Economics of Donald Trump's trade policy

Hasnat Abdul Hye   | Published: May 14, 2019 20:45:47 | Updated: May 15, 2019 20:58:26

Donald Trump, then Republican presidential candidate, wears his "Make America Great Again" hat at a rally in Sacramento, California  in June 2016.                 —Photo: AP

John Maynard Keynes, the architect of Keynesian revolution in post-war world who turned neo-classical economic thought on its head, wrote: "Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economists. Mad men in authority who hear voices in the air, are distilling their frenzy from some academic scribblers of a few years back." (General Theory, 1949).

Writing so far back in time, Keynes obviously did not include Donald Trump in his league of Practical men or Mad men in authority. Neither did he visualise anyone of his ilk occupying the seat of power in the largest economy of the world. But his description of the political persona and predilections for economic ideas that had long past its relevance is eerily down to earth and fits the ultra conservative economic policy maker that the present occupant of the White House has turned out to be. If the scenario outlined by him resembles the economic universe of thought shared by the present President of America, the reference to defunct economists can easily be related to the seventeen century Mercantilist thinkers who dominated during pre-classical period of economic thought in England. Mercantilist pamphleteers in the seventeenth and early eighteenth centuries were unanimous on one point: the importance of a surplus of exports over imports i.e favourable balance of trade.

The pursuit of Mercantilist objectives implied a considerable degree of state intervention in economic activity. In the interest of curtailing expenditure on imports most European states of that era undertook steps towards national self-sufficiency and on this ground governments attempted to nurture and protect domestic industries. In England agriculture was protected and sheltered from foreign competition through the sliding scale tariff provided by the Corn Law. On the other side of the English Channel in France manufacturing firms were established and subsidised by the government. In addition, governments sought to earn as well as to save foreign exchange by stimulating their foreign trade. The limitations of Mercantilist thought and policy were exposed in the analysis of classical economy in the eighteen century, led by Adam Smith and other economists who focused on economic growth and favoured opening and broadening market as essential to achieve this goal. This paved the way for free trade and has ever since been the rationale behind a global trading regime without or with as few tariff and non-tariff barriers as possible. The role of trade as the engine of growth, both nationally and internationally, has been acknowledged by economists of various persuasions, though with different emphasis.  

But free trade has not had a smooth sailing since the classical economists through their weight behind it. It has faced many restrictions in the form of tariff and non-tariff barriers and subsidies made by governments to sectors in the economy that had less competitive edge over foreign counterparts. The various rounds of trade talks initiated under General Agreement on Tariff and Trade (GATT) that culminated with the establishment of the World Trade Organisation (WTO) is all about making trade freer among all nations that trade among themselves. The establishment of WTO, however, has not made it easier for free trade to make robust headway in global trade, removing the constraining restrictions through multilateral negotiations. Though its performance has been less than outstanding because of insistence of member countries to adhere to their anti-free trade policies in respect of certain sectors, the momentum towards a freer trade regime has been maintained by WTO. Until Donald Trump entered the White House, that is.

With his Making America Great Again and America First slogans, the Trump administration has been following a trade policy that has eerie resemblance to Mercantilist thought. From the outset Trump administration has made no bones that it sees trade deficit with China, European Union (EU) and Japan as inherently insidious from America's national interest perspective. What is more, Trump administration considers the surplus racked up by America's trading partners as the outcome of unfair practices that are based on bad faith. As a result, neo-mercantilist thinkers and policy makers are now at the helm of US Department of Trade, echoing the nationalist ideology espoused by their boss. Neo-mercantilist like Trump advisor Peter Navarro argues that US economy would be stronger if it imported less and exported more because imports subtract from gross domestic product (GDP) while exports adds to it. Policy makers like Navarro, helping to implement the vision of Donald Trump to make America Great Again, have almost harked back to the mercantilist era in their conviction about earning a surplus in foreign trade or at least to reduce the deficit in balance of payment to the lowest level possible.

The accusation about unfair practices of some of America's trading partners is not entirely baseless. For instance, Chinese government's subsidies to some industries   has distorted the cost and pricing of their goods making them more competitive in international trade. But this is an accusation that can be made against America and the EU as well because of subsidies paid to their agricultural sector. Though this has been a sticking point in the multilateral trade negotiation under WTO, known as the Doha round, not much progress has been made due to reluctance of developed countries led by America. So, on this issue, America cannot take a `holier than thou' attitude towards China or to EU for that matter.

Where the neo-mercantilist thought and policy of Trump administration goes off the track and capitalises on rhetoric is on the fundamental question of productivity. It is productivity gains in agriculture, manufacturing and services sector that determines the competitiveness of an economy in global trade. With skilled labour and state-of-the-art technology, the products of a sector in an economy go on increasing in number and decreasing their cost of production. Increase in quantity based on productivity growth implies that a country has surplus over and above the demand of its consumers and so can export the surplus products. Export, however, depends also on decreasing costs of production of the same product relative to that of countries where these are meant to be traded. Trump administration does not seem to recognise that what has made American products uncompetitive in global trade is their costs of production that have been kept high because of higher wages. Assuming innovative technology has not been in short supply in a particular sector in America, its lack of competitiveness in global trade despite increase in productivity measured by number of goods can be explain by higher cost of production due to higher wages.

Under the above circumstances, limiting exports through higher tariff simply raises prices for American consumers (for consumer goods) and business (for inputs). The higher price level leads to less consumer spending with resultant less investment both of which contract gross domestic product (GDP). America has to realise the simple economic fact and try to adjust to the reality that has emerged over the years.

The distortion in cost of production and pricing of goods arising out of subsidies paid by some national governments has to be addressed in the interest of promoting free trade. This is the main task that has been assigned to the WTO. Payment of subsidy is a problem which has been cost by long-standing policies pursued by both America and its trading partners. There is, therefore, no room here for mutual recriminations between two member countries or blocs in global trade. WTO is the best forum to thrash out this problem and reach an agreement that offers a win-win situation to all member countries. This cannot be resolved through bi-lateral trade negotiations on which Trump Administration is pinning all its present efforts. Only through multi-lateral negotiation can this economic imbroglio be mustered and overcome. There is no better forum than WTO for this.


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