International Business in the Age of Economic Nationalism | Taylor's University (2024)

Economic nationalism, the policy of prioritising domestic industries and resources over foreign competition, has a long and complex history. It originated in the mercantilist practices of the 16th and 17th centuries, where European nations sought to accumulate wealth through strict regulation of trade and colonial expansion. These early policies aimed to maximise exports and minimise imports to build national wealth and power.

During the 19th century, economic nationalism was further entrenched through the industrialisation process. Countries like Imperial Germany and the United States adopted protectionist measures, such as high tariffs and subsidies, to nurture their burgeoning industries and protect them from more established foreign competitors. This era saw the rise of the ‘infant industry’ argument, which justified protectionist policies as necessary for developing domestic industries that could eventually compete globally.

The Great Depression of the 1930s marked another significant period for economic nationalism. In response to widespread economic hardship, many countries raised tariffs and implemented protectionist measures in an attempt to protect domestic jobs and industries. The Smoot-Hawley Tariff Act of 1930 in the United States is a notable example, which led to a severe contraction in global trade and exacerbated the economic downturn.

In the post-World War II era, the establishment of international institutions like the International Monetary Fund (IMF), the World Bank, and the General Agreement on Tariffs and Trade (GATT) aimed to promote free trade and economic cooperation. However, economic nationalism persisted in various forms, particularly in developing countries that sought to protect and promote their nascent industries through import substitution policies.

Today, economic nationalism has resurfaced in response to the challenges of globalisation, economic inequality, and political unrest. Countries across the globe are increasingly adopting protectionist policies, reflecting a broader trend of prioritising national interests over international cooperation.

Several factors have contributed to the resurgence of economic nationalism in recent years. One significant driver is the backlash against globalisation. As globalisation has accelerated, many people feel left behind, leading to a backlash against international trade and investment. This sentiment has fuelled nationalist movements and protectionist policies. Economic inequality is another critical factor. Rising inequality within and between countries has led to increased calls for policies that protect domestic industries and jobs from foreign competition.

Political populism has also played a crucial role. Populist leaders have capitalised on economic discontent, promoting nationalist agendas that emphasise self-sufficiency and economic sovereignty. The rise of extreme political movements, including both the far right and the far left, has also influenced this trend. For example, recent elections in the European Union have shown a significant shift towards extreme political ideologies, which often advocate for protectionist and nationalist policies.

Security concerns have also driven governments to adopt more protectionist policies. National security concerns, including the protection of critical industries and technologies, have become increasingly prominent, leading to stricter measures to safeguard national interests. Together, these factors have created a complex landscape where economic nationalism is gaining traction and reshaping global trade dynamics.

United States

Under the Trump administration, the United States adopted a series of protectionist measures aimed at revitalising domestic industries and reducing trade deficits. Key actions included imposing tariffs on steel and aluminium imports from various countries, which were justified on national security grounds. The administration also renegotiated trade agreements, most notably the North American Free Trade Agreement (NAFTA), which was replaced by the United States-Mexico-Canada Agreement (USMCA). The USMCA included provisions to increase North American content in auto manufacturing and improve labour standards, reflecting a shift towards prioritising American economic interests.

China

China's ‘Made in China 2025’ initiative is a strategic plan to transform the country into a global leader in high-tech industries such as robotics, aerospace, and electric vehicles. The initiative aims to reduce reliance on foreign technology and promote domestic innovation by providing substantial government support to key sectors. This policy includes measures such as subsidies, low-interest loans, and preferential procurement policies for Chinese companies. By fostering homegrown technological advancements, China seeks to enhance its economic sovereignty and competitiveness on the global stage.

India

India's ‘Atmanirbhar Bharat’ (Self-Reliant India) campaign, launched by Prime Minister Narendra Modi, focuses on boosting local manufacturing and reducing dependency on foreign goods. The campaign encompasses a wide range of policies aimed at promoting domestic industries, including financial incentives for local manufacturers, increased tariffs on imports, and efforts to attract foreign investment in key sectors. The initiative also seeks to strengthen India's infrastructure and support small and medium-sized enterprises (SMEs), positioning the country as a self-sufficient economic powerhouse.

European Union

Within the European Union (EU), several member states are advocating for greater protection of strategic industries and tighter controls on foreign investments. This trend is driven by concerns over economic security and the desire to protect critical infrastructure and technologies from foreign acquisition, particularly by state-owned enterprises from non-EU countries. For example, the EU has introduced a new framework for screening foreign direct investments to ensure they do not pose a threat to security or public order. Additionally, there is a growing emphasis on supporting European champions in industries such as digital technology, renewable energy, and pharmaceuticals to enhance the EU's strategic autonomy and economic resilience.

The trade war between the United States (US) and China began in 2018, marking a significant escalation in economic tensions between the two largest economies in the world. The conflict was initiated by the Trump administration's decision to impose tariffs on $34 billion worth of Chinese goods, citing unfair trade practises, intellectual property theft, and the substantial trade deficit with China.

