowable. Pandora’s box is open – for good and bad – and people in economically-challenged regions are longing to reach the Nirvana they observe on their little screens.
Modern transportation technology has basically removed the “literal” barrier of entry that geography once posed. Planes, cars, ships, etc. have made it theoretically affordable for even the poorest human being to emigrate. It is only the administrative, physical, and commercial barriers erected by the nation-state – frequently using geography in its defence (desert between Mexico and U.S.A.; the Mediterranean Sea between Europe and Africa) – that holds back this form of globalised immigration. Yet there is no solution or end in sight of the people from poor regions desiring a better life through immigration.
So the nation-state’s erected barriers will continue to come under real and philosophical pressure. The question has to be asked: “What right does one human or society have to block and hinder the free and peaceful movement of another through this world?” There only is an affirmative answer given the existence of the nation-state, which somehow has established this right through the creation of artificial borders based on historical events. Remove the nation-state from the equation and the answer becomes simple – “None”.
However, the transparency provided by technology has had equally far-reaching implications in the developed world going far deeper than just an issue of foreign immigration. With the use of radio by the political elite – politics became more accessible to the masses. The 1908 U.S. presidential race between Republican William Howard Taft and Democrat William Jennings Bryan marked the first time that recorded speeches were used to expand the speaker’s audience to those not in attendance. Woodrow Wilson was the first president who felt compelled to hold a presidential press conference in 1913.
In those countries where the media was less under the influence of the political elite, it soon developed into a hunt for human “gossip” and less a technology used for political debate.
President Warren Harding followed, becoming the first president to deliver a speech broadcast by radio. FDR perfected the use of this medium during his 30 evening radio addresses between 1933 and 1944 which became know as the Fireside Chats, a great political achievement which welded the American people to his reform programmes, come thick and thin. After the war, Harry Truman delivered the first oval office TV address and President Eisenhower used the same format to inform the people about his decision to send troops to enforce school desegregation.
In 1960, CBS organised the first TV presidential election debate, which many credited as a turning point in favour of the young dashing looking John Kennedy against a tired-looking make-up-less Richard Nixon. Finally, the entertainment value of the Trump period in the White House would certainly be substantially diminished without his many “tweets” to the masses, even though the information value might be suspect. Through voice, picture, and later internet, the nation-state’s representatives appeared ever more accessible to the U.S. electorate.
The U.S.A. is perhaps the most prominent user of this medium of enhanced political communication but other countries saw similar developments. The BBC and its founding father – John Reith – finally convinced King George V in 1932 regarding the necessity to hold a Christmas message via radio to his subjects around the world. The use of this technology was certainly not limited to liberal free societies and so one of the most influential film directors and producers of history – Leni Riefenstahl – perfect the use of the visual documentary in her masterpieces for the Nazis, Triumph of the Will and Olympia.
All this meant that the average person felt closer to their leaders of the nation-state than ever before. They started to see them – warts and all – as more and more human. Their mistakes and errors became known, documented and stored for future use. Leaders of nation-states became first fallible in the eyes of their electorate than increasingly ridiculed. In those countries where the media was less under the influence of the political elite, it soon developed into a hunt for human “gossip” and less a technology used for political debate.
The paparazzis were let loose on the political elite in the name of the fourth estate. As the available media outlets multiplied and polarised alongside the prevailing views of their specific audience, they started to loose their journalistic objectivity and was increasingly driven towards a short-term sensationalism. Youtube uploads and their followers became so numerous that many adjusted their content, based on the populism of “likes,” catering for specific desires and views. It was only a matter of “Google-ing” and “following” them, and everyone could find proof and arguments backing their own view about the leaders of the nation-state.
Preconceived ideas where strengthened and backed-up not by objectivity and researched facts but by selective sourcing of interpretation and subjectivity – the birth of “fake news”. In democracies, subjects increasingly found the “facts” they wanted and projected these onto their leaders, which in turn fed their image, which they felt provided the strongest backing to achieve electoral victory in the next contest.
