Trump shows how not to do trade policy
Reforming the global economic order might in principle represent a worthwhile objective. Rampant inequalities among countries and continents and the serious threat posed by climate change to life and therefore to economic development and wellbeing are just two of the reasons why many, including to an extent this publication, argue that the current arrangement is not working anymore. Add to that the consequences of economic globalisation in rich countries, where once safe jobs for low-skilled workers have been moved to developing countries so that businesses could save on wages and working standards, and you could have a pretty solid case for changing the rules of the game. In practice, we are right now witnessing a major restructuring of the world economy after the election of Donald Trump as US President. It would be logical to assume that those who favour change should support Mr Trump in his effort. However, despite all the noble causes that could justify a new economic order, that the way in which Mr Trump is bringing it about is reckless and likely to cause immense damage and no good at all.
Although in the past both Democratic and Republican administrations had championed free trade in the belief that its benefits outweighed the cost, Donald Trump has for a long time expressed contempt for economic globalisation, accusing foreign nations and particularly American allies of having profited from the generosity of the United States. In the past month, he even claimed that the European Union was born in order to ‘screw’ the United States. While it is doubtful that Mr Trump is concerned about the effects of climate change, given that he has surrounded himself of climate-sceptics, or about global inequality, given that he is a billionaire and so is much of his cabinet, he is certainly more sensible to the rage of American voters who lost their jobs because of relocation elsewhere, many of whom have embraced his Republican Party in recent elections. Therefore, it should come as no surprise that Mr Trump is now trying to reshape a trade system that, in his view, has damaged the Unit ed States: he has the power and the mandate to do so.
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Mr Trump has so far mainly relied on sweeping, across-the-board tariffs (or the threat of them) to achieve his international economic objectives. In the first two months, he has imposed a 20% levy on imports from China, and threatened to do the same (with a few differences) with Canada and Mexico, among the biggest trading partners of the United States. More recently, on March 26th, he announced a 25% tariff on all vehicle imports, including components of cars, with potentially dire consequences for a much globalised sector of the world economy: the levy is due to start on April 2nd.
In doing so, however, he is causing alarm all around the world and in his own country, and rightly so. Above all, the imperial way that he is employing, chiefly with executive orders and without consulting Congress or multilateral institutions like the World Trade Organisation, to replace a trade system that took decades to be built, says much about his attitude towards governing and his contempt for more conventional, but also more democratic, practices.
American businesses and consumers should be the first to rage against Mr Trump’s decision, because it is they who are going to feel the deepest negative consequences of Mr Trump’s tariffs. A tariff is in effect a tax on imports, which American businesses will have to pay and that in most cases they will certainly pass on to American consumers, who will therefore pay higher prices on goods. Although Mr Trump claims that businesses may avoid the levy if they choose to relocate to the United States, that will be simply impossible to achieve in the short term for industries that rely on global supply chains, such as the auto industry: firms will have to build new factories before being able to transfer production, and that takes time.
Internationally, Mr Trump’s tariffs will cost thousands of jobs, because American demand for consumer goods will decline due to rising prices, and that will especially threaten American allies like Japan, South Korea and Germany, countries that export much of their goods to the United States, at a time in which these very same countries are reevaluating their security relationship with the US, not seen as a reliable partner anymore.
But there is another, long-term consequence of imposing sweeping tariffs that should scare the whole world. In this respect, history can teach a good lesson. In the late 1920s and early 1930s, at the height of the Great Depression started in 1929 with the Wall Street crash, the initial response of the US Administration led by the Republican Herbert Hoover consisted mainly of imposing tariffs to friends and foes alike to stimulate domestic manufacturing and avert a further downturn of the economy. The result, however, was a massive aggravation of the crisis both in the United States and especially internationally, for countries whose economy was deeply linked to that of the US, like Latin American nations or, more importantly, like Germany. There, the resulting economic downfall due to the lack of US investment had a considerable effect in the rise of the Nazi Party, until then a marginal force in German politics, which was able to gain momentum due to the economic crisis.
As an instrument of economic policy, tariffs might therefore have a political impact: for leading theories of international relations, after all, economic interdependence helps to bring about peace and to reduce the likelihood of war among nations. Although this is not always the case (China’s integration into the global economy, for instance, has not tempered its aggressiveness), the opposite is also true: economic autarky in its aggressive form is a cause of conflict, as the aforementioned German case underlines. No wonder that in 1944 at a major international conference in Bretton Woods the United States, led this time by President Franklin Delano Roosevelt, championed a free trade system for the post-WWII economic order! No wonder also that after the First World War a lonely voice, that of John Maynard Keynes, denounced the Treaty of Versailles as a risk of further aggression, and proposed to reduce cross-border economic frictions instead of increasing them.
It should also be underlined that Mr Trump is making no mystery of his will to achieve political goals through economic means. The former Prime Minister of Canada warned that the US President wants to effectively destroy the Canadian economy to annex the country to the United States, and the incumbent is poised to win an election on April 28th whose campaign is dominated by Donald Trump’s policies. Therefore, to those who wish to see a changed economic order, an order founded on justice, fairness and equality of opportunity, Donald Trump’s reckless tariffs on the rest of the world must appear as a threat, not as a welcome development.