When Donald Trump announced the imposition of tariffs on steel and aluminium many conservative commentators – some of whom I suspect have never been within cooee of an economics text – became free-market economists overnight. I heard some bringing Adam Smith into the frame in support of free trade. Now it is true to say that Smith favoured ‘free trade’ but with more nuance than those who casually drop his name.
Like most people who studied economics I read some of Smith’s work but not much of it. The late, great economist Mark Blaug in his book Economic Theory in Retrospect spoofed the notional man who laboured through every word of The Wealth of Nations before revealing his view that there “probably never was any such man.”
That said, it’s a safe bet that Blaug read a lot more of Smith’s magnus opus than most economists of the past and infinitely more than the current breed. He makes the point that Smith supported free trade but also understood that “protectionist measures are justified…in retaliation against foreign tariffs.” There, you see, fair trade. Trump and Smith in furious agreement.
This is my view. Those who spout the free-trade mantra live in fairyland. They simply don’t know what they are talking about. There is no such thing as free trade between independent nations.
Free-trade deals find expression in long and complex documents. They are long and complex because of a litany of carve-outs and also because each side knows that the other is predisposed to cheating. And cheat they do.
Does anyone think that a US vehicle manufacturer setting up shop in Mexico doesn’t get a sweetheart deal from the Mexican government? Does anyone think that China operates in the best traditions of laissez-faire? And where are the purists in arguing for dismantling the plethora of barriers that every country puts around its agricultural sector? Let me repeat for the benefit of so-called free traders: there is no such thing as free trade.
What is the truth about international trade? On the whole, without doubt, it has been enormously beneficial. But, like many beneficial things, it should not be embraced willy-nilly or lauded beyond its potential bounty.
International trade provides scope for all sides to reap gains as specialisation increases the total quantity and quality of the output of goods and services. However, the distribution of these benefits between countries is indeterminate; in the sense that economic theory offers no reliable way of predicting the outcome.
Trade is disruptive. In each trading country it leads to the development and growth of some industries and to the demise and the decline of others. There are almost always attendant transitional economic and social costs on working families and communities. The size and longevity of these costs is indeterminate.
Trade produces a less diverse industrial base in each trading country than would otherwise be the case. The extent and consequences of this effect is indeterminate.
Trade can undermine national security by robbing particular countries of their capacity to produce strategically important materials and goods. The extent and consequences of this effect is indeterminate.
Let me say, in respect of this latter point, that every Australian should want the US to have a very strong steel industry out of which weapons are made to defend us from barbarians. Take note: According to the World Steel Association, US production of crude steel fell from 102 million tonnes in 2000 to 82 million tonnes in 2017. During the same period, Chinese production rose from 129 to 832 million tonnes. Be informed and wary or be starry-eyed and stupid.
According to the New York Times, tariffs on steel and aluminium “raise fears of a damaging trade war.” This sentiment was echoed around the world by the usual nincompoops and so-called economic “experts” who make a habit of being wrong about everything. Some facts are useful. And Trump, unlike the nincompoops and experts, knows them.
The US is the largest market in the world. Its merchandise imports outstrip those of any other country. Access to the US market is the key to riches and the world knows it. World Bank data for 2016 shows that the value of US imports was 42% higher than China, its nearest competitor in these stakes. The rest are far behind.
The US buys much more than it sells. According to the US Bureau of Economic Analysis, the US had a merchandise trade deficit of $810 billion in 2017. Of this $375b was with China, $151b with the EU, $71b with Mexico and $69b with Japan. And these countries, selling much more to the US than they are buying, are going to retaliate? Really, Trump isn’t trembling in his boots.
Consider this, for example. The EU imposes a tariff of 10% on imported US cars. The US imposes a corresponding tariff of just 2.5%. The Obama White House reported in May 2015 that “almost 70 percent of U.S. imports [in 2014] crossed our borders duty-free, but many of our trading partners maintain higher tariffs that create steep barriers to U.S. exports.” Threats of retaliation of any materiality are whistling Dixie.
There is a power imbalance and it is in favour of the US. Here’s an analogy. As a supplier, you might not like Coles or Woolworths putting their own brands on their shelves and buying less of your product than they used to. But you have to consider your options.
Trump knows exactly what he is doing. He has first-mover advantage. He is already using the tariffs as a bargaining chip with Mexico and Canada in renegotiating NAFTA. No country will want to take him on. Opposition will melt away. He is a giant among minnows – inside and outside the US.