The resulting cynicism between the leaders of the nation-state and the population was inevitable and is perhaps best summarised by a number of recent quotes from the leaders of the European people:
“When it becomes serious, you have to lie.” – on Greece’s economic meltdown, 2011
“If it’s a Yes, we will say ‘on we go’, and if it’s a No, we will say ‘we continue.’” – on French referendum over EU constitution
“We all know what to do, we just don’t know how to get re-elected after we’ve done it.” – On Eurozone economic policy and democracy
However with every lie, with every cynical comment, as well as with every sexual affair and continuous degrading attitude towards the female electorate (who comprise more than 50% of the voting population), the people increasingly rejected their political establishment. The unthinkable started to happen in democracies of the West. A sexual predator and real estate tycoon won the U.S. presidency with a slogan you can fit on a hat, “America First”. A lesbian, Investment Banker became the leader of the opposition in the German Bundestag, representing a party that opposes same-sex marriages and argues for the protection of the national rights of the working class along lines reminiscent of German politics of the 1930s. The entire French political elite and establishment – not just the presidency – was wiped out in just under two years by a young investment banker with virtually no public office experience.
The contradictions are glaring and only imaginable in a world where “fake news” has replaced basic objectivity. In an ever-fragmenting European political environment, Spain and Italy fail to deliver again and again through elections the political stability that the nation state would need at a time to tackle its global challenges. These political changes are cataclysmic. The temporary democratic victors of this disillusionment of the people in its political elite – the populists –have one thing in common – they are not politicians but political outsiders and feed on this image.
Perhaps driven by economic slowdown and certainly fired on by a sensational press, the people are fed up with their traditional political leaders. The more these outsiders discredit the political institutions of the nation-state through which they obtained power by comments and outrageous behaviour and claims – the more sensational they become for the press as a precious tool for higher publicity and internet “hits”. A self-feeding frenzy between new political elite, media and the people has been initiated and is starting to devour the structure of the very nation-state to which the necessity of a free press was so necessary in the past.
Let us dispel all delusional hope that this new non-political elite is somehow better equipped to deal with the challenges to the nation-state or – even less so – our global threats, than the previous established elite. It is preposterous to imagine that investment bankers, traders and real estate tycoons, all political novices, are better suited for solving our problems than anybody else. The most likely outcome – which we can also see on the historic horizon of the future – is an even broader disillusionment by the electorate, followed by an even more radical replacement of the old and new political elite. More sensationalism, more outrageous claims, and more radicalisation made acceptable by fake news will drive the nation-state into the abyss.
The success of the Nation-State destroys itself
In the seed of the success of the nation-state lies its severest challenge to the very institution itself. The success story of the nation-state was to create a globalised world in which prosperity for many improved dramatically. However, from at least the middle of the 19th century, nations created issues and challenges for humanity, which are no longer national but global. A look at today’s world reflects this. Those risks to humanity that are hardest to solve are no longer national but require global responses. Military conflicts are no longer clear-cut wars between countries trying to eliminate the enemies’ national armed forces and occupying the enemies’ territory and capital. Military wherewithal in the shape of nuclear weapons is no longer just a threat to the local population in war zones but is a threat to the survival of humanity itself.
Pollution is no longer just threatening the national rivers or forests but is causing weather patterns to change and water levels to rise impacting emerging market economies based in the Middle of the Pacific and the Indian Ocean as well as in the rest of the world. Religious differences are no longer just impacting the border between two countries but engulfing the entire world in a struggle for a different Weltanschauung. Diseases are no longer a local or even a national or regional threat but via world travel have become a global concern.
The success story of the nation-state was to create a globalised world in which prosperity for many improved dramatically. However, from at least the middle of the 19th century, nations created issues and challenges for humanity, which are no longer national but global.
Any look at the major headlines in the past few years confirms this. For all its power to win the war in Iraq against Saddam Hussein largely on its own, the U.S. (by far the strongest nation in the world) failed miserably to win the peace without local Iraqi buy-in. The Lehman Brothers crisis painfully illustrated that national regulators were not up to understanding the global implications of those they regulated. The U.S. Federal Reserve is constituted to deal with American (that is, national) inflation and unemployment rates, even as the dollar’s supranational dominance makes their decisions possess a truly and unthought-of global significance. Increasingly the nation-state is coming to its limit to find adequate responses to these global challenges.
In fact, the very foundation of national currencies and payment methods is being called into question by globalised capital markets which suddenly – through the use of new technology – experiment with global non-national currencies in the form of Bitcoin and other encrypted electronic decentralised currencies. The cycle is always the same – the nation-states’ success in creating global trade leads to global capital flows, which in turn is leading towards global currencies undermining the function of the nation-state and its central banks to issue, control and regulate its finances in its nation-state currency.
