What Price Free Trade?

The world seems to be receding into the dark ages. Brexit negotiations between UK and 27 European nations are bogged down. Effectively, twenty seven trade deals need to be negotiated in the knowledge there will be a price to pay, possibly in trade tariffs.  In USA, President Trump has imposed trade tariffs on steel and aluminium imports to prop up America’s failing steel and aluminium industries. China, which has often been accused of trading unfairly by “dumping” its goods on the west now has a President for Life who will put China first to maintain its economic power. What next?

Laissez faire seems to be in retreat. The expression means to leave alone, exemplified by an economic and political doctrine that considers economies function most efficiently when unencumbered by government regulation. The alternative is protectionism. When America was in its infancy, trade tariffs were imposed on the traffic of goods, not just brought from other nations but from other colonies and states. If a producer in the Carolinas wanted to sell goods to a buyer in Maine, every time those goods entered a new colony or state, a tariff had to be paid. It made all exports prohibitively expensive. The 1789 Constitution helped to cure the problem.

Until Roosevelt’s time in the 1930s, America’s trade policy was set by Congress without the benefit of international negotiations. Protectionist legislators, under the 1930 Smoot-Harley Tariff Act and in response to the Great Depression, raised duties on thousands of imports. The intention was to protect American industry. America’s trading partners retaliated by raising their own tariffs. World trade slowed almost to a halt.

FDR and his team and trading partners quickly learned the lesson, as did the trading world nations. The US 1934 Reciprocal Trade Agreements Act granted the President authority to agree tariff reductions with foreign governments. The policy was accepted internationally in 1948 with the creation of the General Agreement on Tariffs and Trade. The World Trade Organization followed in 1995. Reciprocity is the key underlying principle. Each country will liberalize its trade to the extent that other countries liberalize theirs. International negotiations overcome protectionism. I do not suggest that GATT and WTO were perfect. WTO is not a free market organization. Instead, it has a set of rules designed to facilitate fair and undistorted economic competition. But it is encumbered by delay and weighted towards first world countries

It is always dangerous when politicians ignore history. Mr Trump does so, not only at his country’s peril but also for the rest of the world who trade with USA. One of the Trump administration’s first acts was to withdraw the United States from the Trans-Pacific Partnership, a major initiative of the Obama administration. It was intended to create the world’s biggest economic bloc, linking America’s economy with those of eleven Pacific nations. Withdrawing from the agreement denied American exporters enhanced access to substantial foreign markets and opened the way for more Chinese influence. The other signatories of the original deal, including Japan, Australia, Canada and Mexico, went ahead without the U.S. These countries now grant preferential market access to one another, making it harder for American companies to compete in their markets.

If the United States is reluctant to participate in multilateral trade agreements, other countries have every incentive to do deals that both exclude and hurt Trump’s renegotiation of North American Free Trade Agreement. While Canada and Mexico may be more dependent on the U.S. than vice versa, an end of NAFTA would probably devastate many U.S. industries that rely on Pacific trade. 

In addition to withdrawing from and renegotiating trade agreements, the Trump administration has increased unilateral sanctions against U.S. trading partners for receiving subsidies or for dumping their products on the American market. Decisions to impose trade penalties, like the latest steel and aluminium tariffs, risk unwanted reactions.

It is worth noting that sanctions on Bombardier drove the Canadian plane manufacturer into another deal with Airbus, Boeing’s major foreign rival. And when Bethlehem Steel, the US number two steel producer, crashed in 2001, the cause was bad management, not unfair competition.

President Trump seems to believe the U.S. can act unilaterally without consequences. Economic history is firmly against him. The world’s economies are interdependent, so the impact of governments all following Trump’s America First trade policy will likely have disastrous consequences. The international trade system the U.S. helped create, one based on open markets and classically liberal principles, is threatened. Trump’s approach is an abdication of the traditional U.S. role as the free trade defender. In a way, he and his Administration have become Ugly Americans, where American behaviour changes dramatically and adversely when dealing with foreigners. On what goods will he seek to impose tariffs next?

If the U.S. abdicates its role as champion of the international trading system, will China fill the vacuum and with what consequences for the current system of open and free markets? I was taught the standard principle of economics that all individual actors exist within a system. Any action taken by one actor will likely result in a response from others. This means that wise governments, in considering which policies to adopt, must calculate how their actions will interact with those of others. “America First” makes no such calculations. Instead, it seems to demonstrate what happens when an ignorant, thin-skinned bully has a big stick in his hand. This time the Trump bull will rage in China’s and other shops to no avail.