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Trump's Tariffs: A Costly Return To 'American' Values?

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Lipper Alpha Insight

By Thomas Aubrey

American trade policy and free trade have rarely been bedfellows. President Trump's arbitrary tariffs on imports of steel (25%) and aluminum (10%) announced on March 1 might be better understood as part of an American mercantilist tradition that stretches from Alexander Hamilton's 1791 report on manufactures to the Smoot Hawley Tariff Act of 1930.

Indeed, the opening up of the US economy to international trade is a relatively new phenomenon. Trade openness defined as exports + imports / GDP only began a sustained improvement as a result of the Kennedy GATT round that concluded in 1967. This was subsequently followed by the Tokyo round (1979) and the Uruguay round (1995) which included the founding of the World Trade Organization.

Hence, for the last 150 years, the US has been on the side of protectionism more than it has been on the side of free trade.

Chart 1: Trade openness of the US economy 1870-2017

Source: Historical statistics, Thomson Reuters Datastream, Credit Capital Advisory

The shift away of support for free trade in America should perhaps not be surprising. The same thing happened to Great Britain in the late 19th century as imports began to grow faster than exports. Joseph Chamberlain, the then-secretary of state for the colonies, campaigned strongly for tariffs on foreign imports with preference given to trade with the empire. Chamberlain, however, lost the debate with concerns about rising food prices playing a central role in his defeat.

Just as Britain's trade deficit and anti-free trade rhetoric ballooned in the late 19th century, the same thing has been happening in the US since the 1990s. President Trump argues that a trade deficit is clear evidence of "unfair trade" and what is needed is "fair trade" instead. However, there is very little difference between "fair trade" and mercantilism given that both focus on the balance of

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Comments (5)

Pompano Frog profile picture

China is doing all of the right things in promoting economic and wage growth.

But, wage rates of production workers is only a small fraction of the differences in the cost of production. Wage rate differences can be overcome with increased automation.

Differences in the cost and availability of money for production is a larger factor. Where did Geely automotive get the money to buy Volvo (Swedish car company)??

It wasn't out of profits. What interest rate are they paying on those bank loans? Would those bank loans ever be called?? Who controls the lending decisions of those banks??

Who provided the financing for Geely to buy 10% of Diamler??? It wasn't out of profits.

American manufacturers and workers can compete if they are playing on a level playing field. It is enormously difficult to unseat a dominant manufacturing enterprise just because there are enormous economies of scale. But, if your government is willing to subsidize that attack it will eventually be successful.

The strategy works. But, it is dependent on the dominant country allowing the attack to go on. The dominant country needs to be politically weak to be vulnerable to that attack.

China is not losing those low wage jobs to Vietnam, Pakistan etc. It is China's intelligent economic policy to lend money to Chinese companies with low wage jobs to move them to other countries but keep the design and management in China. This lowers China's visible trade surplus and frees low wage workers for higher wages. Wages in China are rising 6% per year currently in all wage quintiles.

You will see China's trade surplus shrink. It will not really be shrinking. They have caught on to the gimmick of shifting the trade offshore to countries that are exempt from export restrictions.
Ben Gee profile picture
China just want what the west got the last 200 years.
Ben Gee profile picture
China created hundreds of millions of jobs by improving its infrastructure, making most everything cheaper.
The US lost many, many jobs because its wage rates are too high. Its products are too expensive.
China is losing many jobs to countries where the wage rates are lower too.
We lose jobs, other people took our jobs, they DID NOT STEAL our jobs, sometimes, we gave some jobs away.
Pompano Frog profile picture
Dear Reader..

The views expressed in this article have been the dominant economic narrative of the last 30 years. This narrative has created..created the economic stagnation of real wages for the bottom 50% of the U.S. population.

China during that same period has seen an enormous increase in their per capita real wages. Do they have tariffs? In fact, they have elaborate subsidies and regulatory tariffs that have stolen jobs from U.S. workers.

The politicians of both political parties have traded access to the U.S. market in exchange for foreign policy influence. It is an outrage.
Why are the american population then buying all the chinese stuff? Stop doing it. Even the caps your president used in his campain was “made in china”. Agree that if there are dumping and subsidies involved there is a problem. But this is with the chinese. Not EU or other “allies”. The US wanted tariffs and its a negotiated agreement. Noone forced you to sign. So get back and negotiate, rather than this primitive barking.
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