Humanity is facing increasingly global challenges for which the concept of the nation-state is ill equipped to provide solutions even via existing multi-national institutions. These challenges are as broad as religious confrontation, global terrorism, increasing number of countries with nuclear capability to destroy humanity, global pollution, international immigration, financial inequality in the West caused by an increasingly global labour market, and global health threats. While facing this challenge from above, the nation-state is equally being threatened from within or from below with a rejection by its people of its political ruling class.
The real problem
But while the nation-state is being challenged in supranational policy terms by these global threats, as a result of the inability to address these challenges, the frustrated population of the the West has chosen to increasingly reject multi-national institutions (see Brexit) and to slowly turn towards nationalism as it feels it has lost democratic control of the decision-making process. It is the worst of all worlds; as problems become more transnational in nature, unelected, supranational institutions are increasingly reviled as anti-democratic, arrogant, and wildly unsuccessful.
The cycle is always the same – the nation-states’ success to create global trade leads to global capital flows, which in turn is leading towards global currencies undermining the function of the nation-state and its central banks to issue, control and regulate its finances in its nation-state currency.
It is this nexus that further explains the rise of populism throughout Europe on the left and right (Golden Dawn in Greece, Podemos in Spain, Five Star Movement in Italy, The Front National in France, UKIP in the UK, and the AfD in Germany). It would seem that what is needed is nothing less than a new world system, supplanting the failing Westphalian order, that combines political legitimacy at the national and local levels, with the ability to master the many supranational problems of today. Only a new global order – and a new ideology supporting it – can help us find solutions for global challenges. This global order cannot be based on the discredited nation-state institutions, which the very populations are rejecting so forcefully.
Back to the future — The new feudalism
Ironically, the model to solve the many problems evident at the dawn of today’s multipolar age – to master the increasing limitations of the nation-state that have been so glaringly exposed – is to go back to the future, to revisit the very feudal age that pre-dated Westphalia.
For what is called for is more coherent and effective supranational structures at the top, in line with the old primacy of the feudal church. For example, in this case a more effective G20 is necessary to deal with the many trans-national aspects of the global financial and economic systems. A global but decentralised currency regulated outside the sphere of any particular nation-state is needed.
In Asia, the United States is no longer a sufficient force (for all its power) to manage and hedge against the rise of China. Instead, increasing the role and power to influence nation-states through the Quadrilateral grouping of the U.S., Australia, Japan, and India makes a great deal more sense. A Europe with a Euro-zone finance minister and a mutualisation of common debt (from now on, though not for what has been run up before) would tackle the ongoing challenges to the financial stability of the people of the continent. European nation states need to agree to follow the same (rather stringent) fiscal policies to turn the euro-zone core into a true supranational community. The nation-state has to give up sovereignty to deal with the success it has created.
As this shopping list for increasingly effective supranational structures makes clear we are agnostic about the ways to achieve this; in some cases it will be inter-governmental (between nation-states), in others like the euro-zone, the supranational institution will take on a life of their own. While in challenges that threaten the very survival of humanity and human civilisation on our globe – such as nuclear war, the environment as well as certain economic and trade aspects – the only way forward is for nation-states to give up control and pass sovereignty over these issues to global institutions that function above and beyond the nation-state. But in any event, the goal is to pragmatically go back to the pre-Westphalian era, where more unified and effective supra-national institutions existed to mange trans-national problems.
At the same time, even in this more feudal world, the nation-state is not going anywhere; for many people cleave to it precisely because they still feel strong allegiances to their countries, and crucially feel they have some democratic and practical control over their outcomes. Nation-states will continue to have a dominant military role, play a major role in macro-economics, and be the dominant force securing their own internal security. But over time, the nation-state will do less, but by concentrating on these key functions, it will also do it better.
Crucially at the bottom of the global governance tree, localism — as was true during the feudal area — will also come into its own again. In line with Thomas Jefferson’s brilliant insight, problems should always be solved at the lowest possible level, precisely because it is closest to the people itself, and means the political and democratic legitimacy of policy solutions can be secured. As American Jeffersonians so well understood, by diffusing power you paradoxically can magnify it and guarantee its legitimacy.
So everything from education issues, to policing, to infrastructure, should be primarily managed at this local level. Further, as the feudal world well knew, it is here that people feel most connected to decision-makers; we may not personally know the president but we do know the Head of the School Board and can heap all sorts of direct social pressure on him if he sends the kids to school in a blizzard. This accountability, which is exactly what populists are rightly bemoaning, has been lost in the world of the nation-state. A feudal emphasis on localism can be the well-spring for a more legitimate, more broadly acceptable system of government.
