4 July 2018
Originally published by CityAM.
Much of the language used at the moment with respect to trade is reminiscent of warfare.
Donald Trump’s trade “war” requires “retaliation” by the other belligerents, as if we were talking about the bombing of London in World War II, rather than the decision by the US to make its imports more expensive and its citizens poorer.
According to some analysts, the US can “win” the trade war, as it exports less to China than vice versa.
In reality, trade “wars” are competitions in which both parties shoot themselves in the foot repeatedly to see who is the last standing. The rational course of action is not to “retaliate”, but simply not to shoot oneself in the foot at all.
Trump’s steel tariffs, for instance, far from being an economic bombing raid on Europe and China, may well hurt America even more, as they make US products more expensive, both at home and abroad, while Europe will only lose a few jobs in the steel industry.
But, the economic revanchists say, aren’t others “showing weakness” by not retaliating?
In short, no.
The objective of trade is to make our own citizens wealthier and more free. They become wealthier by being able to buy goods from around the world, and are more free as they can live their lives without restrictions placed on them by the state.
As a thought experiment, imagine if the US decided to ban all foreign products from its economy and pursue a policy of self-sufficiency. It would still be sensible to allow American products into Britain even though we cannot sell a single product to them; being able to buy Ford motorcars and Dell laptops makes us wealthier irrespective of whether the US decides to make its citizens poorer by restricting their choices.
There are many conflicting economic arguments for how an economy should be run, but broadly speaking, free trade is the closest thing there is to a universally accepted theory.
If one looks at the countries that have delivered the largest increases in prosperity over the last generation or two – Norway, Singapore, New Zealand, Switzerland, Australia – one immediately sees that they range from right-wing (Singapore) to left-wing (Norway), with everything in between. But they have all led the world in free trade.
This is because free trade creates prosperity irrespective of corporate tax rates, healthcare funding, the privatisation of schools, and other policies defined by the left-right dichotomy.
A nation thinking strategically would see the current farce not as a “war”, but as a perfect opportunity to establish itself as a world leader and global hub for free trade.
In his classic book On War, Carl von Clausewitz said that “everything in war is simple, but the simplest thing is difficult”. With respect to trade – thankfully – it is both simple and easy: just give our consumers and businesses the freedom to buy from where they choose.
If China wants to make its citizens poorer by offering us subsidised, cheap steel, we should say thank you, and focus on making other things. If the US wants its companies to pay more for steel by slapping on tariffs, we should realise that we have an opportunity to make lower-cost products than Americans can.
Just as at any other point in history – think ancient Athens, Venice, Song Dynasty China, the Netherlands in the seventeenth century, or Britain during the late nineteenth century – any nation can profit by pursuing a policy of maximum free trade, regardless of whether others are shooting themselves in the foot.
Free trade is the easiest no-brainer in economics.
Max Rangeley is Editor of the Cobden Centre, and an IFT Board Member
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