Trump’s trade war: The world will get poorer — and the US especially
The United States is about to plunge into recession, pulling much of the world down with it. The tariffs announced by President Donald Trump on April 2 will reverse decades of rising wealth based on specialization and exchange, based on little more than his unfocused feelings.
Announcing his new rates, the president claimed they were reciprocal. But the tariffs supposedly levied by foreign countries were invented. Any system that calculates protectionist Brazil and free-trade Singapore as both imposing a tariff equivalent to 10% is too preposterous to merit serious refutation. O judgment, thou art fled to brutish beasts.
Then again, this was never about judgment. It is about one man’s ability to channel the unfocused anger that can be found in any electorate at any time.
The White House announcement, like all protectionism, rested on aesthetics, not economics. Hence the prominence given to the United Auto Workers.
The UAW represents the angry but inchoate nature of protectionism. At the end of March, the labor union issued a press release exulting in new tariffs on imported vehicles: “We applaud the Trump administration for stepping up to end the free trade disaster that has devastated working-class communities for decades.”
On the same day, March 26, the UAW furiously protested the loss of 600 steelworkers in Dearborn, Michigan. Their employer, Cleveland-Cliffs, had been the main supplier of steel to U.S. car firms and was now struggling with falling demand.
What had caused the falling demand? According to a report in USA Today, “Many UAW local leaders at Ford Motor Co. and General Motors plants around the U.S. told the Free Press they are concerned that the tariff war will disrupt production.”
One of the ironies in the debate about protectionism is that it is free traders who are accused of being in the grip of some dogmatic commitment to an ideal that does not work in the real world.
In reality, it is the other way around. Tariffs sound plausible until they are tried. Most of us start life with anti-free trade instincts. I certainly did. Protectionism accords with our intuitions. It rests on a series of gut feelings that come across as common sense.
Of course, we should grow our own food! Obviously, we can’t compete with slave-wage economies! No one wants to depend on foreigners for key strategic industries! Our trade can’t carry on forever in deficit!
All these assertions sound reasonable. All turn out to be false. Think about them for a moment.
Not trying to grow their own food is what distinguishes wealthy modern economies from poor medieval economies. The globalization that followed the end of World War II conquered famine. Indeed, the one country where famine still happens is North Korea, which made a point of standing aside from globalization to pursue what it calls juche, self-sufficiency.
Buying cheaper products from lower-wage economies is what lets rich countries move up the production chain, improving their wages and living standards while alleviating global poverty. Everybody wins.
The way to have a secure supply of something you consider to be a strategic resource — food, steel, minerals, whatever — is to source it from the widest possible variety of suppliers so that you are not vulnerable to a localized shock or disruption, which might as easily happen on your own territory as anywhere else.
There is no correlation between your trade balance and the success of your economy. A trade deficit must, by the laws of math, be matched by an investment surplus. Every dollar not spent on buying U.S. exports must instead be invested in the U.S., creating new industries and jobs. The U.S. last ran a trade surplus in 1975, and I hope we can all agree that life has gotten better since then. Indeed, one of the reasons the U.S. has comprehensively outperformed Europe over the past half-century is that people are choosing to invest in American companies, thereby incidentally and irrelevantly creating a trade deficit.
Free trade, in short, works in practice every bit as well as in theory. No country that engages in it remains poor, at least not for long. It is the precise opposite of a dogma. It is a pragma.
Here’s one way to think about it. Removing restrictions from commerce extends to the international plane the principles of specialization and exchange that we apply to our own lives. I have mounting trade deficits with several of the pubs around my English village. They give me hard goods in exchange for cash. I never sell them anything. Sometimes, they engage in dumping, offering below-cost products: a free glass of wine with my meal on a Monday, say. Who gets the better end of that deal?
Would I be wealthier if I tried to grow my own vines, press the grapes, ferment the juice, bottle it in glass that I had blown myself, and label it with paper produced from my own timber? Would I be better off if I lobbied the authorities to prevent the pubs from selling me their wine?
Adam Smith used wine to illustrate the absurdity of protectionism back in 1776:
“By means of glasses, hotbeds, and hotwalls, very good grapes can be raised in Scotland, and very good wine too can be made of them at about 30 times the expense for which at least equally good can be brought from foreign countries. Would it be a reasonable law to prohibit the importation of all foreign wines, merely to encourage the making of claret and burgundy in Scotland?”
