One thing I can say for Donald Trump is that he is forthcoming about his specific plans should he return to the White House.
The crux of his economic policy seems to be imposing tariffs of up to 20 per cent on all imports – unless they come from China. Those would be taxed at 60 per cent, while Trump would slap a tariff of “100, 200, 2,000 per cent” on cars manufactured in Mexico or China.
God help us, the man is mad. Two thousand per cent? That’s tantamount to shutting down the US market for such products, a measure evoking a child screaming at the top of his voice and throwing his toys out of the pram.
“The higher the tariff, the more likely it is that the company will come into the United States,” explained Trump. “You make it so high, so horrible, so obnoxious” that companies will “come right away”.
This shows what happens when the stress in ‘political economy’ falls on ‘political’ rather than ‘economy’. I’m sure this sort of thing plays well among the less intelligent strata of the US population, the types who in my day decorated their bumpers with stickers saying “Buy a foreign car, put 10 Americans out of work”.
Those chaps could be forgiven for their economic illiteracy. But a man likely to become US president isn’t entitled to such leniency.
Protectionism flies in the face of traditional economic wisdom, which became traditional specifically because it was wise. It has also been vindicated by historical experience, in the US and elsewhere.
If we look at the Great Depression, for example, we’ll find that the 1929 stock market crash, supposedly the trigger of the calamity, barely made the front pages of the papers at the time. Only about two percent of all Americans owned any shares, and, people being people, those overachievers were unlikely to be viewed by the rest with excessive sympathy.
In fact, when the value of those shares plummeted, most of the non-holders probably responded in a very human way by displaying schadenfreude. The crash was none of most people’s concern, and the papers reacted with commensurate restraint.
The depression only began to bite after Roosevelt’s protectionist measures went into effect. And that makes sense.
As Mises, Hayek or any Chicago economist worth his salt would have told you, the success of a reasonably free economy is determined by the consumer, which is to say by a strong, voracious demand. And what boosts the demand is free competition among suppliers, regardless of which country they come from.
In such conditions they are forced to offer better products, lower prices and more efficient services. Supply-side ideas, so popular back in the 1980s, don’t change this fact. Supply-side is just a way of stimulating consumer demand.
Manufacturers and other suppliers take the lead by offering the goods and services they bet people will want to buy. If the bet pays off, they win. If it doesn’t, they lose.
The aforementioned conventional wisdom speaks with its usual bluntness. You can only help a consumer economy by helping the consumers, it says. You can’t do so by hurting them.
This can only mean that protectionism can’t help the economy. It almost certainly will cause untold damage, by mollycoddling domestic production behind a protective wall of near-monopoly. That anyone should deem this necessary suggests that domestic production was ineffective to begin with.
Yet when its incompetence is artificially protected from more competent rivals, it will have little incentive to get its act together. Quality will go down, prices will head in the opposite direction, funds will be channelled into the least – and away from the most – productive areas, and consumers will bear the consequences.
There isn’t now, nor was there at the time of the Great Depression, anything new about any of this. Bright economists from Anne-Robert-Jacques Turgot, Adam Smith and David Ricardo onwards had known it and written about it. Ricardo even went so far as to argue that a country shouldn’t retaliate against protectionist tariffs imposed by other countries against it. Doing so, he insisted, would only hurt its own people.
Thus, for example, Smith: “To give the monopoly of the home-market to the produce of domestic industry… must, in almost all cases, be either a useless or a hurtful regulation. If the produce of domestic can be brought there as cheap as that of foreign industry, the regulation is evidently useless. If it cannot, it must generally be hurtful.”
Thus spoke common sense, something Trump proudly (and loudly) likes to highlight as his forte. In fact, his attachment to protectionism smacks of economic illiteracy, which is indeed common but not very sensible.
If Trump gets elected and acts on his promises, his protectionism is guaranteed to drive up inflation and increase America’s national debt even more than Harris’s objectionable socialism would. And it’s not just those dastardly foreign producers who will bear the brunt of tariffs, but also US consumers.
If Trump hasn’t studied the causes of the Great Depression, perhaps he should cast a quick glance over his own experience as US president. Every economic study I’ve seen shows that it wasn’t just foreign manufacturers but also US consumers who were hit by the tariffs Trump introduced then.
The University of Chicago ran a survey last month. The question put to a group of prominent economists was whether they agreed with the statement that “imposing tariffs results in a substantial portion of the tariffs being borne by consumers of the country that enacts the tariffs, through price increases”. An impressive 98 per cent said yes.
As far as Trump is concerned, they thereby branded themselves as rank communists out to get him. To me, they simply upheld economic theories vindicated by centuries of practical experience.
This isn’t to say that political considerations have no place in economic policies. The trouble with Trump is that he tries to justify his economic protectionism by economic arguments, which is neither grown-up nor clever. However, a persuasive case may be made for limiting or even blocking imports from China.
Such imports to America and Europe have built up an evil communist regime as an economic powerhouse able to challenge the West all over the world not only economically but, more important, politically and militarily. Alas, the US has a long history of creating monsters by putting short-term economic benefits before long-term strategic needs.
Both the Soviet Union and Nazi Germany built up their brawn largely – the former almost exclusively – thanks to transfers of American technology and capital. For every million in profits the US realised from its munificence towards the Soviets, she later spent a billion trying to counteract the ogre she had created. (Anglo-American economist, Stanford’s Prof. Anthony C. Sutton, published several books presenting extensive research on the subject.)
Trying to curtail China’s growth by “obnoxious” tariffs, sanctions or even an outright ban for that reason would doubtless hurt US consumers, but one could argue they’d suffer pain in a good cause. I’d certainly be sympathetic to this argument should Trump make it.
But he doesn’t. The argument he does make falls into the category of rabble-rousing populism, not sound economics or strategic thought.
God help us, indeed…