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From ... in Political Economics History —

Tariffs: Trade Or Structural Change?

President Trump’s Liberation Day on 2 April and subsequent multiple tariff actions have been highly controversial. Supporters expect economic revival, while opponents predict a disaster and fret over the end of globalisation. The US Court o

Tariffs: Trade Or Structural Change?

President Trump’s Liberation Day on 2 April and subsequent multiple tariff actions have been highly controversial. Supporters expect economic revival, while opponents predict a disaster and fret over the end of globalisation. The US Court of International Trade has now found the tariffs illegal, saying that the President had no authority to pass them using emergency powers. The administration immediately launched an appeal, and within a day a US federal appeals court granted a temporary stay. 

An eventful legal tussle is likely to follow, which the Administration is confident it will win. Whatever the legal outcome will be, it is important to understand the reasons for and the objectives of the tariff actions.

Rhetoric Versus Reality

Trump’s rhetoric is that countries, friends, and foes alike have been ripping off the US for years because they charge higher tariffs on American imports than the US is charging on their exports. While the difference of tariff rates is mostly real, the ‘ripping off’ narrative is a misrepresentation of the situation. The US has always had the opportunity and the means to challenge tariffs it disagreed with, but has not done so for a number of reasons.

The most important reason to maintain an accommodating international commercial policy was that the US, as most dominant economic and military powers in history have done, has used tariffs as a tool to help achieve geostrategic goals. In the Cold War years, low tariffs facilitating easy entrance to the American market played an important role in securing foreign countries’ loyalty to the West.

Market access became crucial for domestic policy reasons as well. US producers demanded increasingly open markets for their growing production, and the Government looked to serve their interests:

... in Secretary of State Cordell Hull's vision, trade also had a diplomatic mission. For him and the bureaucrats occupied with commercial matters in the State Department, free trade went hand in hand with internationalism. They sought open doors for exporters through rules of nondiscriminatory trade — the pursuit of ‘multilateralism’ — under the General Agreement on Tariffs and Trade (GATT).

This was the engine that drove the big globalisation push that had always been propagated by certain circles but became a forceful movement in the 1970s with the unfolding of the new neoliberal economic era. Free Trade Agreements (FTAs) followed one another, the first being the 1985 United States-Israel Free Trade Agreement. Rapid globalisation and the push for deeper and more binding commercial legislation saw the burgeoning of regional agreements.

Multilateral Trade Agreements

Multilateral open trade under the aegis of the GATT and later the World Trade Organisation (WTO) reached its peak in the 1990s. After the collapse of the Soviet Union, the US became the de facto world hegemon and American and European Big Business sought to take advantage of this powerful position. They demanded completely open markets without tariffs and non-tariff impediments (standards and regulations) in the way of exports and foreign direct investment.

The North American Free Trade Agreement (NAFTA), concluded in 1994 between the USA, Canada, and Mexico, was the first new generation regional trade agreement. It was quickly followed by negotiations on the Transatlantic Trade and Investment Partnership (TTIP) between the US and the European Union, and the Trans-Pacific Partnership (TPP) between the US and 12 Pacific Rim countries. These drafts were not the usual commercial treaties between countries, but represented the planned codification of Big Business’s rights and prerogatives vis-à-vis countries. A study by the Centre for European Policy Studies (CEPS), the globalist European think tank, wrote in 2015: 

TTIP is about more than just trade. It is about creating a more strategic, dynamic and holistic US-EU relationship that is better positioned with regard to third countries to open markets and to strengthen the ground rules of the international order.

It is worth highlighting two features of these planned agreements: the investment and the harmonisation chapters. Through the Investor State Dispute Settlement (ISDS) mechanism, companies would have been given the right to sue states for real or supposed profit losses due to measures taken by foreign governments, even for health or environmental protection reasons. This would have created a double legal system, one for everybody and another one for foreign multinationals. This was a huge leap forward from the World Trade Organisation (WTO) Appellate Body judging commercial lawsuits between governments. The harmonisation chapter aimed at compelling countries to harmonise regulations with other countries to make sure that investing multinationals would not suffer regulatory disadvantages.

During his first presidency, Mr. Trump expressed his dislike for this kind of blanket bloc trade agreement. He stopped the TPP negotiations and, while he did not explicitly stop TTIP, he withdrew support and it tapered off. He achieved what Stop TTIP, a major European civil movement that gathered over 3 million European signatures, could not. At the same time, the US also started to distance itself from the WTO, for example, by refusing to implement some WTO dispute judgements and blocking the appointment of members of the WTO Appellate Body. This has been a policy followed by both Republican and Democrat governments. This is understandable, wrote Bloomberg, because:

Finally, national security is a matter of sovereignty and no US government — whether Republican or Democratic — would ever allow a panel of three bureaucrats in Geneva to determine what is or isn’t in America's national security interests.

