I have no axe to grind regarding President Donald Trump. I
am not a fan but unlike the Brexit issue I have no skin in the game. So when I
say I don't like much of what I heard during Trump's inauguration speech, I say
it as an economist and a citizen of the world (which in Theresa May's eyes
makes me a citizen of nowhere).
I tuned in just as Trump got into full flow. But I shuddered at the passage which contained the phrases:
"We have defended other nations' borders while refusing to defend our own ... One by one, the factories shuttered and left our shores with not even a thought about the millions and millions of American workers that were left behind ... From this day forward, it's going to be only America first, America first ... Protection will lead to great prosperity and strength."
I am critical of British politicians who play the nationalist card and I am not impressed by leaders of other major nations who do the same. Imagine what the reaction in the British press would be if German politicians said similar things. But when an American president takes such a tack, we know that this could be very damaging to the world economic and political order upon which our prosperity has depended for so long.
As an economist, I question the notion that protectionism will make the US economy stronger. My immediate reaction was "has he learned nothing from long dead US politicians Smoot and Hawley?" Standard economics states that raising tariff barriers simply increases the costs to consumers who ultimately have to pay. It's the same reason I am so concerned that the UK will fail to get a deal with the EU and we have to fall back on WTO rules which raises the costs of most imports.
Yet there is an argument that this is conventional thinking and we should be approaching the problem differently. Indeed, a young journalist asked me this week if tariffs are such a bad thing. In effect, he was asking whether the pursuit of economic efficiency really is the be all and end all. Given the times in which we live, it is a question which deserves an answer. I suspect the answer lies in the extent to which they serve the national interest. The national interest in this case is not simply about the economic costs and benefits, because on these grounds there is no case. It is about taking back control – a slogan we heard so often during the Brexit referendum. Ironically, the message from Theresa May was that the UK wants more free trade, rather than less, which seems to contrast with the Trump view. Trump’s appeal is to those who believe that the pace of change has been too rapid, and my guess is that American voters might tolerate higher import tariffs for a while but ultimately realise they are economically self-defeating. But tariffs may simply have to be tried to remind a new generation of why the world has spent 70 years trying to reduce them.
Think of the US auto industry. The area around Detroit declined (as did the British Midlands) because the cars built there were more expensive and technologically inferior to those produced by the foreign competition. Domestic consumers took the view that they got better value for money by looking elsewhere. Imagine they didn't have that choice. Imagine that instead US workers continued producing cars and stayed put in Michigan. This would have reduced the internal migration of skilled workers, with the result that currently-dynamic urban areas would have grown more slowly and there would be fewer resources available to be allocated to higher value-added sectors such as tech or fracking. In short, there would have been less dynamism. If that is what the public wants, that is their choice. But as my friends on the other side of the Atlantic tell me, that is not the American way.
Then there is the problem of retaliation. If the US erects barriers, you can bet its trading partners will respond. American companies have pinned their hopes for many years on the Chinese market – whether those hopes have been realised is another matter. But they will be shut out of the world's most dynamic major market and will lose global market share as a consequence, especially if China were simultaneously to open up to the Europeans. And it is not as if the US does not have world class companies which compete globally. Microsoft, Apple, Google and Amazon have revolutionised the world, and did not arrive in their present incarnation behind tariff barriers. They depend on being able to sell around the world, and rely on global supply chains to stay competitive. Its global banks have survived the financial crisis in far better shape than their European counterparts and still play a huge role in the global financial architecture.
We should also not ignore the soft power which the US enjoys. Netflix is changing the way the world watches TV; Hollywood blockbusters are still the films most people talk about; its universities are ranked as amongst the best in the world. Moreover, the US issues the world's pre-eminent reserve currency. This should not be underestimated: Controlling access to dollar markets gives the US unprecedented economic and financial leverage.
