Editorial: A trade war would hurt the US as well as the world

President Donald Trump speaks during a news conference. Photo / AP

Editorial

The world has survived the first year of Donald Trump's presidency without the trade war it had reason to fear. It might not be so lucky in his second year. He has said he intends to slap a 25 per cent tariff on imports of steel and aluminium.

Canada and China immediately complained and European Commission president Jean-Claude Juncker warned that retaliatory tariffs could be imposed on US products such as bourbon, Harley Davidsons and Levi jeans. Trump responded that he might put a tariff on European cars.

That illustration of what could happen should have made a President listen to better advice this week but wiser counsel did not prevail. Trump's chief economic adviser, Gary Cohn, resigned on Wednesday.

Tweets aside, Trump does seem open to persuasion on some important subjects but he has long held to a simplistic view of trade. He believes the United States is somehow weakened economically if it has a trade deficit with another country.

Since the US buys more from many other countries than it sells to them, he thinks it is losing money, losing wealth, losing jobs all because foolish previous incumbents of the Oval Office have signed "horrible" trade deals.

He is operating on a common fallacy, as has been pointed out to him by economists in the US media this week and no doubt inside the White House too. The fact is, America buys more from the world than it sells abroad because America is rich. It consumes more than any other country.

It has trade deficits with other countries for the same reason that a business or a household buys more from each of its suppliers of goods and services than it sells to them individually. All households have a trade deficit with their supermarket.

Wealth is made by selling what you can do best to as many people as possible for the highest price you can get.

The US is very wealthy because it produces many things that people want very much, not only Levis, bourbon and Harley Davidsons, but aircraft, computer software, movies, popular music, new medicines, the world's highest rated universities and much else.

America is big enough to be rich if it were selling these things only to its own citizens but it is even richer thanks to its ability to sell these products worldwide.

Retaliatory tariffs would make these things more expensive to foreign consumers, meaning the US would sell fewer of them, just for the sake of protecting less competitive US products such as steel and aluminium. Protection of those metals would also make American aircraft and Harley Davidsons more expensive and less competitive.

All this would have been explained to the President but he seems not to be listening. "Trade wars are good," he tweeted. "When a country is losing many billions of dollars on trade with virtually every country it does business with, trade wars are good and easy to win..."

Nobody wins a trade war. Prices rise all around, consumption falls, production falls, jobs are lost. If Trump is hell-bent on this course, the US Congress must do what it can to stop him.