The Next Step in Free Trade: China

Globalisation kept marching, however. Corporate hunger for large markets and cheap labour was fomenting the impetus to admit China into the WTO. This was supported and demanded by Big Business and Western Governments. Dissenting voices were swept aside, even though there were strong arguments against unfettered global free trade. John M. Culbertson, economist, consultant to the Subcommittee on International Finance of the House Banking and Currency Committee, wrote in his seminal article, ‘The Folly of Free Trade’, as early as 1986:

We have elevated the economic theory of free trade to the status of a national theology, and we follow its simple dictums as if they were immutable laws. We appear prepared to follow the precepts of free trade wherever they lead us, even if that means plunging lemminglike to our economic ruin.

Today the evidence should be clear to anyone who wants to look at it: our blind allegiance to free trade threatens our national standard of living and our economic future. By sacrificing our home market on the altar of free trade, we are condemning ourselves and our children to a future of fewer competitive businesses, fewer good jobs, less opportunity, and a lower standard of living. These unacceptable outcomes threaten us in ways that are all related to our practice of free trade.

Nonetheless, political pressure and propaganda obligingly underpinned by fashionable economic theories rode to victory and globalisation continued.

The Clinton Administration was driving Chinese accession, despite imports from China becoming the largest source of US deficit by the mid-1990s. Apart from the huge market and cheap labour coveted by business, the overlaying globalist political dream was that, by dint of its commercial ties to the West, China will gradually be integrated in the world economy and basically accept and conform to the Western world order. Clinton spelled out his rationale for China’s accession in a 2000 speech at Johns Hopkins University: 

For the first time, our companies will be able to sell and distribute products in China made by workers here in America without being forced to relocate manufacturing to China, sell through the Chinese government, or transfer valuable technology — for the first time. We'll be able to export products without exporting jobs.

Membership in the WTO, of course, will not create a free society in China overnight or guarantee that China will play by global rules. But over time, I believe it will move China faster and further in the right direction, and certainly will do that more than rejection would.

How grievously mistaken he was proven by the large-scale deindustrialisation of the USA, the serious macroeconomic consequences, and the concomitant social disaster. 

Trump supporters now declare that this commercial openness was a huge mistake that led to the ‘China shock’, the consequences of which Middle America has had to suffer for decades. It is due to “the theory that’s killing America’s economy”: that of comparative advantage. This concept, introduced into economic thinking by David Ricardo, posits that countries should specialise in producing what they can most efficiently. Accordingly, they should import all other products from countries which are most efficient in producing those articles. Thus, the whole world becomes one workshop, where each country is a work department specialising in what they do best. 

This concept has become a revered economic axiom in neoliberal economic theory. It served the interests of Western countries as long as they had technical and knowhow advantage, so they could specialise in high added value production while less developed countries could export cheap products of low added value. This is the basis of the system of global supply chains helping companies find the cheapest source of human and material input. The system started to become problematic when other countries, especially in Asia, developed fast, refused to remain low added value producers, and started to become competitors.

Comparative advantage remains a pillar of modern economic argument, and well-founded criticism is usually dismissed. However, it is not theory that matters to corporates, but large profit margins and power.

Structural Changes in the Economy

By now, the combination of massive deindustrialisation and concomitant social collapse has become a major issue in the US and in most of the West. The dollar’s ‘exorbitant privilege’ of being the world reserve currency has helped the US finance its hegemony and maintain a high level of consumption despite an ever-growing deficit, but the structure has become too fragile to sustain over the long run.

The Biden Administration recognised the structural difficulties. National Security Advisor Jake Sullivan summarised the Administration’s concept of a new economic policy at the Brookings Institution in April 2023. He said:

The vision of public investment that had energised the American project in the postwar years — and indeed for much of our history — had faded. It had given way to a set of ideas that championed tax cutting and deregulation, privatisation over public action, and trade liberalisation as an end in itself.

There was one assumption at the heart of all of this policy: that markets always allocate capital productively and efficiently — no matter what our competitors did, no matter how big our shared challenges grew, and no matter how many guardrails we took down.

Now, no one — certainly not me — is discounting the power of markets. But in the name of oversimplified market efficiency, entire supply chains of strategic goods — along with the industries and jobs that made them — moved overseas. And the postulate that deep trade liberalisation would help America export goods, not jobs and capacity, was a promise made but not kept.

