Paradox of American free- market capitalism – by C.M.A.Nayar

Synopsis: The free-market capitalism adopted by USA during the reconstruction period after the Second World War had created a strong manufacturing base in USA with a flourishing export market with a trade surplus till 1975. Reaganomics for large scale import of cheap goods for managing inflation was followed by every President who succeeded him . Mad pursuit of globalization with  global sourcing and transfer of manufacturing activities to other countries gave a jolt to the manufacturing base in USA . USA was the leader for almost all the major manufacturing activities till 1980’s and other nations have overtaken USA in almost all these fields now. This also has resulted in economic deficit ( loss of GDP ), social deficit ( unemployment ) and technical deficit ( loss of competence ) putting USA into a difficult situation .  The mounting trade deficit year after year caused severe economic strain and a time has come to take bold steps for protecting US economy. It may appear paradoxical that a champion of free-market economy in the global scene may adopt a  controlled economy with local production and limited imports. The slogans like “ Make in America “ and “ Make America Great Again “ promoted by President Trump will have to be seen in this background so as to rebuild the nation . The tariffs introduced by President Trump are mainly meant to stimulate local production and limit imports .It is true that President George Washington  had introduced tariff as a source of revenue when the country did not have a big manufacturing base . However , the situation is quite different now with USA having a huge manufacturing base and I do not expect President Trump to treat tariff as a source of revenue .  There is no doubt that there will be a cost for bringing manufacturing back to America : decreased margin for companies , increased prices and consequent inflation in USA. Loss of knowhow consequent to outsourcing will have to be addressed through  new skill-development , effective vocational training and above all an educational system which gives importance to the creation of physical wealth and not virtual wealth .Financial engineering should become complementary to traditional engineering for creation of physical wealth.  

1.Introduction

Although capitalism and free market capitalism are used interchangeably , there is a difference between the two . In both the cases, private individuals are responsible for the production of goods and services and the law of supply and demand determine volume of production and market prices . The main difference between the two is that Free market capitalism maintains that the Government should not have any role for regulating  commerce .  The notion of free market capitalism was propounded by Economist Milton Friedman in 1962 advocating that Free market capitalism is the need of the day for achieving economic prosperity .  Republicans , in general , embrace free market capitalism while Democrats consider that the Govt should have some role for regulating commerce in certain cases and in certain situations . Even when several American economists and most of the Republicans proclaim that USA is a free- market economy , the reality is different . There are several controls introduced by the US Congress, US Administration  and Federal Reserves for managing the economy .

2.Globalization and its impacts

Milton Friedman’s theory for free-market economy which embraces the whole world gave birth to Globalization . The reconstruction period after the Second World War saw phenomenal progress in transport and communication opening new avenues for closer interactions among different countries in the world mainly in three domains : technology , economy , politics/culture. The net impact of this change could be called “ globalization “ . It was believed that economic globalization will bring prosperity for all the people in the world through global access to manufactured goods at highly competitive prices. However , the reality was different and globalization benefited mostly developed nations for managing inflation.  In order to ensure certain fairness in competition among companies attempting to get advantages in export-market , UN adopted  in July 2000 the “ UN Global Compact “  with 10 principles covering four domains: Human Rights,Labour,Environment and Anticorruption . Almost all the countries in the world have strongly supported these principles . Although UN claims , it as  world’s largest corporate sustainability initiative involving over 20,000 companies and 3,000 non-business participants in around 160 countries , it is a sad fact that these principles are not fully respected systematically by most of the signatories. Consequently, the cost advantage presented by several companies in export market were not really in full conformity with some of  the principles of UN Global Compact  .The benefits of globalization were mostly available to developed nations through cheap imports. However , it was at a huge cost of economic deficit ( trade deficit ) , social deficit                        ( unemployment ) and technology deficit ( loss of competence).No doubt ,China prospered. Excessive interdependency consequent to an illogical  push for global sourcing  for cost-optimization is causing  supply-chain interruptions related to geopolitical conflicts .A new reflection on the matter has set in motion a process of deglobalization and different geopolitical and economic developments are already showing their impact on trade.   Countries which took advantage through massive global sourcing will be compelled to change the strategy adopting increased local sourcing/ proximity sourcing and sourcing from friendly nations . The campaign for  “ Make in America “ launched by President Trump will have to be seen in this background for creating a new “ consumption culture “ and a new  economic order in USA .

3. Mounting US trade deficits

“  Reaganomics” and adoption of unbridled globalization during the last thirty to forty years has brought USA to the present situation with massive imports and huge trade-deficit year after year . I give below the evolution of trade deficit in goods  as well as Goods+ Services from Reagan presidency  onwards when  each president took charge . Presidents get elected in November and take charge only in January next year . Since the financial year in USA is between October and September the outgoing president continues to be responsible for the performance between November and January and the incoming president is responsible for performance only for 9 months of the first year .