All told, the US is in a far stronger position than Trump’s supporters believe. Admittedly, we no longer live in a world of unchallenged American power – the rise of China has seen to that. But the US has more to lose than gain if Trump really does set off down the protectionist path. We can only hope his team is less impulsive than he is.
I tuned in just as Trump got into full flow. But I shuddered at the passage which contained the phrases:
"We have defended other nations' borders while refusing to defend our own ... One by one, the factories shuttered and left our shores with not even a thought about the millions and millions of American workers that were left behind ... From this day forward, it's going to be only America first, America first ... Protection will lead to great prosperity and strength."
I am critical of British politicians who play the nationalist card and I am not impressed by leaders of other major nations who do the same. Imagine what the reaction in the British press would be if German politicians said similar things. But when an American president takes such a tack, we know that this could be very damaging to the world economic and political order upon which our prosperity has depended for so long.
As an economist, I question the notion that protectionism will make the US economy stronger. My immediate reaction was "has he learned nothing from long dead US politicians Smoot and Hawley?" Standard economics states that raising tariff barriers simply increases the costs to consumers who ultimately have to pay. It's the same reason I am so concerned that the UK will fail to get a deal with the EU and we have to fall back on WTO rules which raises the costs of most imports.
Yet there is an argument that this is conventional thinking and we should be approaching the problem differently. Indeed, a young journalist asked me this week if tariffs are such a bad thing. In effect, he was asking whether the pursuit of economic efficiency really is the be all and end all. Given the times in which we live, it is a question which deserves an answer. I suspect the answer lies in the extent to which they serve the national interest. The national interest in this case is not simply about the economic costs and benefits, because on these grounds there is no case. It is about taking back control – a slogan we heard so often during the Brexit referendum. Ironically, the message from Theresa May was that the UK wants more free trade, rather than less, which seems to contrast with the Trump view. Trump’s appeal is to those who believe that the pace of change has been too rapid, and my guess is that American voters might tolerate higher import tariffs for a while but ultimately realise they are economically self-defeating. But tariffs may simply have to be tried to remind a new generation of why the world has spent 70 years trying to reduce them.
Think of the US auto industry. The area around Detroit declined (as did the British Midlands) because the cars built there were more expensive and technologically inferior to those produced by the foreign competition. Domestic consumers took the view that they got better value for money by looking elsewhere. Imagine they didn't have that choice. Imagine that instead US workers continued producing cars and stayed put in Michigan. This would have reduced the internal migration of skilled workers, with the result that currently-dynamic urban areas would have grown more slowly and there would be fewer resources available to be allocated to higher value-added sectors such as tech or fracking. In short, there would have been less dynamism. If that is what the public wants, that is their choice. But as my friends on the other side of the Atlantic tell me, that is not the American way.
Then there is the problem of retaliation. If the US erects barriers, you can bet its trading partners will respond. American companies have pinned their hopes for many years on the Chinese market – whether those hopes have been realised is another matter. But they will be shut out of the world's most dynamic major market and will lose global market share as a consequence, especially if China were simultaneously to open up to the Europeans. And it is not as if the US does not have world class companies which compete globally. Microsoft, Apple, Google and Amazon have revolutionised the world, and did not arrive in their present incarnation behind tariff barriers. They depend on being able to sell around the world, and rely on global supply chains to stay competitive. Its global banks have survived the financial crisis in far better shape than their European counterparts and still play a huge role in the global financial architecture.
We should also not ignore the soft power which the US enjoys. Netflix is changing the way the world watches TV; Hollywood blockbusters are still the films most people talk about; its universities are ranked as amongst the best in the world. Moreover, the US issues the world's pre-eminent reserve currency. This should not be underestimated: Controlling access to dollar markets gives the US unprecedented economic and financial leverage.
All told, the US is in a far stronger position than Trump’s supporters believe. Admittedly, we no longer live in a world of unchallenged American power – the rise of China has seen to that. But the US has more to lose than gain if Trump really does set off down the protectionist path. We can only hope his team is less impulsive than he is.
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