There is little doubt that after over 360 years, the old Westphalian system, dominated by the nation-state, is beginning to show its age. The irony is that the true antidote to what ails it – going back to the future and resurrecting feudal elements of the pre-Westphalian world by buttressing both supranational and local responses to today’s problems – can be the very ancient answer that moves the modern world forward.
About the Authors
Dr John C. Hulsman is President and Managing Partner of John C. Hulsman Enterprises, a prominent global political-risk consulting firm. His new book, To Dare More Boldly: The Audacious Story of Political Risk, was published by Princeton University Press in April and is available on Amazon. He lives in Milan, Italy.
Dr Boris N. Liedtke is the Distinguished Executive Fellow at INSEAD Emerging Markets Institute and has over twenty years experience in the financial sector. He was the CEO of the largest bank by assets in Luxemburg and board member for Operations at the largest German fund manager. He is author of numerous articles on finance and trade as well as having received his PhD from the London School of Economics for the publication of Embracing a Dictatorship by MacMillan.
Dr. Dan Steinbock is the founder of Difference Group and has served as research director at the India, China and America Institute (USA) and visiting fellow at the Shanghai Institutes for International Studies (China) and the EU Center (Singapore). For more, see https://www.differencegroup.net/
The Four Steel Men Behind Trump’s Trade War
By Dan Steinbock
In just a few months, the Trump administration has undermined more than seven decades of U.S. free trade legacies. Who are the policymakers behind this reversal? What is their agenda? And why is steel their common denominator?
Recently, the Trump administration hammered a revised North American Free Trade Agreement (NAFTA) by pressuring Mexico and then strong-arming Canada to the tentative deal. The White House’s objective is either to redefine the terms on the basis of U.S. economic leverage and unipolar geopolitics or – if that is not acceptable to other parties – to withdraw the U.S. from such FTAs. It is not “either you are with us or against us,” as in the Bush years, but “America First – or nothing.”
Today, Trump’s tariff wars are led by Peter Navarro, Director of Trade and Industrial Policy, and Director of the White House National Trade Council, as well as his ally and Trump trade advisor Dan DiMicco, former CEO of the U.S. steel giant Nucor.
The two are supported by Robert Lighthizer, U.S. Trade Representative and former Reagan administration trade hawk, and Secretary of Commerce Wilbur Ross, a bankruptcy expert who made his fortune from restructured and offshored U.S. jobs.
Last year, the trade hawks were still contained by mainstream policymakers, such as former Secretary of State Rex Tillerson, Director of the National Economic Council Gary Cohn and Treasury Secretary Steve Mnuchin.
After Tillerson lost his job and particularly when the tree-trader Cohn resigned, things changed. Cohn’s Goldman Sachs companion Mnuchin proved weak, and Ross leans on winners, regardless of the cause. As free-traders were out, protectionists stepped in. That was more in line with Trump’s 2016 campaign promises, when he threatened to use 35% – 45% import tariffs against nations that have a significant trade surplus with the U.S.
The Uncompromising but Compromised Navarro and DiMicco
In the protectionist camp, the key player is Peter Navarro, the author of sensationalist China-bashing books, and his longtime friend DiMicco, a vocal free trade critic. For years, the two have been determined to prioritise steel industry, even at the expense of other American industries that offer more jobs, profits, or both.
With Navarro, the path to notoriety began with great political aspirations and failures. In the ‘90s, he lost five elections in San Diego; for mayor in 1992, city council in 1993 and 2001, county supervisor in 1994, and Congress in 1996. As politics did not work, he scribbled half a dozen business books, including If It’s Raining in Brazil, Buy Starbucks (2001), When the Market Moves, Will You Be Ready? (2003), What the Best MBAs Know (2005), The Well Timed Strategy (2006) and Always a Winner (2009). Intriguingly, all of them were typical feel-good-win-the-world business staple, and none of them focussed on China. But then came the global crisis. This was a problem to Navarro and others who mistook short-term bubbles for sustained growth. That’s when China became a convenient scapegoat.
