Bruce Golding
Why don’t we learn history’s lessons?
US President Donald Trump has unleashed a tariff offensive against every country in the world. His argument is that the United States has been unfairly treated, luring away investments and jobs. He claims his strategies are designed to rebalance trading relationships and bring jobs back to the US. He is obviously oblivious to the lessons of history.
Tariff offences are one form of trade war. They have been used in the past with disastrous consequences, the most significant of which was the Fordney-McCumber Tariff measures of 1922, introduced by President Warren Harding, that raised the average tariff on American imports to 38 per cent. The major exporting countries to the US retaliated with significant tariff increases on American goods. This resulted in huge price increases to consumers across the world, loss of market confidence and stock market decline without any compensating benefit to the US economy. Many historians insist that it was this initiative that led to the Great Depression of the 1930s which left 15 million Americans out of work and many more close to starvation.
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The world seemed to have learned from this and other trade war experiences and this led to the General Agreement on Tariffs and Trade (GATT) in 1947 and, subsequently, the World Trade Organization (WTO) in 1995, which sought to establish rules for trade among countries that would foster economic growth, lower prices to consumers whose ability to spend underlies economic activity, and avoid a repeat of Fordney-McCumber. Since then, tariffs have been used as targeted sanctions in political disputes, as in the case of Iran and Russia.
Trump sees things differently. He argues that countries all over the world are taking unfair advantage of the huge American market with gigantic consumer demand by clever fiscal measures, unfair labour policies, and currency manipulation. A large number of American investors have established manufacturing and processing facilities abroad, feeding the US market with cheaper goods, to the delight of its consumers.
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Trump doesn’t understand why they did so. Manufacturers and producers are cost-sensitive. They will locate their plants where they are able to produce efficiently and at the lowest cost, whether it is in Mexico, China, Vietnam, Laos, Cambodia, or India. This has to do not only with labour costs but work culture. Observe a production line in China and compare it with a similar line in America.
The effect of Trump’s tariff offensive in a country that is so import-dependent (trade deficit of US$1.2 trillion) is that consumers will pay more and, consequently, buy less. Trump also does not understand the workings of the global supply chain in which the finished consumer product — whether a motor car, blender, screwdriver, or even a simple lead pencil — involves the production and trade efforts of manufacturers in several countries, taking advantage of the efficiency benefits at each point. Can US producers fill the breach? Not if the consumers are going to find their prices unaffordable. Many of these inputs will still have to be imported by the US. The result is likely to be higher prices, business closures, and job losses, leading to less consumer expenditure.
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Just like water finding its own level, producers opt for the best equation in terms of costs and profits, wherever in the world that is to be found. Trump fails to understand that the global market, like the genie, cannot be put back in the lamp. His moves will have some effect, but it is likely to be a realignment of trading relationships that is unlikely to benefit the US economy.
China, which is on the cusp of becoming the largest economy in the world, is not likely to cave in to Trump’s demands. A striking difference between the approaches of the two countries is that the US strategises, in terms of years. China thinks in terms of decades and is prepared to persevere for the long term. China is very likely to pursue, with attractive enticements, new trade arrangements with the European Union, Asia, Africa, and Latin America, leaving the US as a helpless observer. Trump’s gutting of its foreign aid programmes leaves it less leverage to pressure countries in these regions to stay away from China.
The mixed messages coming out of the Trump Administration have not been helpful to his strategy. Some spokespersons insist that these new tariffs are firm and are there to stay. Others state that they provide a basis for negotiations. If I were a US investor with my manufacturing plant in China or Vietnam considering whether I should relocate my plant to the US, why would I take that decision not knowing what the outcome of those negotiations will be and whether it would be advantageous for me to relocate?
Trump’s moves and the retaliatory responses of several other major countries have effectively left the WTO moribund. The global trade rules that countries like Jamaica had reluctantly signed up for have, in reality, been suspended.
Trump’s tariff strategy is inane. Jamaica cannot be accused of indulging in unfair labour practices, our labour regulations are far more stringent than those of the US, nor can our trade balance be a problem for the US since we import from them four times more than they import from us. Yet he has slapped a 10 per cent tariff on Jamaican exports to the US.
Ghana, on the other hand, enjoys a huge trade surplus with the US simply because it has natural resources that America need, but it doesn’t have the purchasing power to buy an equivalent amount of goods from America. Its exports, too, have been slapped with a 10 per cent tariff.
Trump refuses to acknowledge that America no longer holds a monopoly over technology and innovation that have dramatically changed the global production landscape. He refuses to accept the advances that have been made in places like China, Japan, India, and Indonesia. The US no longer owns that patent and his attempted disruption of the supply chain will not diminish the ability of these countries to produce quality products cost-effectively. Yes, the US market may now be less accessible, but some of their exports to the US were merely transiting to other countries. They are capable of finding a workaround which will reduce US re-exports.
Cracks have emerged among senior Republicans regarding the efficacy of Trump’s tariff offensive, no doubt over concern that voters are likely to revolt. Senator Ted Cruz, a sycophantic Trump supporter, was strident in his condemnation. Senator John Kennedy, though less strident, declared that this is now Trump’s economy and if his policies succeed he deserves the credit, but if they fail, he has to accept the blame. Even Elon Musk, through a social media post by his brother, inveighed against the tariff measures and declared that its chief architect, Peter Navarro, despite his Harvard PhD, had not ever built s**t.
Demonstrations are increasing across the US against Trump’s policies, including the drastic deportation measures, the evisceration of welfare programmes and their agencies, and the looming cost impact of his tariff measures. This dissatisfaction may well resonate in the midterm elections next year. The Democratic party has been in a state of flux since its defeat in the November elections. Trump may well turn out to be its biggest asset for a recovery.
— Bruce Golding served as Jamaica’s eighth Prime Minister from September 11, 2007 to October 23, 2011.
