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Jacobin - January 10, 2020

"A left approach to trade policy ought to concern itself with reforming this system so that developing and developed countries alike can pursue industrial policy, promote technology transfer, combat concentrations of private economic power, and fight for multilateral institutions that ensure economic development and buttress human rights. National domestic policies should additionally be geared toward achieving full employment and developing economies for social need."

Controlling Capital

What then should we do? One strategy is to directly confront the ability of capital to move across borders in the first place by instituting various capital controls in order to address trade imbalances and pursue policies oriented towards the needs of workers, as argued by scholars such as James Crotty and Gerald Epstein.

In particular, capital controls would help reorient power over issues of trade and economic development by restricting the ability of financial capitalists and MNCs to threaten labor by divesting their money and offshoring their production. This would lay the groundwork for pursuing full employment through a job guarantee program and would increase labor’s bargaining position over wages, since the vagaries of international capital flows would be precluded.

Historically, capital controls have been an indispensable component of development for now industrialized nations. Such policies aided in the management of their currency values and allowed them to pursue industrial policy, properly developing their own economic capability to capture a share of the value-added in trade higher up GVCs. Of course, this doesn’t guarantee a rising income share accruing to labor, so such policies would have to be combined with the strengthening of unions, challenges to private concentrations of economic power, and ultimately democratization of the means of production.

Without their proper use, pursuing expansionary policy can bring about a process which increases trade deficits, exchange rate fluctuations, and even lead to competitive devaluations of real domestic wages. If uncontrolled, capital inflows and outflows can be damaging and bring volatility to currency values and domestic prices. The strength of this process will depend on the relative importance of trade for any particular economy. Importantly, trade imbalances should not be seen as an afterthought to domestic policy, as socialist policies can quickly become politically untenable because of the economic pain financial conditions will bring if capital flight occurs.

There are myriad forms of potential capital controls. They range from stand-by controls, wherein countries agree to return illegal money flows, to taxes, such as a small tax on all foreign exchange transactions, which would raise revenue and discourage speculative short-term flows. There could also be heavy restrictions on domestic and foreign bank lending. Even stronger policies include straightforward quantitative restrictions, such as outright bans on transfers or the selling of assets, regulating the rate of capital mobility, or restricting who can supply foreign exchange.

The threat of even more comprehensive and restrictive capital controls, such as the complete freezing of assets or foreign lending, could be used to force capital into bargaining over more progressive and democratic economic arrangements, as well.

The upshot is that capital controls will allow for more stable economic management as we reallocate and reinvest wealth away from large cash pools held by the rich and towards socially necessary services and production. They create policy space for agendas such as full employment, investment in green infrastructure, and stronger protections for workers. They could even be integrated into trade deals with other nations to construct multilateral agreements which begin to tackle the problem of tax havens and illicit finance.

Beyond Capital Controls

As powerful as they are, the use of capital controls cannot be the only aspect of a leftist approach to trade. Two additional issues need to be addressed. First, that the current global trade regime leaves developing nations dependent on the industrialized core for manufactured imports and technology, and second, that the international system will require radical reforms to truly produce just trade and the economic development of all nations. When it comes to the technological dominance of the industrialized world, there should be more mindful consideration of how to channel this to developing nations.

We should be bolder when it comes to the transfer of technology and the handling of intellectual property. Looking to Britain, the Labour Party’s John McDonnell has advocated for the “free or cheap” transfer of green technology to the Global South as a form of reparations for imperialism. A socialist long-term goal should be the public sharing of scientific and technological progress. No trade deal should operate to shackle developing countries with debt in order for them to obtain the technology needed to transition to a green economy.

Going even further, as socialists we should advocate for multilateral institutions that structure trade and international payments to foster the economic and social development of nations. In one sense, this entails the replacement of the US dollar as the international reserve currency with a system that is not nested in any particular nation — something akin to the bancor system advocated by J. M. Keynes, and more recently by Paul Davidson. Many nations need US dollars and other key currencies to buy essential imports, making them reliant on export income or foreign loans. A supranational unit of account that is not controlled by a single nation would help to solve this problem.

The United States is unique in that it possesses the privilege of issuing and managing the world’s reserve currency. For this reason, it does not face the constraints on financing trade that other countries will, presuming that there is always international demand for US dollars. It is likely that the US could embark on expansionary macroeconomic policies without rapidly facing a balance-of-payments constraint. However, American socialists should not neglect the trade concerns of the rest of the world because of this exception, nor should they seek to maintain this privilege.

Of final concern is that the current system encourages the reduction of labor costs and exchange rate depreciations to incentivize FDI and increase the competitiveness of exports. This austerity can only lead to economic stagnation and deepens the potential of a debt crisis. An alternative system would place the burden of adjustment on trade surplus nations, who must recycle their surplus earnings into investment in deficit nations, helping correct these imbalances in the future.

This means allowing developing nations to pursue the policy and investments needed to upgrade their positions within GVCs. ...
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