So a repackaged Navarro hit the market with The Coming China Wars (2008), which claimed that America was facing battles with China over everything from decent jobs, and advanced technologies to strategic resources. Surprisingly, these hateful ramblings that smacked of simple China basing were given legitimacy by the reputable FT Press, the “world’s leading educational publishing company.” As Navarro realised he had found a gold mine, he released the more extreme Death by China (2011), which was published by Pearson Prentice Hall, the parent of the FT Press. Paradoxically, the more Sinophobic he got, the more he was rewarded.
Even stranger was Navarro’s debacle that resulted from efforts to fund a documentary based on his book, which went hand in hand with suspected “financial irregularities”, a subpoena by an FBI agent, and a charge for document destruction.[1] Like the over-driver Energizer Bunny, Navarro did not let such hindrances stop him. Even during the debacle, he co-authored a book on America’s economic ruin in cooperation with R. Glenn Hubbard, the heavy-weight economic advisor of Mitt Romney’s presidential campaign. But unlike former Fed chief Alan Greenspan who got caught for glorifying laissez-faire policies that led to the 2008 crisis, Hubbard had a lower public profile which allowed him to capitalise on the crisis via excessive consulting fees.[2]
Ironically, Death by China accused China for environmental pollution worldwide, whereas Nucor, one of America’s largest corporate contributor to U.S. air pollution, had already in 2000 paid almost $100 million to half a dozen U.S. states in the largest environmental settlement ever with a steel manufacturer. Death by China was co-authored with Greg Autry, an economist who represents Coalition for a Prosperous America and the American Jobs Alliance, which believes that U.S. trade policies have severely harmed the nation’s economy, security and people.[3]
That is how China became a convenient scapegoat for Nucor’s dramatic fall. As long as free markets, deregulation and globalisation boomed, Nucor soared. As Dan DiMicco took over in 2000, its stock price more than doubled to $31 in half a decade. But thereafter it more than doubled again to a peak of $75 in fall 2008. How did DiMicco do it? The simple answer is: the fastest possible way, via mergers and acquisitions (M&As).
First DiMicco took over Auburn Steel (2001), Nucor’s first acquisition in 36 years, the came Birmingham Steel (2002). Smart CEOs got more cautious by 2005, when U.S. subprime market first tanked, but not DiMicco. After the mid-decade, he got hungrier acquiring even bigger targets, such as Connecticut Steel, Verco Decking and Harris Steel (2006). And even as U.S. real estate sector began to sink into recession, DiMicco bought Magnatrax (2007), and David J. Joseph Co. (2008). That’s when the $20 billion steel giant posted a loss of $293 million, its first loss since 1966. Unsurprisingly, in the aftermath of the financial crisis, Nucor lost all those gains by early 2009, within a few months as Nucor’s stock plunged back to $34 (see Figure 1).[4]
The punchline of the story is how DiMicco explained the fall of Nucor after 2008. It was not the excessive M&A wave. Nor was it the lack of foresight after the mid-decade, when many signs surfaced that Nucor’s growth was untenable. Instead, and once again, China served as a scapegoat. In the past, DiMicco had endorsed Navarro’s books. Now the two began to co-write op-eds bashing China.
Despite their more recent stated reservations about Navarro, Wall Street Journal, Barron’s and others highly-regarded business publications were glad to give him space at the time. In April 2009, the two argued that China’s currency manipulation accounted for U.S. trade deficits with China (Wall Street Journal). In October 2009, they decried China’s “weapon of mass production,” which they claimed was fueled by currency manipulation, unfair trade practices and gutting U.S. manufacturing (San Francisco Chronicle). (For a sanity check, it should be recalled that during this period Chinese economy accounted for almost half of global growth, which spared the world economy from Great Depression 2.0.)
To the two, these financial op-eds were but a stepping-stone to Capitol Hill’s kingmakers. In September 2009, DiMicco gave testimony on Chinese currency to the House Ways and Means Committee. By early 2010, they proclaimed China an emerging global threat and that it was time to “get tough” with the mainland (Barron’s); that is, assertive slogans that somehow found their way to the official U.S. 2017 National Security Strategy, after Trump was willing to see America’s ailing steel industry as a national security issue, at par with Pentagon’s rearmament.
Navarro’s Death by China had a simple solution to America: it urged business executives to be like Nucor, America’s largest steel producer, and Dan DiMicco, its chairman. “If American corporate executives want to better understand the art of fighting back against Chinese mercantilism and protectionism, they need look no further than Nucor…and the example set by its [chairman], Dan DiMicco [who] spends considerable time in the public arena lobbying for real trade reform with China.”
