Tar Heel Business

Conventional political theory holds that the basis of worldly influence, or “soft power”, has its foundation in the economic or military force known as “hard power”.  As globalization has enabled more and more countries to acquire hard power through bustling economic growth, these nations now want to assert their own beliefs and institutions on the world in the form of soft power.

It was not long ago that the U.S. was lecturing countries like China and Indonesia on the necessity of free markets, but now with the U.S. stuck in a plodding recovery and many developing countries experiencing robust growth, numerous of these countries have determined that their own methods may be best.

These countries pride in their economic prowess has brought out nationalistic fervors, despite the fact that most developing countries’ growth can be attributed to mass urbanization and technology transfers.  This tenuous confidence has brought formerly impoverished countries like China to the forefront of international policy debate, which can be seen in China’s rally to replace the dollar as the world reserve currency.  The U.S. has bent and allowed such new comers to the world stage, as demonstrated by President Obama’s recent comment that the sphere of power in global affairs is drifting away from the U.S.

Perhaps the most astounding aspect of this colossal geopolitical shift is the sheer number of developing countries emerging on the international scene.  The result is a hyper competitive atmosphere of “new wealth” countries looking to assert their newfound power.  An example of this nascent competition can be seen in the heated space race between China and India.

Many countries have used the performance of their top companies, or “national champions”, as a means to confirm their nation’s superiority.  Countries have allowed these ambitions to supersede fundamentals of free market economics, as they have used their political muscle to drive these select companies forward.  Currently, China is trying to consolidate its sprawling steel industry into a few select companies that can be global heavyweights.  South Africa recently put pressure on the Swiss mining company Xstrata to withdraw its bid for one of South Africa’s prominent companies, Anglo American.  A change from communism was not enough to break Russia from its relationships with its energy firms like Gazprom.  Brazil is a part owner in its titan Petrobras.  South Korea has long supported the growth of huge conglomerates, or “chaebols”, such as Samsung.  The list goes on and on.

In emerging countries where free market principles are often viewed with skepticism, national champions receive many benefits from implicit and explicit government support.  When one country starts subsidizing its companies, others naturally follow so that their own companies can continue to compete on the global level.

This government fostering of national champions is a form of protectionism that greatly conflicts with the U.S.’s traditional stance towards free markets.  Rather than oppose these new developments, the U.S. has contributed to their proliferation through the Buy-American provisions in the stimulus bill and the recent tariff on Chinese tires.  After seeing the United Steelworkers Union receive government assistance, many other U.S. industries have started to clamor for special “protection” from Uncle Sam.

Despite the world’s newfound sophistication, it continues to be plagued by a problem that has haunted humanity for centuries: hubris.  Currently, the world economy is on a path to higher prices, lower trade, and less wealth because of national egos.  In recent years, the world has propelled so far forward thanks to free trade of technologies and goods; let us hope that we will not allow these gains to come undone because of selfish vanity.

-Brian Stockton