Todd Buchholz: Made in America 2.0

November 11, 2024

Written by: Todd Buchholz

Written by WWSG speaker, Todd Buchholz: The backlash against free trade in the US, from both parties, has contributed to a wave of resistance to globalization around the world. But compared to its trading partners, America is in an enviable position, thanks to low energy prices and a growing ability to produce high-tech goods.

Globalization is dying, as demonstrated by the unanimous disdain for free trade in the US. In the run-up to the presidential election, both candidates – Donald Trump and Kamala Harris – seemed pleased with the increase in tariffs.

This poses a greater danger to the rest of the world than to America. After the global financial crisis in 2008, the American economy, beginning in 2016, achieved a significant recovery. After that year’s bitter election battle between Trump and Hillary Clinton, the US outperformed other G7 countries in growth, productivity and stock market returns.

Compared to its partners, America, with its huge domestic market of 340 million people, appears more vital and better equipped to weather the trade storm. In the USA, exports make up only 11% of GDP, and in Germany – almost 50% of GDP. While China gobbled up many factory jobs in the 1990s thanks to its vast pool of cheap labor, executives across the US are now finding that the country’s strict regime and rising wages have tarnished the “Made in China” brand. At the same time, America’s vast energy resources and innovation centers in Silicon Valley, Austin and Raleigh-Durham are reviving the “Made in the USA” option.

History puts things into perspective. By the summer of 1944, Allied victory in World War II looked more certain: American, British, and Canadian troops stormed the beaches of Normandy, while the Pacific Fleet retook almost all of the territory captured by Japan. But what shape should the world take after the smoke clears?

America gave a huge postwar gift to allies and former enemies by supporting free trade. Although it had sufficient military power and industrial potential to establish imperial dominance, it chose otherwise – a policy of economic openness.

The US government invited finance ministers to Bretton Woods to develop new rules for the international monetary system and opened its borders to imported goods, allowing US consumers to buy Sony radios, Volkswagen Beetles and more. (Of course, protectionist measures were also introduced in the USA).

Why did America choose this path? Two words: Cold War. Focusing on the coming conflict, the US government began a game of economic chess while the USSR was still placing pieces on the board. Capitalism had become a team sport, and America had to attract more players.

This policy was at odds with previous history. The United States could return to the policy of protectionism, the Smoot-Hawley Tariff Act of 1930, which increased average tariffs on more than 20,000 types of goods by 60% and reduced imports by two-thirds. But instead, America did something incredible. The Navy has deployed more than 6,700 ships to secure maritime cargo routes. Thus – once again – globalization was born. Countries around the world could focus on producing goods according to their comparative advantages and get those goods that they did not have. Soon the Germans, the Japanese, and later the South Koreans found out what the economic miracle was.

The result is that the world has become incredibly rich. Global GDP has grown dramatically, from approximately $1 trillion in 1960 to more than $100 trillion in 2022; the proportion of people living in extreme poverty fell from 54% to less than 10%; the average life expectancy was increased from 50 to 73 years.

But three and a half decades after the end of the Cold War, this Pax Americana has lost its luster. The Navy was reduced to 296 ships, and the once great cities, especially St. Louis and Baltimore, withered as industry moved to China and Mexico. Populist politicians and voters facing serious challenges see globalization more as a Trojan horse than a pillar of American national security. And that is mainly due to the rise of China, which is considered to have benefited the most from globalization.

However, prophecies that China’s economy would eclipse America’s have not come true. Moreover, labor costs in China have risen fivefold since the early 1990s, and the country is on the brink of a demographic collapse worse than that of the Roman Empire.

Meanwhile, America is rising again. As the Covid-19 pandemic exposed the fragility of production chains, US industrial construction spending doubled between 2020 and 2022, and then doubled again from 2022 to 2024. The cities of Phoenix (Arizona) and Columbus (Ohio) are emerging as hubs for semiconductor production, and even Detroit is starting to revive. Low energy costs (thanks to the shale revolution) and advanced industrial technologies have transformed the American economy. Few could have predicted this outcome at the beginning of the century. That revival is reflected in the financial markets, where small- and mid-cap companies focused on industrial products have performed well over the past ten years.

Investors are understandably nervous today due to fears of a recession, market volatility, liquidity difficulties and wars in Ukraine and the Middle East. But in the economic spectacle of the 21st century unfolding before our eyes, America is not only the center of attention; she writes the screenplay. We might be in for a hell of a show.

Todd Buchholz was director of the White House Office of Economic Policy under President George W. Bush and managing director of Tiger Hedge Fund. He is also the recipient of the Harvard Economics Department’s Allyn Young Teaching Award.

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