Why Free Trade Must Prevail

Just over a fortnight into the new year and it appears that the tone of 2017 has already been set: it promises to be a fight between protectionism versus globalisation. In the red corner, and rather unexpectedly, is China’s President Xi Jinping, who told the World Economic Forum in Davos there would be no winners in a trade war and warned countries against returning to protectionist trade policies.

A few days later, President Donald Trump of America in the blue corner told the watching world at his inauguration address in Washington DC that “We have made other countries rich while wealth and confidence of our country have dissipated over the horizon…Protection will lead to great prosperity and strength.

While it remains to be seen whether this is just a war of words for each country’s domestic audiences, or something more sinister, the implication is that America is turning its back on the world for the first time since the Second World War.

From this day forward, a new vision will govern our land,” said Trump. “From this moment on, it’s going to be America first.

If nothing else, Trump has reversed President Roosevelt’s dictum that diplomacy consists of “speaking softly and carrying a big stick.” We have yet to see what kind of stick Trump will carry, but he certainly makes a lot of noise. The world has had protectionist policies before, mainly in the 1930s.

Since the end of the Second World War, most developing countries have worked to eliminate tariffs and work with bodies such as the World Trade Organisation. Alan Greenspan, the former chairman of the Federal Reserve, said that protectionism leads “to an atrophy of our competitive ability. If the protectionist route is followed, newer, more efficient industries will have less scope to expand, and overall output and economic welfare will suffer.

To which Donald Trump would no doubt tweet: “Phooey.”

Protectionism has also been accused of being one of the major causes of war. The American Revolution was caused primarily by British taxes and tariffs – tea party anyone? – while the policies both before and after the First World War are thought to have contributed to the depression of the 1930s. As Frédéric Bastiat said: “When goods cannot cross borders, armies will.”

We have to hope things won’t go that badly, but there are very few instances of protectionism being a sound economic policy. Millions of dollars are spent every year on trying to protect the Florida orange industry from cheaper Brazilian imports. But Americans argue that other countries protect their own sensitive industries.

I am not anti-trade,” said Wilbur Ross, the nominee for commerce secretary. “I am pro-trade. But I am pro-sensible trade.

As for the tariffs that Mr Trump has called for imposing on some imports, Mr Ross said he had learned the lessons of the Smoot-Hawley Tariff Act, which raised import taxes on thousands of goods in the 1930s and is widely believed to have perpetuated the Great Depression.

In D this view was warmly greeted. The world should be wary of creating a crisis amid talk of trade wars, World Trade Organization chief Roberto Azevedo said after a meeting of trade ministers in Davos.

In many ways this was the most schizophrenic Davos meeting for many years. For the most part, politicians were downbeat and gloomy. They see a Donald Trump presidency as being bad for the Old World Order.

I’ve heard a lot in Davos about trade wars. That would destroy jobs, not create jobs,” he said, after the meeting attended by 29 WTO members. “We must definitely avoid talking ourselves into a crisis.

In contrast the heads of some of the world’s biggest financial institutions spoke in glowing terms about Donald Trump’s presidency. A panel of bank chief executives said that Trump could herald the start of a new era of economic growth driven by a booming banking industry for the first time in nearly a decade.

Mary Callahan Erdoes, chief executive of JP Morgan Asset Management, predicts: “The US economy will take off in a way that it hasn’t for many years. There has been a pendulum switch that will be very positive for US companies and should cascade to other businesses outside the US. It will be great for the next couple of years.”

So amid all this posturing and tweeting what can we expect during 2017? Will the wise voices prevail or will the world descend into a social media-fuelled race to the bottom, with leaders competing to sound tough and in doing so stymieing the world economy?

I’m an optimist but I’m also a realist. All countries, including very much the USA, have much to gain from doing deals that bring down trade tariffs. Trade is a two-way street. All countries have incentives to bring down tariffs – a US car exported into the UK attracts a 10% duty on top of UK VAT and they have a tremendous opportunity now to get that lifted.

If my prediction is right 2017 could usher in a new golden age of free trade and economic prosperity. And that really would be a “win-win.

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