Finding Chilean blueberries transported by plane on supermarket counters in any season and at a reasonable price is both pleasant and convenient. Free trade generally benefits consumers, increases competition and stimulates innovation. Trump's decision to impose tariffs on steel and aluminum has aroused a massive and alarmed backlash, more politically than marketly, and apart from the few Pennsylvania counties that still produce steel, even in the United States the idea that starting trade wars could lead to easy victories for America and profitable has been overwhelmed by criticism.
It has been said that opening the Pandora's box of trade deals could lead to an end to the ongoing expansion, a burst of inflation and an acceleration of the upward movement of rates. Some have gone so far as to say that trade conflicts pave the way for military conflicts. The contained reaction of the markets, now back close to the levels immediately preceding the announcement of tariffs on steel and aluminium, it seems to us for the moment more reasonable than the over-the-top one of the political comments. We would like to make some considerations on the matter. As Gary Shilling notes, the world was not created without tariffs. Let us add that economic history from the Neolithic onwards, a history of progress after all, unfolded within customs cages.
From imperial China to the Sun King, duties and taxes were omnipresent not only between states but also between regions or cities. The first globalization, the one that followed the geographical discoveries of the sixteenth century, was not held back by duties, which actually helped to finance it. For its part, the development of large American industry from the foundation of the Republic to the end of the nineteenth century it would not have been possible without the high tariffs that would protect it from British competition. After all, customs tariffs were the major source of income for the
federal government of America from 1789 to 1914.
The brief historical phases in which free trade was partially experimented, from the Intercursus Magnus between the English, Burgundians, Dutch and Hanseatics at the turn of the fifteenth and sixteenth centuries to mid-nineteenth century Europe, were successful as long as they saw a balance of power between the countries involved and terminated as soon as this balance failed. Karl Marx, in early 1848, sided with free trade because the impoverishment this would create among the losers would create the conditions for revolution.
Roosevelt in 1934 remodulated but did not abolish the high tariff barriers of the Smoot-Hawley Act of 1930. The strong recovery of the second half of the decade occurred, in America and Europe, through taxation and was not held back by high tariffs.
After the end of World War II, the United States offered Europe and Japan very favorable trade agreements in order to facilitate their reconstruction. This unbalanced situation has persisted until today. The American tax reform approved in December aimed to correct one of these imbalance factors (the one whereby America is the only country that does not refund indirect taxes to its exporters and the only one that does not tax imports) but the lobby of importers prevented this. Moreover, the United States is the only country where the lobby of importers is stronger than that of exporters.
China, the standard bearer of free trade as net exporters always are, adds to the aforementioned imbalances a notable ease in the appropriation of intellectual property. If a Western technological company wants to operate in China, it must sell know-how, otherwise it will not be admitted. In other sectors, such as steel, China finances the losses of public companies, which can thus export below cost and drive American and European competitors out of business. China then uses Mexico and Canada to bring its products into the United States as if they were of NAFTA origin, thus enjoying the benefits provided by the treaty.
Europe does not protest with China because it is afraid of losing its market. America is trying instead. It would be nice if the proponents of free trade, in addition to raising their voices in cases where those who are less protectionist decide to become like the others, also rose up against those who remain, such as Europe and China, more protectionist than the others. It is also easy to abuse the concept of national defense, but it is also understandable that America, which had twenty aluminum factories in 2000 and today only has two, wonder how he will produce tanks and aircraft carriers in the day when he will no longer have steel and metallurgy and there will be a war.
Just in recent days, Putin has ordered that the entire Russian military supply chain use exclusively domestic raw materials and components by 2025. Free trade lowers prices through competition and that is its great positive aspect. But when only one producer remains, because he is the best and because all the others have closed, this one (China) can start setting the prices he wants. This is what is likely to happen in distribution with Amazon and Alibaba. Today they lower their prices, but when will they be alone? It should also be said that manipulating the exchange rate produces the same effects as tariffs every day, with the difference that the tariffs usually apply to a limited number of items, while with the exchange rate everything is affected.
In particular, Germany passed an intolerable level of current account surplus last year equal to 9 per cent of GDP and deludes itself into the illusion of getting away with reducing it to 7 by next year through the revaluation of the euro and wage increases which are reducing its competitiveness. Even on the 7th, Germany will attract reprobation and sanctions at least from America. With a 7 surplus, a country that wants to avoid appearing very rude must either reevaluate or accept to produce (not just assemble) in the countries to which it exports or still resign itself to being subject to duties.
Even the most patient of free traders cannot go on living surrounded by mercantilists. In 2018, the US Congress will do nothing more. Healthcare reform is impossible, welfare reform is politically suicidal, anything else is difficult. At the end of the year, Congress will likely switch to Democrats. Trump, unable to sit still, will try to accomplish something in foreign policy and with a comprehensive review of international trade agreements. We will therefore still hear a lot about free trade and fair trade. If the defenders of free trade to the bitter end sometimes sound ideological and conflict of interest, America must be very careful not to exceed the line of fair trade in its demands.
If she overcomes it, she will primarily hurt herself. Not so much for retaliation (exporters have much more to lose than importers in a trade war) as for the laziness that protectionist warmth creates over time for domestic producers. It's a laziness similar, moreover, to that induced by exchange rates and too low interest rates that we see in the rest of the world. Coming to the markets, the phase of consolidation and limbo on interest rates, currencies and stock exchanges continues. If inflation, despite rising, maintains a slow pace and if first-quarter profits come out good, as is possible, bonds will remain at these levels and the stock exchanges, once this phase of purgatory is over, will be able to cautiously get back to the highs, for the moment without overcoming them.
