Trade is the global economy’s bloodstream. The more freely it flows, the better for all.
As David Ricardo explained 200 years ago, different peoples have unique characteristics that enable them to produce certain goods at lower opportunity costs than others can. Free trade gives consumers access to the best goods and services at the lowest prices.
However, what we now call “free trade” is not what Ricardo had in mind. We have instead managed trade designed to benefit certain favored parties and to disadvantage others.
You can’t blame free trade for our problems, because we haven’t got it.
Those who have seen their interests short-changed in the managed-trade game have had enough. That’s one reason Donald Trump is now president and anti-globalization movements are active in so many countries.
Candidate Trump talked about renegotiating trade agreements to help American workers. I support that goal. The problem is that President Trump seems intent on starting a trade war that will hurt those same workers. We are on a very dangerous course.
Worse, if a report I saw last week is accurate, that course is already locked in.
Congress Can’t Stop Trump from Imposing Trade Sanctions
The report comes from Axios, a Washington-based news site recently launched by some Politico veterans who want to disrupt the mainstream media. This is what Axios reported June 30, based on the input of anonymous Trump-administration sources:
With the political world distracted by President Trump’s media wars, one of the most consequential and contentious internal debates of his presidency unfolded during a tense meeting Monday in the Roosevelt Room of the White House, administration sources tell Axios…
With more than 20 top officials present, including Trump and Vice President Pence, the president and a small band of America First advisers made it clear they’re hell-bent on imposing tariffs—potentially in the 20% range—on steel, and likely other imports…
One official estimated the sentiment in the room as 22 against and 3 in favor—but since one of the three is named Donald Trump, it was case closed.
No decision has been made, but the president is leaning towards imposing tariffs, despite opposition from nearly all his Cabinet.
If Trump wants to start a trade war, Congress and the courts probably can’t stop him unless they can pass new laws by a veto-proof margin. The chances of that happening are near zero.
That meeting in the Roosevelt Room may turn out to be as consequential as Bretton Woods was, if Trump acts to launch major trade sanctions.
Trade sanctions will slow down already slow global economic growth and could trigger a much wider systemic crisis.
The World Will Respond
The trade war, if it happens, will spring from the administration’s failure to appreciate one simple fact: Other countries will respond.
The Trump administration’s steel tariff idea, for example, has already provoked European Union officials. EU trade commissioner Cecilia Malmstrom warns, “We want of course to avoid anything dramatic here, but if that would have hit our companies we will have to respond, of course.”
The EU and other trade partners will not simply roll over and accept US tariffs. They will retaliate in ways specifically calculated to hurt American businesses and consumers.
My fear is that the US will then up the ante with yet more tariffs or other barriers, and the fight will get ugly, causing real pain and losses for both sides. All this will be completely unnecessary.
Mr. President, Negotiate!
Can existing trade agreements be improved? Yes, definitely. But trade negotiations are insanely complex in the best of circumstances. Multiplayer game theory applies. Right now, we have general trade equilibrium, with minor adjustments all the time.
Not everyone has everything they want, but no one is angry enough to stop playing. If one major player changes the rules, however, all the other players in the game have to respond. Those national players have their own businesses and voters that they must pander to. The game can collapse quickly.
Pile that risk on top of our many other economic vulnerabilities, such as the increasing political turmoil in Europe, and we might see major fireworks.
President Trump campaigned on the promise that he would negotiate better deals. Well then, Mr. President, rather than impose tariffs and destroy a few hundred thousand high-paying jobs in US manufacturing, let’s find out how well you can negotiate.
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Sharp macroeconomic analysis, big market calls, and shrewd predictions are all in a week’s work for visionary thinker and acclaimed financial expert John Mauldin. Since 2001, investors have turned to his Thoughts from the Frontline to be informed about what’s really going on in the economy. Join hundreds of thousands of readers, and get it free in your inbox every week.