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Trump’s tariffs and some truths about ‘free’ trade

opinionTrump’s tariffs and some truths about ‘free’ trade

The supposition that free trade is always a net positive or that the imposition of tariffs is always a net negative is simply fallacious.


President Trump’s protectionist imposition of tariffs on Chinese, steel and aluminum imports are, on their face, a brazen attempt to keep a campaign promise and position himself to hold on to the blue-collar vote among a tiny fraction of Americans in swing states in the upcoming mid-term and 2020 presidential elections. As is consistent with many of the actions taken by The Great Disruptor in his short tenure as President, he is throwing conventional wisdom out the window to secure his place in history as a change agent. That does not diminish the contention among many trade cynics that “free” and “fair” trade is neither truly free nor fair.

The debate about the merits of free trade that are ensuing in the wake of Trump’s actions rest on the well-worn theory that free trade is central to what makes capitalism work, and that the imposition of tariffs are the kind of government intervention that encourages corruption, fraud and inefficiency. Economists have maintained for a long time that the more free trade a country engages in, the better off it will be, yet history has shown that the countries which industrialised the fastest actually practised some form of protectionism. This includes the kind of protectionism America practised by using tariffs to transform itself from an agricultural economy into a manufacturing goliath in the 1800s, and again following the Great Depression.

It is also worth noting that some of the worst trade deals the US ever made were of its own choosing in pursuit of free trade, starting with making the dollar the reserve currency of the world following World War II under the Bretton Woods Agreement. Doing so required countries to purchase more dollars than their trade with the US would otherwise dictate, meaning that the dollar was perpetually over-valued and its goods were consistently less competitive in the global marketplace on a broad scale as a result. If instead, a basket of currencies, or one or more currencies backed by a commodity, had become the world’s reserve currency, the US would not have needed to complain as much about constantly being given the raw end of the deal under free trade agreements, because its goods would probably be worth 20%-30% more than they are now, if they were not pegged to America’s currency of choice—the dollar.

The same logic applies to the widespread use of free trade zones (FTZs), which, on one hand, have been a great way to hyperdrive cross-border trade by country and region, but one of FTZs’ by-products is that companies can freely export goods that would otherwise have been subject to tariffs. Companies around the world—including many American companies—have done just that, for decades. All countries that use such Zones benefit from having done the same. If Trump wants to slam the door on “back door” tariff-free entry into the US, as he maintains is a driving force behind the imposition of these tariffs, in order to be consistent, he should also close that loophole.

Another, unspoken, range of issues associated with the widespread use of FTZs is that nefarious actors have been able to take advantage of a general lack of transparency associated with the operation of FTZs to launder the proceeds of crime, finance terrorism, and facilitate the proliferation of Weapons of Mass Destruction. FTZs have been proven to have generally inadequate anti-money laundering and combating the financing of terrorism safeguards, weak procedures to inspect goods and register legal entities (including poor record-keeping and information technology systems) and a lack of proper coordination and cooperation between Zone and Customs authorities.

Some countries have manipulated the use of FTZs within their borders for their own benefit by passing laws that require that local partners in any FTZ venture must own a large percentage of the operation within a set period of time, giving locally owned companies a heightened ability to use FTZs to enter America and other countries in a preferential manner, giving these companies greater market share as well as a better ability to take advantage of tariff-free trading. Foreign companies in these countries often agree to play along and get locked into long-term agreements, even though any justification about the comparative advantage of benefiting from lower wages or operating costs there may have fallen by the wayside years ago.

In general, there appears to be a lack of understanding about how capitalism in the 21st century functions on a real-world basis among a variety of the people who are making policy about it. The supposition that free trade is always a net positive or that the imposition of tariffs is always a net negative is simply fallacious. Much depends on individual circumstance, capabilities, comparative advantage, and the ability to stay ahead of the competition curve. America’s steel industry, and many of the blue-collar manufacturing industries it used to command, will not come roaring back by virtue of imposing tariffs. Only a tiny fraction of the US population will directly benefit by their imposition—far more will experience negative impacts.

That said, it is also worth pointing out that the US and EU happen to be the largest users of dispute mechanisms within the World Trade Organization, and the US has won most of the cases it has brought before WTO tribunals, which gives some credence to the notion that the US is an aggrieved party under the current multilateral trade regime.

If bilateral, regional or global trade regimes were truly free and fair, there would be no reason to restrict trade. But the truth is, they are not. Many of these agreements are negotiated in secret and are approved with loads of lobbyist influence—the Trans Pacific Partnership being the most recent example. If a net result of Trump’s action, and any trade conflicts that may erupt as a result, is that flawed trade agreements are amended and freer and fairer global trade regimes emerge, then disrupting these agreements as Trump is doing will have been proven to be a smart move—not only for the US, but for any nation, particularly those with less influence and fewer comparative trade advantages than the US has.

Daniel Wagner is CEO of Country Risk Solutions and co-author of Global Risk Agility and Decision Making.

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