TRUMP’S TRADE BUTTON IS BIGGER.
As Donald Trump’s point men on the trade front were dodging questions on the Sunday talk shows about which products and countries exactly the new national-security tariffs would cover — their line was that it’s up to their boss, who probably hadn’t told them yet — I was reading a new research paper on how the world’s trade experience post-2008 compared with the genuine trade catastrophe that followed 1929. It made for chilling reading.
Not Antarctic chilling. But toe-numbing for sure. The paper, a collaboration of two economists at Queen’s Management School in Belfast, one at Oxford and one at Vienna University, reminds us that the first-year hit to both world trade and world output was actually greater in 2009 than in 1930. But, whereas in the Great Depression matters kept getting worse and worse and didn’t hit bottom until three years in, in the Great Recession things turned around pretty quickly.
For that, the paper’s authors credit two things. First: a prompt counter- cyclical monetary and fiscal policy response, which the world didn’t experience in the early 1930s. In fact, the consensus view of history is now the same as Milton Friedman’s — that U. S. monetary policy went in exactly the wrong direction following the 1929 stock market crash. In fact, at Friedman’s 90th birthday party in 2002, Ben Bernanke, another great student of Depression- era policy, apologized on the Fed’s behalf, saying “You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.”
But the second reason we didn’t repeat the disaster of the 1930s is that, by and large, the world didn’t go protectionist after 2008. The research paper focuses on British experience after 1929. At first, Britain more or less continued its traditional ( after 1846) policy of open borders. But in 1931, it joined the other countries of the then- Empire in building a system of preferential tariffs. After that, the pattern of British imports and exports changed, with most further declines in British trade f all i ng on non- Empire members.
No doubt I’m being excessively gloomy to bring up the 1930s in response to Trump’s tariffs of 25 per cent on steel and 10 per cent on aluminum. Combined, they cover less than one per cent of the U. S. economy. By contrast, in the 1930s governments didn’t mess around. Britain’s opening protectionist salvo was tariffs of up to 100 per cent on manufactures from outside Europe and she followed that up with a 10-per-cent tariff on essentially everything else. Another difference between now and then is that today we’re a decade into a solid recovery of world trade and growth, not still in the stomach-turning initial cliff jump.
But trade skirmishes can get out of hand. Europe says it will retaliate. Trump tweeted over the weekend that if it does, he will respond with further measures. It’s the kind of tweet for tat that can blow up unless cooler heads prevail. You don’t have to be a Trump-hater to consider the president not the coolest head available nor to believe that his ability to back down graciously after things have escalated may be limited.
What about us? It would be good to get an exemption as the world starts going trade-crazy. We could come in under the Americans’ preferential tent, as we sheltered with the Empire in the 1930s. But trade wars do as much collateral damage as real wars. Little good can come of them. Shelter is what you do in such a world, not thrive.
Should we retaliate? Adam Smith advised that such decisions, being unscientific, should be left to “that insidious and crafty animal, vulgarly called a statesman or politician.” Our two economies are so enmeshed that it’s easy to find products where a higher Canadian tariff will do palpable harm in the U.S. Of course, the harm will also be palpable in Canada. We will hurt our own consumers of whatever we do target. That’s the nature of trade wars: the destruction is mutually assured.
Will retaliation have the desired effect? Does anyone really know — maybe Ivanka excepted — what will move Donald Trump? He’s plainly a bully, and a long-standing rule of thumb is to stand up to bullies. But he’s also clearly stubborn and he seems not to care much about conventional political calculation. So he may indulge a grudge, if you get on his wrong side. The Kennedy credo was “Don’t get mad, get even.” Trump likely will get mad. But he may also go out of his way to get even.
As the temperature rises, we need to keep in mind, no matter how good retaliation feels, that the U. S. can hurt us more in a trade war than we can hurt them.
THAT’S THE NATURE OF TRADE WARS: THE DESTRUCTION IS MUTUALLY ASSURED.