This initial move was followed by several rounds of tariff increases, ultimately affecting hundreds of billions of dollars' worth of goods on both sides. The Biden administration has continued many of these policies, maintaining tariffs and introducing additional restrictions, particularly on technology exports, reflecting a sustained tough stance on China. This trade war signifies a broader trend towards deglobalisation and the fragmentation of the unipolar world order, heralding the start of a multipolar era where economic power and influence are more widely distributed across multiple global players.

The timeline of the trade war includes several key events:

• July 2018: The US imposes tariffs on $34 billion of Chinese goods, prompting immediate retaliatory tariffs from China on an equal value of US goods.
• September 2018: The US escalates the conflict by imposing tariffs on an additional $200 billion of Chinese imports, which China countered with tariffs on $60 billion of US goods.
• December 2018: Both countries agree to a temporary truce and begin negotiations.
• May 2019: Negotiations break down, leading to further tariff increases by both sides. The US raises tariffs on $200 billion of Chinese goods from 10% to 25%, and China responds with tariffs on $60 billion of US goods starting June 1, 2019.
• January 2020: The Phase One trade deal is signed, with China committing to increase its purchases of US goods and services by at least $200 billion over two years and make several structural reforms. However, many tariffs remain in place.
• January 2021: Joe Biden is inaugurated as the US President, maintaining many of the tariffs and trade policies implemented by the Trump administration.
• November 2021: The Biden administration tightens restrictions on Chinese tech companies, including expanded blacklisting of companies involved in quantum computing.
• March 2022: New export controls are introduced, restricting the sale of advanced technology, such as semiconductor manufacturing equipment and AI technology, to Chinese companies deemed to have military connections.
• November 2022: The US Department of Commerce announces further restrictions on technology exports to China, specifically targeting AI and quantum computing technologies.
• March 2023: The US further expands its blacklist of Chinese companies, adding firms involved in biotechnology and surveillance technology, citing national security concerns.
• August 2023: The US and China engage in renewed trade talks aimed at reducing tensions, but little progress is made as core issues remain unresolved.
• December 2023: China introduces a set of export restrictions on rare earth elements, crucial for various high-tech manufacturing processes, escalating the trade conflict.
• June 2024: Both nations announce a new round of negotiations, focusing on specific sectors like technology and agriculture, with an aim to reach a partial agreement to ease some trade restrictions.

The trade tensions between the European Union (EU) and China have been escalating in recent years, driven by a range of economic and political factors. The EU has increasingly voiced concerns over trade imbalances, market access, and China's state-driven economic model, which includes significant government subsidies and support for domestic industries. The growing influence of Chinese companies in strategic sectors within Europe has also raised alarms, leading to calls for tighter regulations and protective measures.

Recent Developments

• Investment Screening Mechanism: In 2020, the EU introduced a framework for screening foreign direct investments, particularly targeting investments from China. This mechanism aims to protect critical European infrastructure and technologies from potential national security threats posed by foreign takeovers.
• Anti-Dumping Measures: The EU has implemented several anti-dumping measures against Chinese products, particularly in the steel and aluminium sectors, to protect European manufacturers from unfair competition.
• Digital and Technological Concerns: Issues surrounding 5G technology and cybersecurity have intensified tensions. The EU has expressed concerns over the involvement of Chinese tech companies, such as Huawei, in its 5G infrastructure, leading to partial bans and increased scrutiny.
• Tariffs on New Energy Vehicles: In July 2024, the EU imposed tariffs of up to 38% on new energy vehicles imported from China, citing unfair government subsidies. In response, China launched an anti-dumping investigation into EU pork imports, accusing the EU of unfair practices and escalating trade tensions further. China also threatened to impose tariffs of up to 25% on large-engine vehicles imported from the EU and the US. This multifaceted retaliation highlights China's strategic approach to counter the EU's measures, significantly impacting sectors like automotive and agriculture and increasing the risk of a broader trade conflict.

The trade tensions between major economic powers, particularly the US-China trade war and the EU-China trade tensions, have had significant implications and impacts on global business and the international economic landscape.

Disruption of Supply Chains

The tariffs and technology restrictions imposed during the trade conflicts have significantly disrupted global supply chains. Companies have been forced to reconsider their sourcing and manufacturing strategies due to increased costs and regulatory challenges. Many businesses have sought to diversify their supply chains to mitigate the risks associated with heavy reliance on China. For example, companies in the technology sector have moved some of their production facilities to other countries in Southeast Asia to avoid tariffs and ensure smoother operations.

Sector-Specific Impacts

Certain industries have been more heavily affected than others by the trade tensions. The technology sector, for example, has faced significant challenges due to tariffs on electronic components and the blacklisting of Chinese tech companies like Huawei. This has disrupted supply chains and increased production costs. The agricultural sector in the US has also been hit hard, with Chinese retaliatory tariffs reducing the demand for American agricultural exports, leading to significant revenue losses for farmers.

Technological Decoupling

The growing concerns over technology and cybersecurity have led to a decoupling of technological ecosystems between the US, EU, and China. The restrictions on technology exports and the scrutiny of foreign investments in high-tech sectors have created a fragmented global tech landscape. Businesses must navigate differing regulatory environments and standards, impacting sectors such as telecommunications, electronics, and artificial intelligence.