The hard lessons of Trump’s failed trade war
Even if you measure their success by the President’s favoured metric, the tariff hikes have backfired
Ihave warmed to Donald Trump in the two and bit years he’s been President. This is not because of anything he has done or said, but because of what he has not done, or rather been unable to do. All front and no substance, he’s been revealed as a mass of ineffectual hot air. Those who saw him as a menace to democracy and the health of the world must be sadly disappointed.
The bark and bombast has admittedly continued unabated; he tells it as he thinks. But the bite has been almost entirely absent. He’s like Shakespeare’s player “that struts and frets his hour upon the stage … full of sound and fury signifying nothing”.
The only obvious “achievement” to date are his tax cuts, but even these have failed in their proclaimed justification, neither paying for themselves as promised nor permanently lifting the economy’s growth potential. Corporations have been enriched, allowing them to further puff up the stock market with buy-backs, but the deficit has been ruinously enlarged.
As for trade wars, these haven’t worked either. “Trade wars are good and easy to win,” the President said when he began hostilities. The hard lesson since learnt, and obvious to most of us all along, is that they are neither good nor easy to win. Trump has failed miserably even on his own terms – where a trade surplus is a mark of economic success and a trade deficit of failure. If this is true, then he has been roundly defeated. The US trade deficit ballooned to $621 billion (£474billion) last year, the highest in a decade, according to data published this week. Exports are falling and imports are rising, the latter surging by 7.5 per cent for the year as a whole. Protectionism, it seems, has done nothing to close the gap. What’s more, the tax cuts have compounded the problem by turbocharging demand, sucking in imports regardless of the extra tariffs imposed.
Over the course of 2018, the Trump administration imposed tariffs on approximately $283billion of US imports, with rates ranging between 10 and 50 per cent.
According to the spurious logic of protectionist economics, any negative consequences for consumers are assumed to be offset by foreign exporters lowering their pre-tariff prices in order to remain competitive. In such circumstances, the importing country would end up with a net gain of billions of dollars in tariff revenue.
Again predictably, this is not how it has worked out. According to recently published analysis by the Londonbased Centre for Economic Policy Research, tariff increases have been fully passed through to the prices of imported products, such that the tariff revenue the US is now collecting is insufficient to compensate for the losses being borne by consumers. The analysis found similar patterns for foreign countries who have retaliated against the US.
Fortunately, the consequences for the US economy, though harmful, are not yet that great – “just” $3billion per month in added tax costs and another $1.4 billion per month in deadweight welfare (efficiency) losses, according to the research.
These are big numbers, but in the context of a $20trillion economy, they are neither here nor there. The relative impact on China, against whom the protectionism has thus far been mainly directed, appears to have been quite a bit bigger. If impoverishing your enemy more than yourself is the aim, I suppose this might be regarded as a win. As it is, the US and China are widely reported to be about to call a truce, with the US withdrawing all the tariffs it imposed last year and China agreeing to buy unspecified quantities of American oil and agricultural produce, and to curtail subsidies to state owned enterprises.
Both sides will present the rapprochement as a victory, but in itself it will do little to address the underlying complaint against China – systematic intellectual property theft, and, ridiculously, of exporting too much to the US. And if the alwayssuspected true purpose was that of Chinese containment, then it will have achieved nothing at all. It is as if a gunboat had been sent to the South China Sea, fired off a few cannon then beat a hasty retreat. Trump has effectively blinked.
A less confrontational approach could have achieved the same if not better. It was a similar story with the North American Free Trade Agreement, condemned by President Trump as “the worst trade deal ever”. After much harrumphing and fist waving, Mr Trump ended up agreeing a new deal that looked … well, very much like “the worst trade deal ever”.
It is rare to be able to congratulate our own Government on anything these days, but if reports are to be believed, it has determined to go virtually tariff free in the event of a no-deal Brexit. Only a small number of favoured industries will be protected. It’s good to see that even in these benighted times, the spirit of Richard Cobden, the free trader who campaigned for repeal of the Corn Laws, lives on, unlikely though it is that parliament will ever allow such enlightened thinking to be put into practice.