Source Census bureau :   gands.pdf https://share.google/l6DRKe7hKkHocq7Tc                                              Note 1 : This marked the beginning of import of cheap goods  from China for taming inflation .                      Note 2 : George Bush Sr inherited a situation of high trade deficit and he tried to bring down the trade-deficit with some success.                                                                                                                                  Note 3. Although Clinton inherited a reasonably good situation with falling trade-deficit , his policies increased the trade-deficit further                                                                                                              Note 4 . Trade-deficits increased further under George Bush Jr .                                                                        Note 5 : Obama made a good attempt to bring down trade-deficit                                                                  Note 6 : Trump’s first term saw considerable increase in trade deficit                                                              Note 7 : Biden’s term saw very high trade-deficit 

This is certainly not a sustainable situation and a course -correction for moving towards balanced trade is required as being highlighted by President Trump . Local production , proximity sourcing and balanced trade will be essential elements needed for this transformation . Such a change  is likely to increase the cost of production of several consumer goods and consumer durables in USA with an impact on inflation

4. Make in America and MAGA

President Trump won the election with the  slogans “ Make in America “ and  “ Make America Great Again ( MAGA ) ” . In my view , both these slogans are laudable and essential in the present context in USA  although these are not in conformity with the notions of Free-market capitalism .  There are several practical problems which would need clear answers.

• Will the American companies shifting their plants from China come back to USA? . All the indications so far give the impression that they may go to countries like Vietnam and Thailand . President Trump will have to find a way to change the mindset of Corporate America to have a sense of national pride and nationalism .
• Import and inflation : Out of the total import of 3295 billion $ in 2024 , around 80 % of the imported products affect the calculation of Consumer Price Index ( CPI ) and the  inflation in one way or the other  . The Consumer Price Index ( CPI) is worked out on the basis of price -changes of around 80000 articles under around 200 categories      ( food, energy, apparel, housing , health care , transportation , personal care  etc ). Local production of these items  could  increase the cost with an impact on inflation . Such actions can be meaningful only if the citizens abandon the “ throw away “ culture and adopt a policy of consuming less of more expensive locally made products for balancing the family-budget . Is US ready for such a cultural change ? . Probably NOT. Much will depend on the persuasive power of President Trump for influencing citizens .
• Strategic autonomy for supply chain : In a changing global scene with probable geopolitical conflicts and weaponization of supply chain , USA will have to ensure strategic autonomy through local sourcing , proximity sourcing ( USMCA) and sourcing from friendly nations wherever needed.

5. Tariff on imports and its objectives

Tariff is a tax imposed on goods and services entering a geographical area of a nation or a group of nations from outside . It could be a protective tariff for protecting local industries from the onslaught of cheap foreign goods . It also has a the long term objective for improving competitiveness for local production through optimization of designs and adoption of modern techniques for productivity-improvement . If my understanding is right , this is what President Trump wants to get done . Another objective of tariff could be revenue-collection and this is generally adopted by countries which do not have a good manufacturing base. In the initial period  of consolidation , USA did not have a good manufacturing base  and President George Washington had imposed tariffs for revenue                ( Hamilton Act 1789 ) . With a huge manufacturing base , USA of today is quite different and a tariff for revenue may not be the objective. The MAGA project 2025 had proposed a tariff on imported goods  for facilitating reduction of income tax and such an action may not be fair in the present context . Some US Presidents had also resorted to tariff for mobilizing resources for war-efforts .

6.Conclusion

6.1. Although USA is ,by and large,  a free-market economy , there are inbuilt Govt controls in several areas for protecting national interests and interests of citizens.

6.2. US had embraced free-market economy after the second world war and  had prospered through successful manufacturing companies meeting the requirement of local market as well as the export-market with a trade-surplus  till 1975. President Reagan’s decision to allow large scale imports of cheap consumer goods for managing inflation marked the beginning of increasing trade deficits leading to the unmanageable situation of today .

6.3. Mad pursuit of globalization with large scale shifting of manufacturing facilities to other countries has crippled the US manufacturing base resulting in economic deficit ( fall in GDP ) , social deficit ( unemployment ) and technical deficit ( loss of competence ). This will have to be reversed through an effective programme for bringing manufacture back to USA.  .

6.4.USA was able to keep inflation low through large scale import of cheap goods from other countries particularly China . It will not be possible to continue this pattern any more . C.M.A.Nayar                                                                                                                                                      PS: See attached annexures for US trade balance by partners and by commodities in 2024  

Annexures – ==U.S. merchandise trade balance by selected trading partners, 2020–24
In millions of dollars. https://www.usitc.gov/research_and_analysis/tradeshifts/2024/us_trade_industry_sectors_and_selected_trading

Note : The trade deficit in 2024 was more than in 2023 with all the countries in the lisrt except Japan and Canada ( almost the same )

Source: USITC DataWeb/Census, accessed February 13, 2025.
Notes: Merchandise trade balance is calculated as U.S. total exports minus U.S. general imports. Calculations based on unrounded data. The countries are sorted by amount of U.S. trade, with those having the largest total U.S. trade by value (U.S. general imports plus U.S. total exports) in these products during the most recent year appearing first.

U.S. merchandise trade balance by industry/commodity sectors, 2020–24
In millions of dollars

Note :  There was a trade surplus in 2024 only for one item : Energy related products . Trade deficit in 2024 was more than in 2023 for all the items except minerals and metals .