Trump is the first US President in memory to advance, and to articulate, a broad protectionist agenda. Picture / AP
In 1944, as the Allies were closing in on Nazi Germany, they did two things to try to ensure that the world would never again face a global war.
That October, at a private mansion in Washington, representatives of the big powers laid the groundwork for the future United Nations. And in the White Mountains of New Hampshire, at the Bretton Woods resort, a much larger international gathering agreed on a plan for economic cooperation.
As leaders of that era realised, laying down arms wasn't enough. It also was important to prevent the sort of worldwide economic depression that, in the 1930s, had led to protectionist trade and currency policies, which fostered ugly nationalism and ultimately led to war.
A key part of the new financial order was a gradual reduction in trade barriers. For most of the time since, the United States has been at the forefront of promoting trade.
Until Tuesday.
That was when President Donald Trump slapped giant tariffs on the washing machine and solar-cell industries. The immediate practical impact, in the first case, will be to raise the price of washing machines. Every hard-pressed family that ends up spending a little more - every retail outlet that loses a sale - can thank the great theoretician in the White House. No wonder Sears begged the president not to go ahead.
The most likely impact in the second case will be to raise the cost of solar, depressing sales and costing jobs. Since the people who make solar cells (the ones receiving protection) are a small part of the overall industry, the tariff increase will help a small group of highly visible beneficiaries and hurt a much larger number. The Solar Energy Industries Association guesses that job losses will reach 23,000.
It's important to note that the tariffs, 30 per cent in solar and up to a whopping 50 per cent in washing machines, were imposed under a rarely used section of trade law whose only condition is that an industry is hurt by imports. Not by unfair imports - just imports.
All that Whirlpool, the manufacturer that petitioned for the appliance tariff, had to establish was that somebody overseas - in this case, Samsung and LG Electronics, both based in South Korea - was making a better product or a cheaper one. If you can't compete, call the government.
The knockoff effects will extend to far more than washing machines, as other domestic companies see if they, too, can bring a trade case. The two petitioners in the solar case were bankrupt. So much for rewarding success.
Internationally, other countries are sure to retaliate.
US exporters will pay the price as our trading partners emulate the US example, overtly or covertly.
"US exporters will pay the price as our trading partners emulate the US example, overtly or covertly," said Gary Hufbauer of the Peterson Institute for International Economics.
As the theorist in the White House knows, retaliation can take two forms. Countries hit by American tariffs will do their best to keep out our products. Chinese mainland producers are not directly affected by the solar tariff, but Chinese-owned firms are. You can bet that China will find a way to hit back.
Secondly, voters in other countries will be more inclined to elect nationalist regimes - a trend scarcely in need of encouragement. The front-runner for president in Mexico, which goes to the polls July 1, is Andres Manuel López Obrador, a populist critical of globalism. Mexico is only the US' third-biggest export market, and China our fourth, so why worry?
Trump is scarcely the first president to resort to tariffs. Presidents George W. Bush and Barack Obama regrettably succumbed - but muted their overall effect by simultaneously pursuing trade pacts. Reagan talked free trade but - in the midst of a severe recession - protected American autos, steel and semiconductors. Trump is the first in memory to advance, and to articulate, a broad protectionist agenda.
Everyone in #TPP group, except USA, will now get privileged access to Japanese market. Hard to imagine a worse deal.
— Lawrence H. Summers (@LHSummers) January 23, 2018
Trump's repeated threats to quit NAFTA can result only in a more defensive posture in Mexico and give succour to other nationalists worrisomely on the rise. The administration's anti-cooperatist stance is the most antique aspect of its policy, a relic of the 1920s.
The world, meanwhile, is going ahead with making, preserving and amending pacts without US involvement or influence. To quote from a tweet by Larry Summers referring to the Pacific Rim pact that Trump withdrew from, "Everyone in #TPP group, except USA, will now get privileged access to Japanese market. Hard to imagine a worse deal."
Treasury Secretary Steven Mnuchin opened another front in the policy-by-nostalgia campaign Wednesday, when he declared that a weaker dollar would be "good for trade". On cue, the dollar fell to a three-year low.
A weaker dollar can certainly boost exports in the short run. Within limits, it can also promote growth in smaller countries. The problem is that other nations will seek to retaliate by cheapening their currencies, similar to the response when one person on a crowded sidewalk stands on tiptoes to see a parade. In the long term, as Presidents Richard Nixon and Jimmy Carter discovered in the '70s, devaluation can fuel inflation, trigger higher interest rates and make it harder to sell American bonds. Nixon and Carter, at least, were responding to a weak economy.
When a strong currency results from underlying strength, it is generally good news. The United States enjoys the remarkable privilege of being able to print paper and exchange it for the world's goods. Does the administration fear prosperity?
It seems to have a fixation with a single number, the trade deficit. While the effect of deficits on the economy is nothing if not complex, Benn Steil, a senior fellow at the Council on Foreign Relations, points out, "We can see long periods where greater trade deficits are associated with higher growth."
What is unmistakable, adds Steil, author of the forthcoming Marshall Plan, is that "the loss of such imports makes us poorer - not richer".
The underlying problem with tariffs, beggar-thy-neighbour devaluations and trade-pact tantrums is that they buy into a zero-sum, we-vs-they mind-set. It is a singular misconception. When other nations prosper, it is good for the United States. Prosperity is infectious. Alas, so is retrenchment. Perhaps Ricardo - the apostle of free trade - is not taught at Wharton.
It is true that any given import will compete with, and potentially displace, a select group of workers and firms. The statesmanlike response is to retrain, and to assist, those affected. Blaming bad foreigners for victimising America is what sloganeers do. This is not limited to the political right. Senators Sherrod Brown and Bernie Sanders are among the other lawmakers joining Trump in demonising trade.
Long term, a closed door leads to economic sclerosis and cronyism, an authoritarian mind-set that rewards businesses that can lobby their way out of having to compete. In time, it leads to cultural and political sclerosis.
Over history, island states (think Singapore, England, Venice) punched above their weight because geography forced them to interact with the world. Diversity is nature's medium for improvement, in genetics and in economics.
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