Atanu Biswas, Professor of statistics, Indian Statistical Institute, Kolkata
Next year will mark the 250th anniversary of Adam Smith’s The Wealth of Nations (1776), where “the father of modern economics” argued in favour of giving everyone the freedom to produce and exchange goods as they pleased to foster greater prosperity. However, at present, US President Donald Trump is in a fierce battle with the theory of “free trade”.
The Historical Precedent of Smoot-Hawley
“Tariff” is “the most beautiful word in the dictionary”, Trump believes. He frequently refers to the late 19th century, when tariffs accounted for over half of US federal revenues under the pre-income tax regime. And by imposing unusually high tariffs during his second term, Trump sparked a global trade war. On April 2, he declared what he referred to as a “reciprocal tariff” approach. Trump termed it “Liberation Day”. Tariffs might have been modified a bit from that, but the spirit remains the same.
It was frequently likened to the Smoot-Hawley Act, a protectionist trade law that increased import levies to safeguard American farmers and businesses. It was signed into law by President Herbert Hoover in 1930. Many economists have criticised Smoot-Hawley for making the Great Depression worse. Before President Franklin Roosevelt lowered tariff levels and encouraged trade liberalisation and collaboration with foreign governments in 1934, America’s overall global trade fell by about two-thirds in four years. However, given that trade is now far more critical to the global economy than it was a century ago, many analysts perceive that the effect of Trump’s tariffs could be even worse than Smoot-Hawley.
Economists’ Warnings: Inflation, Uncertainty, and Job Losses
“Tariffs don’t protect, they backfire,” former US president Ronald Reagan—also a Republican—said in 1987. However, Trump may not have liked his predecessor’s warning. During his first term, Trump slapped tariffs that had not been seen since the 1930s. It, however, was unsuccessful in reviving jobs in the US, and he persisted in disregarding fundamental economic principles.
Tariffs, according to many economists, are ineffective for remedying a trade deficit caused by borrowing and spending patterns. They would almost probably lead to inflation, according to 2001 Nobel Prize-winning economist Joseph Stiglitz; and the 2008 economics Nobel laureate Paul Krugman claimed that “the secret sauce of the Trump tariffs is that they are extremely uncertain”. “If you’re a business trying to make plans, would you want to invest under those conditions?” Krugman said. Tens of millions of American jobs depending on US imports and exports support could be in jeopardy, and the tariffs might make everything in the country far pricier. In fact, on August 1, a stunning US government report showed that job growth cooled sharply over the last three months, which may very well be an effect of these tariffs. Additionally, Trump has considerably damaged confidence in America’s political and economic reliability by imposing tariffs on allies. It caused massive global turmoil and American resistance too.
However, to be fair to Trump, the US has gradually retreated from its post-World War II stance of advocating for free trade and reduced tariffs on a global scale, mostly in reaction to the loss of American jobs, which is frequently associated with unfettered trade and a more aggressive China. For example, when the US had gone from surplus to deficit due to the Great Society policies of the 1960s and the costs of the Vietnam War, President Richard Nixon announced the Nixon Shock by imposing a 10% import tax in 1971 as part of an attempt to rebalance the economy. But for years, the US economy suffered from stagflation—a combination of high inflation and slow growth.
Thirty years later, in March 2002, President George W Bush levied tariffs on a significant quantity of imports of steel. It backfired because retaliatory tariffs were threatened by the US’s economic partners, especially the European Union. According to Andrew Card Jr, Bush’s chief of staff during 2001-2006, “the results were not what we anticipated in terms of its impact on the economy or jobs”. Well, Bush had to lift the tariffs in December 2003, even though he had originally intended to let them stay for three years.
Why does Trump love imposing tariffs, then? Well, Trump’s treasury secretary Scott Bessent has previously hinted that part of his negotiating strategy involves threatening high tariffs. Bessent stated that it’s escalated to de-escalate. For example, Trump threatened to impose taxes on all Mexican imports in 2019 and shut down the border entirely unless it stopped illegal immigration. Trump even thinks tariffs can prevent wars.
But there might be something deeper ingrained in Trump’s philosophy. As Angela Merkel’s recent memoir, Freedom, describes, Trump believes that all countries are rivals and that the success of one means the failure of another. Trump put into practice the zero-sum negotiating strategies he developed in the New York real estate market. However, in an NYT piece in 2017 titled “Zero-Sum Game? Trump’s Mistaken Views on Trade”, William C Freund, a former chief economist for the New York Stock Exchange, perceived that such a viewpoint made Trump a job killer rather than a job creator. In fact, the trade war induced by Trump 2.0 may very likely have been motivated by a similar zero-sum attitude.
What’s the future of Trump’s tariffs? Will Trump be able to strengthen his support among his voters due to such protectionism? What’s there for the rest of the world? Will several new trade chains emerge, all excluding the US? Isn’t the nation on its way to being stripped of the global leadership, which was hard-earned by decades of efforts by its leaders in the post-WWII period? Will Trump eventually be compelled to comprehend Smith’s economics theory, as well as the fact that the world is a reflection of some more complex game—a non-zero-sum one—that might result in even a win-win situation? Will that be too late for the US?