Protectionism preserves, free trade destroys older countries and pushes the antagonism between proletariat and bourgeoisie to the extreme, accelerating the social revolution. That is why, gentlemen, I vote for free trade. It was 9 February 1848 and with these words Marx concluded his speech before an assembly of workers in Brussels. The topic is very hot.
English industrialists have recently succeeded in repealing the Corn Laws, which with their tariffs protected landowners from competition from French agriculture. Now wheat costs much less and the industrialists can pay less for the workers, who are in fact restless and disappointed. They had been promised cheap bread, but not reduced wages.
Forty years later, Friedrich Engels, Marx's lifelong associate and financier, re-reads the Brussels speech and derives interesting reflections from it. Engels, who is revolutionary but also an intelligent industrialist, perfectly grasps the limits of protectionism. If you protect one industry, he says, you damage the others in the same country and end up having to protect them too. If you protect everything, on the other hand, you can't delude yourself that other countries won't do the same.
However, America is right to protect its industry because it is in a nascent stage. In this way it will develop faster and be ready to overtake and compete with British industry in less time than it would have taken without protection. Eventually, however, the widespread adoption of free trade, coupled with productivity growth, will accelerate global development without benefiting labor. Hence the renewed belief that free trade will hasten the revolution. The debate on international trade spans the entire nineteenth century. The century opens under the banner of protectionism and closes under the banner of imperialism, but the most interesting part, seen today, is the middle one, when free trade seems to prevail, at least on an ideological level, and tries to understand the own reason for being.
Among the Victorians (see The Mid-Victorian Generation 1846-1886 edited by T. Hoppen) an initial feverish and even religious inspiration for globalization is felt. Jesus Christ is Free Trade and Free Trade is Jesus Christ, said the utopian Unitarian Sir John Bowring, future governor of Hong Kong, in a speech. Globalization, it is thought, will bring with it brotherhood, perpetual universal peace and economic growth. For those temporarily left behind, poor laws, a rudimentary form of citizen's wages, were passed several times.
In its first phase, the enthusiasm for free trade unites the Little Englanders (the isolationists who argue that the empire can be disposed of because global trade will make it superfluous) and the imperialists, who advocate two-speed integration, more rapid within the empire and necessarily slower with the rest of the world. It will be the latter, very soon, to prevail. At the first signs of trouble for British exporters, it will be gunboat diplomacy that paves the way for free trade.
With a century and a half more historical experience than the Victorians we can afford today to be adult globalists and admit some truths. The first is that the pressure towards free trade always comes from the strongest and most competitive, which is usually also the one that has a production capacity greater than its domestic demand. Victorian England, the United States after the Second World War and China today (and, regionally, Germany) were and are exactly in this situation.
The narration, from Sir John Bowring to Xi Jinping in Davos, does not underline this aspect, which is however important, and instead focuses on values such as freedom and peace. The second is that globalization is a lagging, not leading, indicator of growth. That is, it is an effect, not a cause. The notorious Smoot-Hawley Act of 1930, with which American customs tariffs were doubled, is the son, not the father, of a fall in production and employment that had already begun almost a year ago. Although it is widely recognized that this measure (which obviously corresponded to countermeasures by trading partners) further damaged the economy, it is monetary and fiscal policies that are responsible before the crisis.
Symmetrically, the dismantling of the Smoot-Hawley in 1934 made a contribution to the recovery, but it was not its primary cause, again monetary and fiscal. Roosevelt, moreover, refrained from eliminating the 25 percent tariffs in force before 1930. It was only with the end of the Second World War that the United States, having emerged victorious with an enormously grown industrial apparatus, designed a world order free trade oriented. After all, the Marshall Plan was a large vendor financing operation, similar to what China does today in many parts of the world, in which excessive American production capacity was given vent, giving Europe time to get back on its feet.
The third observation is that poorly managed globalization, as we well know in Italy, can be destructive if the country that undergoes it is inflexible. Trump, ideologically, is not a protectionist and the fears of the bond markets on the inflationary consequences of his policy are excessive. Trump certainly has a mandate from the voters of the old industrialized states (decisive in his victory in November and decisive in his eventual re-election in 2020) to stop the haemorrhage of factories and jobs. The move from Mexico to Michigan will certainly cause per-employee labor costs to rise sharply, but many workers will be replaced by robots that would not be economical to use in Mexico.
In practice, there will be more investment in technology and more productivity and final price increases will be limited. If this is the case, it can be argued, corporate margins will be put under pressure. True, but up to a point. There will indeed be an exchange. The homecoming auto industry will see regulator pressure on energy efficiency eased. The pharmaceutical company that will have to compete for Medicare orders will cede pricing power to the government, but will in exchange have an acceleration and simplification of the expensive process for the approval of new drugs, those on which it typically makes the most profit. The contracts with defense companies will all be renegotiated with large price cuts, but in exchange orders will increase. Only banks and energy will receive (through deregulation and lower taxes) more than they have to give.
Inflation will then be kept at bay by the strong dollar and rate hikes. Certainly Trump and Mnuchin will periodically try to throw cold water on the dollar, but the impression is that they will probably succeed in blocking it, but not in reversing its natural tendency to strengthen.
As for China, the new champion of free trade, everything will be called into question. Trump's weapons are Taiwan, rapprochement with Russia, a reformed NAFTA extended to include the United Kingdom that penalizes imports from China and, in extremis, the imposition of tariffs that could reach 45 percent.
China has North Korea's card in hand, which only it can try to control, the possibility of devaluing and that of threatening the sale of US Treasury bonds, which would raise rates (but also lower the dollar). Before entering into the negotiations, however, there will be a phase in which Trump and Xi will try to take measures, with Kissinger behind the scenes who will try to keep the confrontation in rational terms. Already tonight we will have the opportunity to examine the first decrees of the new administration. Dollar, bonds and stock exchanges don't seem too far from the values that, as far as we can understand, one might expect. Attention, however, from today we enter a new world.