Lighthizer’s Tariffic Republican Party
Neither Lighthizer nor Ross has the public profile of Navarro and DiMicco. Yet, neither is without controversies. When Lighthizer arrived in the White House, he spent nearly $1 million on new furniture alone, attributing the costs to the Obama administration. But his ambitions went far beyond subsidised furniture – and they too, were sparked by the eclipse of U.S. steel industry.
Growing up in Ashtabula, Ohio, near the steel mills that used to be the bedrock of the little Lake Erie port city, he saw them shutter one after another. Today, Ashtabula is known as one of the poorest places in America. Like Navarro and DiMicco, Lighthizer believes that the loss of good-paying manufacturing jobs in his home place has nothing to do with the erosion of low-margin, high-polluting steel industry and the proliferation of steel factories around the world and thus intensified competition. He grew of age in the postwar age of “American Century,” not in the multipolar era of 21st century. As far as he was concerned, Ashtabula’s fall was triggered by unfair competition from cheap, foreign imports, particularly from China.
That’s the story Lighthizer likes to tell to U.S. journalists. The problem with the story is that he left his hometown more than four decades ago in the ‘70s, when Deng Xiaoping was only initiating China’s economic reforms and opening-up policies. Second, America’s trade deficits started in 1971, with Western Europe, then Japan and the “Asian dragons”; that is, Taiwan, South Korea, Singapore and Hong Kong. Third, U.S. deficits with China began only in the 2000s, decades after the fall of the Ashtabula of Lighthizer’s youth.
In reality, Lighthizer was a trade hawk already in the Reagan administration when he served as Deputy U.S. Trade Representative and the White House targeted Japan for alleged trade and currency abuses and then forced Tokyo to agree to the Plaza Accord (1985), to depreciate the U.S. dollar in relation to the Japanese yen and German Deutsche mark by intervening in currency markets. It was that deal – signed in a hotel that would soon become known as the Trump Plaza – that effectively broke Japan’s economic rise, paved the way to its asset bubble and lost decades.
During those years, Ambassador Lighthizer claims to have negotiated over two dozen bilateral international agreements, including agreements on steel, automobiles, and agricultural products. As Deputy USTR, he also served as Vice Chairman of the Board of the Overseas Private Investment Corporation (OPIC). Indeed, OPIC had begun to serve as the U.S. government’s development institution after 1971, when it insured IT&T in Chile thus ensuring de facto U.S. government support to a company that was meddling in Chilean elections, which led to General Pinochet’s violent coup.
Just as Lighthizer in the Reagan administration sought to contain Japan’s rise with new trade and currency policies, he now hopes to use tariffs against China and, truth to be told, against any country that is perceived to stand in America’s way. It is what he believes to be the true tradition of the Republican party: “The icon of modern conservatism, Ronald Reagan, imposed quotas on imported steel, protected Harley-Davidson from Japanese competition, restrained import of semiconductors and automobiles, and took myriad similar steps to keep American industry strong. How does allowing China to constantly rig trade in its favor advance the core conservative goal of making markets more efficient?”
To Lighthizer, tariffs are as American as apple pie; a way to promote American industry and a key Republican tenet originating from the pro-business politicians who created the party. Already in 2011 – five years before the Trump election triumph – Lighthizer argued that Trump’s “get-tough views on China” recall the roots of the party: “For most of its 157-year history, the Republican Party has been the party of building domestic industry by using trade policy to promote U.S. exports and fend off unfairly traded imports. American conservatives have had that view for even longer.”
Like Trump, Lighthizer sees China as a problem, along with the U.S. NAFTA partners, Canada and Mexico, Germany and the EU, Japan and South Korea, and the WTO itself. America is on the right track; the other countries aren’t. So they have to be transformed by America.
Ross, “the Greatest Gifter in American History”
While Navarro and Lighthizer flex their muscles behind the TV cameras, the 80-year old Secretary of Commerce Wilbur Ross has been the trade war’s public face. Nicknamed the “King of Bankruptcy,” Ross made his estimated $700 million in assets by buying bankrupt companies, especially in manufacturing and steel, and then selling them for a great profit after restructuring.
The prime examples include the International Steel Group (ISG), which he founded in 2002 after purchasing the assets of several bankrupt steel companies and which was followed by International Textile Group (ITG), International Automotive Components Group (IAC) and International Coal Group (ICG). Ironically, he made his fortunes by doing everything Trump claims is wrong with America.
