If you sell me something that I want to buy does that make you a “winner”? If I buy something from you that you want to sell does that make me a “loser”? If you think the answer to either of those questions is “yes” then congratulations: you could have a place on Donald Trump’s distinguished council of economic advisors.
Before we had proper economics we had ‘mercantilism’. Mercantilism was the doctrine that nations which sell more produce and manufactures to other nations prevail, and that nations that import more of those things lose. Proponents held that a nation’s economic policy should be to promote the maximum exports of goods, by subsidising merchants, and to suppress imports, through the erection of protective tariffs.
The Scottish philosopher Adam Smith, in The Wealth of Nations, showed why the mercantile system was bunkum.
In his dazzling opus, Smith showed why trade is not a zero-sum game, where some nations have to lose and some win, but a mutually beneficial transaction that makes both parties better off.
“Trade has big benefits, and I am in favour of trade,” said Donald Trump in his first major speech on the economy this week. But he’s not really. From almost every position that Trump has taken – and every attitude he has struck – when can see that, at heart, he is a mercantilist. He believes that trade is about winning and losing.
There are some important caveats about the rosy picture of deepening trade links, as presented by the canonical works of Adam Smith. Trade unquestionably increases overall prosperity for nations by lighting a fire under productivity growth and lowering the price of imported goods, boosting living standards. But it’s also true that, when a country opens up itself to greater trade, it can have a very uneven impact on different parts of a nation.
Some communities and workers can lose out in absolute terms as other nations compete in their area – think of steel plant workers in America’s rustbelt or former ship builders in the North East of England and Scotland.
There are transitional and localised costs as well as broad benefits. And trade patterns can also be distorted if some nations don’t play by the rules of the game, for example by depressing the value of their currency to give all their exports an artificial lift in competitiveness or by subsidising some of their industries for domestic political reasons and then dumping the surplus production on world markets.
If that dumping increases unemployment in certain regions of trading partner states that can, quite understandably, result in great anger among the affected communities.
Trade deficits can also be a problem, not because buying more than you sell from other states is damaging in itself but because of the potential threat to domestic financial stability created by these imbalances if they go on for a long time.
If Trump’s platform was based around taking a tougher line on Asian currency manipulation and unfair subsidies to national industries like Chinese steelmakers, if it was about devoting more resources and attention on US communities hollowed out by global trade competition, or even if he was challenging the tendency of some states to invest too small a share of their domestic savings so they run persistent current account surpluses, that would be one thing – perhaps even a reasonable thing.
Yet his is a platform of angry economic philistinism and neo-mercantilism. He doesn’t merely want the US to stop incurring trade deficits with countries like Mexico, South Korea and China; he wants the US to be the one running the trade surpluses.
He wants other countries to lose when they do business with America – and if that doesn’t work he’s literally prepared to build walls to keep the rest of the world out.
A very large group of Republican-affiliated defence experts have said Trump represents a danger to the US’s national security. Many US economists make similar warnings.
“Economic nationalism particularly from the US is a threat” says Adam Posen of Washington’s Peterson Institute for International Economics and a former member of the Bank of England’s Monetary Policy Committee. He adds: “In the aftermath of the Bush-Cheney administration the president has a huge amount of executive order power and so they can do a lot of damage if he chooses to, without even Congress’ approval.”
In other words, don’t assume the traditional checks and balances of America’s constitution will keep Trump in line.
One of the characteristics of the era of mercantilism in the 16th and 17th centuries was persistent conflict between states as they fought for control of what they thought to be fixed supply of prosperity and power. Tariff barriers went up between nations in the 1930s after the Great Depression – and that was also a time of growing tensions between states, culminating in the cataclysm of the Second World War.
A lurch to economic protectionism from the world’s biggest economy – the nation that provides the currency that facilitates almost all international commerce – would be dangerous for America. It would also be dangerous for the world.
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