So I have been following Donald Trump a little and honestly, I liked the way he kicked back everyone who made fun of him as a clown, joker etc. Today, those same people in the media are just frightened of his rise and have toned down their commentary on him – and this was clearly fun and exciting to watch. Almost everyone who joked about him, not in the distant past, are now clearly shocked in the way he has gathered momentum.
And initially, I liked how Donald Trump was able to identify key issues that have affected the growth of the middle class in the US negatively – particularly, the trade deals with different countries. For example, no one can argue that the Chinese currency wasn’t a factor that affected the US manufacturing industry over the past decade (though I have a slightly different take and don’t blame China completely for every manufacturing job lost in the US – more importantly, I believe it was a direct consequence of the global free trade campaign that was kick-started by the US and other western powers to find and open new markets across the globe – a consequence which has been negative for many, but has been very positive for many many more people across the globe – including many in the US middle class).
But there is no question that trade over the past decade with a country like China, which pegged/manipulated and today manages the currency through heavy government intervention, has severely distorted the flow of capital across the globe. It has also resulted in sudden seismic changes for which the US middle class and frankly, many middle and lower-income groups across the world were not ready. All this created severe stress in the financial growth of the middle class in the US and many other western countries.
But all this said, is Donald Trump’s plan to charge a tariff on all products imported from China or for that matter from Mexico – a country which by the way has a cost advantage to manufacture products there purely from a standard of living standpoint (and probably less regulations) – the right way to go?
Mr. Trump says that he would charge 35% import tariff on all products manufactured in Mexico and shipped into the United States. As wonderful that this might seem, the simple fact is that the World Trade Organization, for which both the US and Mexico are party to, will simply rule this tariff as protectionist and probably as against the accepted rules – thereby opening the window for Mexico and other countries that trade with the US to slap countervailing duties and tariffs on all products shipped from the US – and for that matter, WTO, as far as I know, allows a broad range of options to impose countervailing duties and other protectionist measures that can seriously cripple American industries trying to capture a share of the market in these economically important nations.
It might be true that in any protectionist or trade war, China, Mexico and other such countries might stand to lose more than the US – but I don’t think we are on a war as to who would lose more, but instead on a co-operation as to how much would each make more. Mr. Trump’s policies are like taking the clock back to the past – when all seemed well and good. But that was also a time when China was still a very poor country, India was not open for business at all and the Euro currency did not exist. And so much more has since happened in the last few decades. Who would have expected that American companies can sell millions of phones, clothes, cars, heavy equipment, technology etc. to a country like India, or a country like China? Who would have expected the capitalist American middle class to more than double their investments within half a decade by investing in the communist China? Who would have expected that American shoes and German cars will be exported to Africans when all that was expected at some point in time in the past was an import of an African disease?
And who would now expect to reverse all this progress by starting a trade war through protectionist measures such as import tariffs? Not me and not the people who understand the basics of free market economics.
Obviously, there are heavy distortions in the world economy today – the capital controls and currency manipulation in China is a case in point (or) the delay in opening up of some sectors in India is a another example (or) the presence of a cartel that tries to control and manipulate the prices of oil globally..and I can go on and on. But how we address these issues is as important as these issues itself.
When Adam Smith, the great free-market Scot, repeatedly advised the British government in the 18th century that trade with the East Indies (India) would be much preferable and would in fact create more wealth to Britain than the colonization of the East Indies, the British didn’t seem to listen. Ultimately, the British did create a lot of wealth by expanding their colonization and mercantilist policies, but that came at what cost is a question that should be in everyone’s minds – especially when the same (and probably more) could have been achieved through just using the principles of free market theory and trading with all these “colonies”.
Likewise, though Mr. Trump identifies the issues in hand correctly, his solutions make one ask – “at what cost?”