In the Trump administration, Ross presumably is going after the kind of offshoring of U.S. jobs that gained him with a fortune. Nevertheless, charges of conflicts of interest, including possibly illegal failures to divest from financial holdings (violating a pledge to the Office of Government Ethics), and to disclose financial ties to Russian interests in confirmation hearings (according to the Paradise Papers) keep haunting the semi-billionaire.
Worse, a recent Forbes in-depth report indicates that “allegations [against Ross] — which sparked lawsuits, reimbursements and an SEC fine — come to more than $120 million. If even half of the accusations are legitimate, the current United States secretary of commerce could rank among the biggest gifters in American history.”
As Forbes’ Dan Alexander sees it, the timing of Trump’s job offer was economic manna from heaven: “From Ross’ vantage point, Trump offered the perfect exit. The future cabinet secretary’s private equity funds were underperforming — one on track to lose 26% of its initial value and another two dribbling out mediocre returns — and the accusations were starting to pile up.”
Four Steely Men
So these are the not-so-fabulous four: an idea peddler haunted by fraud allegations, a senior executive willing to promote steel industry at the expense of American innovation; a trade hawk who would like to re-create the Republican Party and the WTO in the image of America; and a bankruptcy wizard and grafter extraordinaire who made his millions by offshoring those jobs that Trump claims to want back.
In each case, protectionism has been less an intellectual matter of correcting the wrongs in international trade. In each case, it has served as an opportunist career enhancer, profit-maker and ideological pretext.
In the U.S. industrial landscape, the four steely men seek a return to the past “American Century” by boosting artificially old and low-margin industries, at the expense of new and profitable ones. Steel is their common denominator.
Since the postwar era, employment in manufacturing has fallen in most major manufacturing countries. Due to the emerging economies’ low-cost advantage and offshoring, advanced economies focus more on higher value-added, that’s their comparative advantage. In contrast, Trump hopes to facilitate U.S. growth with re-negotiated or rejected trade deals to “bring good-paying jobs to our shores and support American manufacturing, the backbone of our economy.” In reality, the reliance on controversial policy instruments (lower taxes, aggressive deregulation, new energy exports), may boost U.S. economic fortunes in the short-term but contribute to broader deterioration in the long-term (deeper income polarisation, social costs of misguided deregulation, environmental hazards associated with shale extraction).
Paradoxically, the Trump administration seeks progress in secondary priority areas where it is destined to generate minimal or transient progress, while ignoring viable advances in those areas of competitiveness and innovation, where it could thrive.
In the view of the steely trade hawks, even the reversal of postwar global economic cooperation is fully legitimate – as long as it is seen to serve the America First doctrine rather than each one’s private agenda.
About the Author
Notes
[1] Once again,Navarro turned to Nucor, but he wanted the deal done through Utility Consumers’ Action Network (UCAN), a San Diego non-profit, led by his friend Michael Shames. So, UCAN deposited Nucor’s checks to Navarro’s production company. Perhaps the hope was that this would be easier to explain to Nucor’s shareholders. In February 2012, UCAN, Navarro’s production company, Navarro and his wife were subpoenaed by an FBI agent to testify before a federal grand jury, due to suspected financial irregularities. Soon thereafter UCAN was charged for document destruction. By fall 2012 Shames was replaced. But the debacle is not over. The following year, UCAN and Shames sued each other.
[2] In Inside Job (2010), the Oscar-winning documentary on the 2008 Great Recession, Hubbard was questioned on his support for deregulation, lucrative consulting, and conflict of interest. Hubbard was dean of Columbia’s School of Business and formerly deputy assistant secretary at the US Treasury (1991-93), chairman of the Council of Economic Advisors (2001-2003).
[3] The Coalition promotes a harder line against China. It represents agriculture, manufacturing and organized labor associations and small exporters. In turn, the American Jobs Alliance is dedicated to fostering U.S. system of free enterprise. The leaders of these two organizations are well-known trade hawks and include a former commissioner of U.S.-China Economic and Security Commission, president of Economic Strategy Institute, Ross Perot’s economic advisor, and Reform Party candidates.
[4] Just months before his successor John Ferriola took over as the CEO in January 2013, DiMicco still bought the $605 million Skyline Steel, which boosted Nucor’s price to almost $45 thus making his departure look a bit more respectable.