Trump’s tariffs will force Britain to find out if it is still a free-trade nation

On both Right and Left, the UK is losing faith in openness and growing suspicious of foreign capital

It has been a long time since major governments engaged in barter – but not quite as long as you’d think. In 1933, Britain and Denmark were reduced to bartering in order to trade. Denmark agreed to supply a certain amount of bacon to the UK each year and, in return, Britain agreed to supply a certain amount of coal. This primitive trading arrangement was a way for governments to circumvent the foreign exchange controls that they themselves had imposed in an effort to keep hold of their gold reserves. In other words, it was a result of the last global trade war.

Since we seem to be on the cusp of another major trade war, led by the US and China, it’s about time we looked back at the circumstances of the last one. The good news is that the situation today is very different. We no longer live in a world of gold standards and such extensive capital controls. The bad news is that we are starting to lose faith in the open system of exchange that makes free trade work efficiently. Donald Trump’s tariffs are bad enough, but the bigger threat to us might be closer to home. Britain is becoming increasingly suspicious of foreign trade and investment. Add in a badly managed Brexit and Labour’s retrograde economic plans and you have the ingredients for a really old-fashioned style of protectionism.

For his part, Mr Trump has embarked upon a programme of tariffs driven by his worldview that the US isn’t getting a “fair deal”. His target shifts around, from German steelmakers to Chinese smartphone manufacturers, but the trend is towards a mercantilist trade policy focused on reducing the US trade deficit. The EU and China have both threatened retaliation, which Mr Trump seems determined to meet with further escalation. We could see decades of tariff reduction reversed.

The last time the world was gripped by a fashion for protectionism, the results were grim. From 1929 to 1933, two thirds of global trade disappeared. Much of the world entered a decade of depression. Contrary to Mr Trump’s adage that “trade wars are easy to win”, there were no winners back then.

The usual story told about the Thirties has it that the Wall Street Crash prompted the US to pass the Smoothawley Act, which raised tariffs and triggered a wave of retaliations that choked off trade and caused the Great Depression. According to Douglas Irwin, a professor at Dartmouth and a fellow at the Peterson Institute for International Economics, this isn’t quite right. He argues that, while the tariffs were damaging, the trade war involved many other moving parts. In particular, he says trade was “strangled” by spiralling rounds of financial protectionism – namely, capital controls in response to banking crises and falling confidence. Governments cut off the flow of money around the world in a desperate and unsuccessful attempt to prop up their currencies and stay on the gold standard.

This retelling of the story puts the current situation in context. Major currencies aren’t on the gold standard any more and most float freely, except for the Chinese renminbi. The question is whether and how the world’s current “trade skirmishes”, as Prof Irwin calls today’s spats, could develop into a full-blown trade war.

Britain, on the face of it, seems ready to play its role in preventing this outcome. The UK is the home of free trade, the only nation to keep its market unilaterally and fully open for nearly 100 years after 1846, the place where tariffs were denounced in 1905 posters shouting “Stop, thief!” and “Tariff reform means more food taxes”. The Brexit project was in part sold on a promise of once again pursuing a liberalising role on the world stage. There are certainly challenges, such as our attachment to animal welfare standards and the desire for reciprocal access to semi-closed markets like China or India, but on the whole, Britain shuns tariffs and has a positive attitude to foreign trade.

Prof Irwin’s analysis of the Thirties should give us pause, however. Trade wars aren’t just about tariffs. They can also spring from misguided attempts to control violent market movements. They can result from a loss of faith in openness and a growing suspicion of international capital. Look at Britain and you can see exactly these sorts of trends, on both Left and Right.

Whether it’s anxiety over our new passports being made abroad, concern over foreign companies owning utilities or bidding for rail franchises, denouncement of corporate “vultures” taking over companies (even if, as in the case of GKN and Melrose, both are British), hysteria over incidents such as the Panama papers, or hatred of bankers, Britain looks increasingly uncomfortable with the underpinnings of global free trade. Some of these worries relate to genuine problems, like low wage growth or bank bail-outs. Others suggest a general backlash against free markets and foreign capital.

This is a difficult atmosphere in which to be taking charge of our trade policy for the first time in 40 years. Brexit will force Britain to find out whether we really still are a “free-trade nation”. But the post-brexit debate could be shaped by bitter rhetoric and the nation’s judgment about how “fair” a deal we have received.

And then there’s the Corbyn factor. The rise of Labour’s hard Left throws into doubt Britain’s support for the free flow of money that keeps trade going. When John Mcdonnell, the shadow chancellor, said that Labour was “war-gaming” for a run on the pound, that almost certainly means that he and his colleagues had been discussing the reintroduction of capital controls. Former advisers to Team Corbyn, such as Ann Pettifor, advocate for a return to pegged exchange rates. And Labour’s nationalisation plans contain a strong element of economic nationalism, stoked even by “moderates” like the MP Luke Pollard, who declared recently: “There is no support from members of the public for more foreign-owned companies running our railway.”

Underneath it all, I still believe that the British public is highly receptive to a popular case for free trade. But it’s clear that there are forces pushing us in the other direction. Mr Trump’s dangerous tariff battle might be the most visible sign of an impending trade war, but it’s not the only one. For all its globalist rhetoric, Britain could be heading towards another kind of protectionist experiment.