No one, in the intervening 2 1/2 centuries, has proved the Scottish sage wrong. On the contrary, a great deal of empirical evidence has mounted up to prove him right.
Yet, as the dog returneth to his vomit, protectionists keep coming back to the old discredited theories, always presenting them as a novel response to a hitherto unencountered challenge.
They get away with it because protectionism is more about vibes than logic. Protectionism is somehow supposed to mean that you are on the side of manly coalminers with soot-stained faces. By implication, free traders (or “globalists,” as they are always termed) wear suits and have soft hands.
Oddly enough, though, I have noticed that the most aggressive protectionists are rarely drawn from the communities they claim to champion. Trump inherited a real estate business. Peter Navarro was an academic who had failed to get elected to public office. Robert Lighthizer was a lobbyist. And so on.
None of these men is offering to do the manual jobs he claims to be defending. None of them is pushing his children into coalmining or shipbuilding. And, in fairness, few of the men still employed in heavy industry want the same lives for their sons. For more than a century, machines have been doing an increasing share of the most brutalizing jobs, releasing men into easier and better-paid work.
Now, you might not like that process. You might, especially if you have a comfortable job in politics or journalism, regret it on aesthetic grounds. But don’t make the mistake of romanticizing an era that never existed. The economist Johan Norberg calculated that the wage of a full-time autoworker in Detroit in the 1950s was equivalent to slightly less than that of an Amazon warehouse worker today and that his job security was no greater.
Whether or not that matters to you, at least have the honesty to admit that it is automation, not trade, that has transformed the economy. Once mechanical diggers have been invented, lines of men with shovels become obsolete. It makes little difference whether the digger was invented in your country or someone else’s. The technology will spread either way.
A question for those who believe that free traders are the ideologues and protectionists the pragmatists: When did governments become so wise? What makes you think that they could disinterestedly pick the most deserving companies to support rather than being vulnerable to lobbying and special pleading?
Sugar has been protected in the U.S. for almost as long as the country has existed, making candy taste worse, driving confectioners to Mexico and Canada, and destroying jobs in food processing, largely because Florida was often a swing state. Today, Pennsylvania is a swing state, so both parties rush to privilege steelworkers. I say “steelworkers” rather than “steel production” because, as President Ronald Reagan used to observe, tariffs make an industry flabby and dependent on handouts. That’s why he liked to say that “instead of protectionism, we should call it destructionism.”
Precisely because they are arguing for something counterintuitive, free traders need to win on real-world events rather than on abstract logic. It is easy to show, in theory, that the arguments for protectionism are not just untrue but contradictory. Ineffective but easy.
Trump advanced three justifications for tariffs. First, that they will raise money and so allow for a cut in income taxes. Second, that they will bring production back to America. Third, that they are a negotiating tool to prise other countries’ markets open.
As a matter of fact, all three of these arguments are false. But surely, even Trumpsters can see that they are incompatible. If tariffs are raising revenue, it is because imports are flowing in, so there is no reshoring of jobs. If they are repatriating production, then they are raising no revenue. And if they are a way to create a tariff-free world, they are doing neither.
Years in this debate, though, have taught me that logic counts for little. What counts is experience. What created the free-trade order we have enjoyed since 1945 was the catastrophic experience of interwar protectionism.
The 1930 Smoot-Hawley Tariff Act imposed levies on some 20,000 imports. In consequence, U.S. trade fell by some two-thirds. Prices surged, leaving people with less to spend and causing the economy to cramp up. The recession, which had been showing signs of coming to an end, became the Great Depression.
Are we about to experience the same thing again? No. In an economy as large as America’s, international commerce is a small proportion of GDP, and unlike in the 1930s, most trade is now in services (which don’t attract tariffs) than in goods (which do). And unlike under President Franklin Delano Roosevelt, Trump’s dreadful trade policies might be partially mitigated by domestic deregulation and tax cuts.
Still, there is no question that unless Congress finds some way of blocking Trump’s tariffs, the world will get poorer, and the U.S. especially. Protectionism will again be discredited for a generation — maybe a century. How much pain, though, must be suffered along the way? The precedents are not encouraging.
Daniel Hannan is a member of the House of Lords and a former Conservative MEP.