President Trump decided to change the trade structure in a radical way. The Administration is testing the waters and trying to see how far it can push foreign partners to rebalance trade relationships. The president seems prepared for short and mid-term turbulence in the economy, which is unavoidable in any serious structural change in any system. It is an important question, however, whether the Administration is ready to shield the poor from potential price increases and to moderate the “greedflation” of corporates taking advantage of the situation to raise prices as it happened during the Covid era. For now, it seems it is. President Trump advised Walmart to “eat the tariffs” instead of raising prices. The example must have been contagious because Home Depot has volunteered not to pass on tariff-related cost increases to customers.

What Is the Aim of the Tariff Action?

Is the goal of the tariff action to increase revenues and reduce the trade deficit, or is it to change the structure of the economy and incentivise local production? In the latter case, there are two major issues to examine. Can the decades-long process of deindustrialisation be turned around? What is the long-term new economic paradigm resulting from tariffs, as countries will seek to reduce their dependence on global supply chains as much as they can?

It appears that President Trump is serious about bringing back manufacturing to the US. He has threatened to levy 50% tariffs on European Union (EU) imports because they “treated us very badly” as they do not buy American cars and agricultural products. But “there is no tariff if they build their plant here”. The warning of placing a 25% tariff on Apple, Samsung, and other electronic companies if they import products manufactured abroad into the US signals the same strategy.

Naturally, there is a strong backlash from the EU, multinationals, and some experts. Gillian Tett, columnist at Financial Times, said in an interview with BBC’s Radio 4 Today programme on 24 May:

And the bigger question though is whether Donald Trump can get his head beyond the 20th century when he looks at trade, because the reality is he seems to only care about things like agriculture and widgets and all kinds of manufactured goods. And in that area, the European Union does indeed have a surplus with the U.S. But when you look at what drives the 21st century digital economy, in fact, America sells more services to the European Union than the other way around.  Trump seems to be stuck in a 20th century vision of trade that’s very aggressive and mercantilist and focussed on old-fashioned manufacturing.

This is a popular but less than robust argument of the proponents of globalism. Even a digital economy needs manufactured ‘widgets’ such as hardware, chips, tools, and a variety of other items. Agriculture, a vital sector that feeds humans and animals, needs machinery and all kinds of instruments. Manufacturing drives further innovation in all areas of production, and is a crucial element of national security. If manufacturing were as inconsequential as often suggested, China would not be in the prominent geoeconomic position it currently enjoys. 

Manufacturing remains an essential element of a balanced economy. President Trump’s efforts to reindustrialise and re-shore, especially high-end, high-added value production, are logical. 

The idea is valid, but the details of implementation are crucial. Given the hollowing out of US manufacturing, reviving it needs a complex plan of reindustrialization that includes education, training, building factory capacity, energy allocation, and a whole ecosystem of a manufacturing economy. This takes careful planning, systematic implementation, and time. It also needs strong and stable political support.

Some Indispensable Conditions to Effect a Structural Change

It is essential to look at the economy in a holistic way. Tariffs alone cannot and will not help in transforming the economy to benefit the whole country without a comprehensive action plan involving the entirety of the economy and society. Some major issues to consider are the economic and political power relations within the country.  

Corporate Power

Any government wishing to make structural changes will have to face and tackle corporate power. Boundless trade liberalisation and offshoring were facilitated by government policies, but were carried out and, indeed, demanded by big business. Power struggles between corporate power and government have a long history, one salient example being the US Government’s antitrust move against Standard Oil Trust, leading to the Sherman Antitrust Act of 1890. When the interest of Big Business is allowed to become completely divorced from that of the country as a whole, economic imbalances and social tensions follow.

Financialisation

Financialisation means that money works primarily to make money and not to serve the rest of the economy. Financial institutions decide on what is financed and what is not according to their own specific criteria. Impact financing is a highly visible method of ‘forcing’ behaviour and channel corporate money into activities and assets desired by the ruling class.

Market Concentration

Beyond a certain level, market concentration becomes an impediment to a healthy economy. Big Business ownership of ever more brands and companies means less competition, less invention, higher prices, lower wages, and more power for mega corporates, translating into political power.

The Economy of Cheapness

Corporate profit maximisation based on sourcing the cheapest available labour globally produces macroeconomic imbalances. When wages are consistently suppressed over time via mass immigration and corporate lobbying power, inequality reaches a gargantuan magnitude, and leads to undesirable social engineering. 

Ideology

Ultimately, all economic models claim to rely on an ideological basis. Globalism sees the world as a borderless big workshop where Big Business can choose the cheapest production factors available globally to maximise profits. This is called ‘efficiency’, and has little or no consideration for national macroeconomic consequences. Sovereignists consider nation-states to be organic entities where the country’s welfare is paramount. Some of the latter think that the economy should serve the interests of all citizens of the country, not just that of special interest groups. 

It will be interesting to see which model President Trump’s favours, and whether he has sufficient political power to follow it through.

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