I have been a strong proponent of the notion Trump is likely to start a global trade war.

Others are of the opinion that Trump will not do what he promised.

Politicians lie. Who can argue with that? So, which viewpoint is more likely?

Please consider Donald Trump Threatens the Resilience of World Trade.

Like cats in popular folk wisdom, globalisation appears to have many lives. The integration of markets in goods, services and capital that accelerated in the 1990s with the fall of communism and the rise of China has been written off many times, notably during the global financial crisis. Yet it has survived.

This past year, its obituarists have had more material to work with than usual. The stalling of a number of high-profile trade deals has had the pre-emptive mourners out in force arguing that the engine of liberalisation has failed.

A number of large trade pacts — usually dubbed “free-trade agreements” whether or not they succeed in liberalising commerce — have failed in recent years. But 2016 was notable for two particularly large ones hitting the buffers — the Transatlantic Trade and Investment Partnership (TTIP), involving the US and EU, and the Trans-Pacific Partnership (TPP) of 12 Asia-Pacific economies. Moreover, the trade world was treated to some comic relief late in the year when the smaller pact between the EU and Canada was held up for a while by obstreperous Walloons, the government of Belgium’s francophone region objecting to various provisions therein.

The underlying forces against globalisation are often overstated. But Mr Trump’s election could change everything.

He has already appointed two instinctive protectionists itching for trade confrontation with China, Wilbur Ross and Mr Navarro, to his trade team. It may be up to Congress to restrain the administration’s wilder protectionist impulses — which is a little like putting the toddlers in charge of a nursery.

Globalisation has survived many things, but the rise of mercantilist populism in the form of Mr Trump may be its biggest challenge for decades. The year of 2016 was not a disastrous one for international commerce, but it may prove to be an uneasy calm before the trade wars begin.

Global Trade Wars

I am a huge free trade advocate, regardless of what any other country does.

Trump clearly does not share that view. But will Trump really do what he says? Will Congress go along?

I have an open mind on this, but right now it seems that Trump is more likely than not to do what he says.

Global Trade Wars

I have been warning about the increasing likelihood of a collapse in global trade for some time.

We took another step down that road with Trump’s appointment of Peter Navarro to head up the White House National Trade Council.

It’s impossible to over-emphasize one simple point: No one wins global trade wars. Trump believes he can.

He won’t.

The Question of “Fair Trade”

Some argue we do not need free trade, we nee “fair trade”. They are mistaken.

The best case I have seen for free trade comes from Ana Eiras, Senior Policy Analyst on International Economics, Center for Trade and Economics (CTE).

Eiras explains Why America Needs to Support Free Trade.

Eiras provides five well thought out positions why free trade is good. More importantly she puts a knife in the ridiculous discussion about “fair trade”. Let’s pick up the discussion from that point.

The Question of “Fair Trade”

Politicians, opinion makers, journalists, and businessmen commonly talk about the need to support “fair trade.” Seldom, however, does anyone explain either what fair trade is or–even more to the point–to whom trade should be fair. In the name of fairness, different groups advocate different protections for their specific industries and call the comparative advantage of other countries “unfair.”

For example, U.S. manufacturers think it is unfair that labor in China is cheaper than labor in the United States, and therefore ask for tariffs against Chinese products. But those tariffs would, in reality, be unfair to millions of U.S. consumers and producers who would be forced to pay higher prices for locally manufactured goods. “Fairness” assumes a dubious character in policies that pick and choose whom to treat “fairly.”

Others argue that America needs to enact barriers to free trade in order to strengthen national defense. For example, a tariff to protect steel would be justified because we need our own steel to support the construction of tanks, missiles, and arms. This argument is built on the faulty assumption that America’s wealth is at least constant. But a constant level may imply that the U.S. is falling behind other nations in relative terms. The strongest national defense depends on a relatively strong economy, and a strong economy is possible only with economic freedom.

Once economic barriers begin to emerge, a nation’s wealth begins to decline. America’s relative economic freedom and wealth have already begun to decline. In fact, according to the Index, the United States has lost considerable ground in economic freedom (declining from 4th freest economy to 10th freest in 2004), which means it has also lost more and more opportunities to increase wealth.

The only form of fair trade–if such thing exists–is free trade. When facing competition from Chinese manufacturing, U.S. manufacturers have two options: either adopt new technologies to cut costs and become more competitive or shift the focus of their operations to different areas in which they can be more competitive. Neither of these two options harms consumers, since they will continue to have access to the least expensive, best-quality products.

Most workers benefit as well. For some people, free trade requires change, but they also now have opportunities to use their skills in more efficient, advantageous, and productive ways that are created by the innovation and prosperity that competition promotes. Likewise, for a strong national defense, America needs the resources, innovation, and income that are derived from the absence of barriers to trade and investment.

Consumers Key to Debate

Consumers are key to this debate. If it’s good for consumers, it’s good for the economy, and by default it is good for trade.

I encourage everyone to read the rest of Eiras’ excellent article.

Fair Trade Fantasy

“Fair trade” is nothing but a misguided fantasy from producers who cannot compete in the real world.

It makes no economic sense for US citizens to pay double or triple for underwear, TVs, phones or anything else to “save American jobs”.

The amazing irony in this debate is no jobs will be saved anyway!

NAFTA did not cause a loss of manufacturing jobs, productivity and robots did. No matter what Trump or anyone else promises, those jobs are not coming back.

Sure, the US has misguided tax policy that encourages foreign production. But that is a separate issue. At least Trump is correct on that score. Lowering corporate taxes is the right thing to do.

Tariffs are precisely the wrong thing to do. I fear we are going to find that out again, while the parrots all chant “Fair Trade, Not Free Trade”.

Related Articles

  1. December 22, 2016: “Death by China”: Beijing Fires “Trade Cooperation Warning” at Trump
  2. December 12, 2016: Global Trade War Baked in the Cake: Boeing Faces China’s Wrath.
  3. November 21, 2016: EU Retaliates Against US Banks, London: Global Trade War Tit-For-Tat
  4. September 22, 2016: US-EU Trade War Looms (Don’t Just Blame Trump); Spotlight on Hillary’s Global “Trade Prosecutor”
  5. September 26, 2016: Draghi Increases Risk of Global Trade Collapse With Brexit Tough Talk

Mike “Mish” Shedlock