Jesse Norman

Politics trumps trade

Was the USA ever really in favour of free trade?

issue 29 September 2018

‘What the hell is going on?’ That anxious wail of economic incomprehension has been heard ever since President Trump decided last January to impose tens of billions of dollars of tariffs on China and other countries, including Canada, Mexico and the member states of the EU.

The wail went up another octave last week as the White House announced a further $200 billion in tariffs. Among the politicians and think tanks of Washington DC, where I have spent the past few days, there is talk of little else; talk rendered more feverish by the prospect of midterm elections in November.

A hundred billion here, a hundred billion there — pretty soon we could be talking real money. Include retaliations from the other side, fold in a goodly measure of escalation, and the world’s first trillion-dollar trade war is not an impossibility. That’s quite a thought.

So then: what is actually going on here? Having learned to take the President seriously, orthodox academic and policy opinion is now learning to take him literally, in his stated desire not merely to address what he sees as unfair trade practices, but to bring back supply chains and reindustrialise America. That’s a long-term agenda, and if Mr Trump believes tariffs and a new mercantilism are the way to achieve it, they could be around for some time.

It is this possibility that enrages the economists. Trade is not a zero-sum game in which each nation can gain only by beggaring its neighbour, they wearily point out. As David Ricardo showed, free trade frees up resources for both sides to focus on products where they have most comparative advantage. Result: win-win.

Indeed, didn’t the sainted Adam Smith himself, the father of economics, specifically argue for the benefits of free trade? Was it not Smith who said ‘Nothing… can be more absurd than this whole doctrine of the balance of trade’? After all, there can never be a trading system of any kind in which every country runs a positive balance of trade, let alone with every other country.

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