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Now we know which economy is the gravest threat to the US after China: Lesotho. China currently has a combined tariff of 54 per cent under Donald Trump’s new plan. But Lesotho apparently deserves a “reciprocal” tariff of 50 per cent on its exports to the US, just ahead of the 49 per cent on Cambodia and 46 per cent on Vietnam, followed by 32 per cent on Indonesia and Taiwan, 26 per cent on India and 20 per cent on the EU. The UK gets away with 10 per cent. (See charts.)
What is perhaps most extraordinary about the overthrow of close to a century’s trade policy is that nobody, apparently, told the president that a procedure that puts Lesotho on the naughtiest step would make the US look ludicrous. But it did — and it did so because that procedure was ridiculous. Here was no subtle analysis of all those alleged tariff and non-tariff barriers from which, says Peter Navarro, echoing his boss, the exploited US has been suffering so terribly. No, it was far simpler and stupider. The proposed tariffs are proportional to the bilateral trade deficit divided by bilateral imports. The implicit assumption is that, in a fair world, trade would balance with every single partner. This is utter lunacy. Yet it has now become the intellectual basis of the trade policy of the world’s most powerful country — alas, poor thing, apparently victim of a global trade plot.
It is not just lunacy. It is wicked. Think of the history of US involvement in Vietnam. Yet now, the US has decided to try to halt its economic development. Vietnam is not alone in seeking to exploit the benefits of openness. Indeed, trade policy has converged on liberalism in emerging economies quite broadly. They were responding to a promise the US has now snatched away.
This is not even all of Trump’s work. Canada and Mexico are still victims of his “fentanyl tariffs”. There is a 25 per cent tariff on automobiles and those on steel and aluminium have also been raised.
Yet tariffs will not close trade deficits. In the 1970s, I worked on the Indian economy, then among the world’s most highly protected economies. Did it run huge trade surpluses? No. Yes, it had a tiny ratio of imports to GDP. But it had a still smaller income from exports. This was because of the adverse impact of protection on export competitiveness. This will now happen to the US: imports will shrink, but so will exports. The deficits, determined by income and spending, will remain roughly unchanged. The world will just end up poorer. As Germany’s Kiel Institute argues, the biggest negative effects are likely to fall on the US: protection is usually an own goal.
The people who founded the global trading system in the 1930s and 1940s had experienced the results of beggar-my-neighbour protectionism in the 1920s and 1930s. The system they created was based, for good reason, on the principles of non-discrimination, liberalisation through reciprocal bargaining, the binding of tariffs and impartial adjudication of any use of the escape clauses in the system. All this was designed to create a predictable, transparent and liberal trading regime. Over eight completed rounds of negotiations, the result became an open and dynamic world economy. This was a product of US statecraft. Trump has not just brought US protection to levels not seen in a century, but has destroyed everything his predecessors sought to achieve. This is an act of war against the entire world.
The debate over whether to take Trump literally or seriously is over. He has now learnt how to be the tyrant he always wished to be. That took a while. But, with the help he has received, he is there. His administration is engaged in a comprehensive assault on the American republic and the global order it created. Under attack domestically are the state, the rule of law, the role of the legislature, the role of the courts, the commitment to science and the independence of the universities. All these were the pillars on which US freedom and prosperity rested. Now, he is destroying the liberal international order. Soon, I presume, Trump will be invading countries, as he proceeds to restore the age of empires.
The application of all these tariffs is a perfect symbol of what Trump is about. He has appealed to a non-existent “emergency”, allowed by a foolish legislature, to impose a highly regressive tax increase that will bear particularly heavily on his own political base, partly to fund a budget-busting extension of his own hugely regressive tax cut of 2017.
It seems inevitable that these tariffs, plus the uncertainty created by the unanchored, and so unpredictable, new policy environment, will damage the world and US both now and in the longer term. Our economies are far more open than ever before. Sudden and huge increases in protection will have correspondingly bigger economic effects than before. Stock markets are surely right to guess that a good part of today’s productive capital stock will turn out to be scrap: continued market turmoil is likely.
This offers a perverse kind of hope. The attempt by Trump and his associates to undermine the republic would take time. It is now more likely that he will run out of it. Imagine that as a result of all this turmoil, the economy indeed falters and so the Republicans are hammered in the midterms. This would make the Maga project far more difficult to carry out. Who knows? US institutions might begin to show a little backbone. Above all, the next presidential election might actually be a fair one.
So long as Maga dominates the American right, the US potential for unpredictable, irrational and pernicious behaviour will remain. That is, alas, a huge gift to China. But the worse it now gets, the more likely it is that Maga will be an interlude, not America’s destiny. This is a consolation and a hope.
martin.wolf@ft.com
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