Economic History Lesson: Trump's Protectionism Will Not Pay
The U.S. trade deficits that have prompted the Trump administration to raise tariffs have a result of the universal use of dollars and are unrelated to 'unjust' trading practices.
BUENOS AIRES — Amid debates in England in the early 19th century on the wisdom of tariffs on corn imports, legendary economist David Ricardo argued that the measure would only benefit landowners — and harm all consumers.
With eminent logic, Ricardo argued that it is best that every country specializes in certain fields of production, which would allow them all to trade with each other, selling products in which they had a relative advantage and buying those in which they had a relative disadvantage. This specialization at the level of production necessarily leads to specialization at the level of nations, so that all countries will show a positive balance with some countries and negative with others.
The aggregate balance does not depend on this specialization, as it reflects the difference between a country's total expenditures and revenues, and must include the financial component (I cannot spend more than I earn unless someone finances the difference). History shows that countries open to trade have always achieved better growth. The Republic of Venice of the Renaissance era and the late Middle Ages Hanseatic League in northern Europe are specific examples of how exchanges have fueled economic growth of nations through history.
It might be useful to review this concept today when the heads of some of the world's most powerful states have challenged many of the limits of diplomacy and raised the threat of a trade war. The focus today is on the bilateral relationship between the United States and most of the countries with which it trades, and its recent decision to impose tariffs on imported steel and aluminum. This measure is the culmination of a series of threats against several countries enjoying a positive trade balance with the United States.
History has shown that this remark is simply wrong.
The United States has persistently had a negative trade balance with most countries for more than half a century now. This has prompted President Donald J. Trump to argue that trade is unfair and that most countries are abusing the United States' good will. As he recently declared via Twitter: "trade wars are good and easy to win." History has shown that this remark is simply wrong.
In the trade war unleashed in 1934, U.S. imports fell dramatically in the wake of tariff applications, but not, to the country's surprise, as much as an even sharper fall in exports. Clearly accumulated trade deficits have generated tensions throughout history. When the Bretton Woods agreements were signed, the economist John Maynard Keynes put special emphasis on reducing such tensions by creating an international currency, the Bancor, though its failure to materialize led instead to the generalized use of the U.S. dollar in international transactions. That led to foreigners holding on to their dollar reserves, which could only be obtained in exchange for goods and services. Inevitably that accumulation was reflected as part of the emitting country's trade deficits.
Transactional demand for dollars grows constantly because the value of international trade is also rising, and these dollars are acquired in exchange for goods and services. Contrary to what President Trump claims, the United States benefits from these deficits instead of losing out. It does not have deficits for the actions of other countries or for not being competitive, but for being the emitting country of the currency used most widely in international trade.
Trump has argued that slapping tariffs on aluminum and steel is in line with national security objectives. Regardless of whether or not this is valid, such blatantly protectionist measures may trigger trade wars of differing magnitude, which will, instead of protecting certain sectors, end up impoverishing the nations involved. Trade wars happen when countries compete to limit, through tariffs and other instruments, international trade. Europe has already expressed its intention to respond to these measures by imposing its own importation tariffs on an increasing number of products from the United States. It is commonly argued that such measures protect industries and by extension the economy, from outside competition. In fact, the benefits given to these sectors are ultimately paid for by other sectors in the country, which must pay more for the same products. The effective global protection given to the economy is, by definition, equivalent to zero.
The United States should not lose sight of the fact that for the size of its economy, its measures will have a significant effect on the entire world's economy. Changes in the structure of the world economy could thus lead other countries to trade among themselves, and leave the U.S. isolated.