Trump thinks that everyone else will pay for the second wall he has constructed. However, his decision to levy sweeping tariffs of at least 10% on almost every product that enters the United States is, in essence, a wall constructed to prevent immigrants from entering the country and keeping jobs and work there. It is necessary to place this wall’s height in historical context. It takes the US back a century in terms of protectionism. It elevates the United States to levels of customs revenue comparable to those of the G7 and G20 nations, including Senegal, Mongolia, and Kyrgyzstan. What occurred this week was not just the US starting a global trade war, or sparking a rout in stock markets. It was the world’s superpower turning its back on the globalization process, which it had fought for and made a lot of money from over the years. And in so doing, using the equation that underpinned his grand tariff reveal on the Rose Garden’s lawns, the White House also turned its back on some fundamentals of both conventional economics and diplomacy.
The great debate about free trade In his announcement.
Trump talked a lot about 1913. When the United States instituted a federal income tax and significantly reduced its tariffs, this marked a turning point. Before this point, from its inception, the US government was funded mainly by tariffs, and was unapologetically protectionist, based on the strategy of its first Treasury Secretary Alexander Hamilton.
The basic lesson the White House has taken from this is that high tariffs made America, made it “great” the first time, and also meant that there was no need for a federal income tax.
On this side of the Atlantic, the theories of British economist David Ricardo from the 19th century serve as the foundation for free trade and globalization. particularly the Theory of Comparative Advantage from 1817. There are equations, but the basics are pretty easy to understand: Individual countries are good at making different things, based on their own natural resources and the ingenuity of their populations.
Broadly speaking, the whole world, and the countries within it, are better off, if everyone specialises in what they are best at, and then trades freely.
Reuters US President Donald Trump delivers remarks on tariffs Reuters.
The basic lesson
White House has taken from history is that high tariffs made America “great” the first time
Here in Britain this remains a cornerstone of the junction between politics and economics. Most of the world still believes in comparative advantage. It is the intellectual core of globalisation.
However, the United States never fully converted at the time. The underlying reluctance of the US never disappeared. And this week’s manifestation of that was the imaginative equation created by the US Trade Representative to generate the numbers on Trump’s big board.
The justification for “reciprocal” tariffs It is worth unpacking the rationale for these so-called “reciprocal” tariffs. The figures are not very similar to the tariff rates that have been made public in those countries. The White House claimed that adjustments had been made to account for currency manipulation and bureaucracy. A closer look at the, at-first, complicated looking equation revealed it was simply a measure of the size of that country’s goods trade surplus with the US. They took the size of the trade deficit and divided it by the imports.
During the hour leading up to the press conference, a senior White House official provided an open explanation. “These tariffs are customise to each country, calculated by the Council of Economic Advisers… The model they use is based on the concept the trade deficit that we have is the sum of all the unfair trade practices, the sum of all cheating.”
This is really important. According to the White House, the act of selling more goods to the US than the US sells to you, is by definition “cheating” and is deserving of a tariff that is calculated to correct that imbalance.
At the Port of Los Angeles, a cargo ship is seen stacked with shipping containers, via Shutterstock. The long-term objective is to eliminate the US’s $1.2 trillion trade deficit. This is why the surreal stories about the US tariffing rarely visited islands only inhabited by penguins matter. It reveals the actual method.
The policy’s long-term goal is to eliminate the US’s $1.2 trillion trade deficit and the largest country deficits within it. The equation was simplistically designed to target those countries with surpluses, not those with recognisable quantifiable trade barriers. It targeted poor countries, emerging economies and tiny irrelevant islets based on that data.
While these two different factors overlap,
They are not the same thing.
There are many reasons why some countries have surpluses, and some have deficits. There is no inherent reason why these numbers should be zero. Different countries are better at making different products, and have different natural and human resources. This is the very basis of trade.
The US appears no longer to believe in this.
Indeed if the same argument was applied solely to trade in services, the US has a $280bn (£216bn) surplus in areas such as financial services and social media tech.
However, the White House did not include services trade in any of its calculations. “China shock” and its repercussions There is something bigger here. As the US Vice President JD Vance said in a speech last month, globalisation has failed in the eyes of this administration because the idea was that “rich countries would move further up the value chain, while the poor countries made the simpler things”.
That has not worked out, especially with China, so the United States is decisively leaving this world. For the US, it is not David Ricardo who matters, it is David Autor, the Massachusetts Institute of Technology (MIT) economist and the coiner of the term “China shock”.
In 2001, as the world was distracted by the aftermath of 9/11, China joined the World Trade Organisation (WTO), having relatively free access to US markets, and so transforming the global economy.
Living standards, growth, profits and stock markets boomed in the US as China’s workforce migrated from the rural fields to the coastal factories to produce exports more cheaply for US consumers. It was a classic illustration of how “comparative advantage” works. China generated trillions of dollars, much of which was reinvested in the US, in the form of its government bonds, helping keep interest rates down.
Getty Images US President Donald Trump speaks during a “Make America Wealthy Again” trade announcement event Getty Images
President Trump’s characterisation of the past half century of freer trade as having “raped and pillaged” the US doesn’t reflect the overall picture, says Faisal Islam
Everyone came out on top. Well not quite. Essentially US consumers en masse got richer with cheaper goods, but the quid pro quo was a profound loss of manufacturing to East Asia.
According to Autor’s calculations, this “China shock” resulted in the loss of one million manufacturing jobs in the United States and 2.4 million jobs overall by 2011. These hits were geographically concentrated in the Rust Belt and the south.
The trade shock impact on lost jobs and wages was remarkably persistent.
Autor further updated his analysis last year and found that while the Trump administration’s first term dabble with tariff protection had little net economic impact, it did loosen Democrat support in affected areas, and boosted support for Trump in the 2020 Presidential election.
