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Donald J. Trump and the return of strategic trade policy

Public statements made by the leaders of Canada, Mexico, the UK, France, Germany, and other EU countries, to protest against Donald Trump’s decision imposing tariffs on aluminium and steel imported to the United States from these countries were predictable. As are the retaliatory measures envisaged by these countries. But this has not prevented the Trump administration from carrying forward its agenda.

Those claiming that the Trump administration’s display of economic protectionism — or for that sake, nationalism — is an unacceptable attack on the foundations of the global liberal world order, multilateralism and a shared values may have their reasons for saying that. It can be very well established indeed that when markets are perfectly competitive, and that there are no information asymetries and no other market failures such as rigidities in moving capital, goods or labour from one country to another, or from one region/sector to another within a country, that the benefits of free trade prevail over competing systems.

Yet, as has been illustrated by many scholars, and as has been proved by the experiences of the United Kingdom and the United States in the XIXth century and by Japan and Korea in the XXth century, — not to mention China’s selective ‘open door’ policy — most of the economic development around the world has taken place behind high protective tariffs. Indeed, the case of protectionism to encourage manufacturing industries has been advocated brilliantly by American founding father, and first Treasury Secretary, Alexander Hamilton, in his Report on Manufactures submitted to the US Congress in 1791. The United States has actually geared toward free trade only after World War II, when the size of the US economy reached an all-time high in relative terms, representing as much as half of the global GDP.

The “open markets” policy advocated by US leaders in the immediate after-war period and that was materialised through the Havana Charter signed in 1948 — establishing the GATT — was a strategic policy that was adopted as much for economic reasons — to allow for an absorption of US domestic production surpluses accumulated during WW II — , as it was for national security reasons. The threat of communism and the containment of the Soviet Union played indeed a very large role in the decision to open US markets to foreign goods, and to subsidise, directly and indirectly, the reconstruction of Western Europe, Japan, the Republic Korea — after the Korean war — and other nations around the globe, in order to avoid the spread of communism. This is all the more true that the United States was at that time, and is still to a large extent, a relatively closed and inward-looking economy — when measured by the ratio of trade to GDP — , compared to other large economies.

In this sense, the decision of President Nixon to abandon the fixed foreign exchange system that prevailed after WWII between the major western economies was a first sign that the United States, facing its own macro and geopolitical problems, was no longer willing and able to subsidise the economies of its European and Japanese allies. This was further illustrated in the 1980s with the return of trade protectionism, and the trade wars waged by the Reagan administration against Germany and Japan. This was a logical consequence of the end of economic catch-up for these economies, and of the rise of Japanese and German firms to become formidable rivals and competitors of American automotive and electronics producers.

In a way, the renewed focus on multilateralism in the 1990s, after the aggressive posture of the Reagan era, was not an accident. It was made possible thanks to the goldilocks economy that followed the implosion of the Soviet Union. This major, and unforeseen geopolitical development, enabled the reduction of military spending in the United States, and prompted the conversion of military focused technologies to civilian purposes — the Internet being the most visible achievement of this transformation. The technological revolution of the 1990s and the role that Wall Street played in it, were direct consequences of the end of the Cold war. Once again, these developments were induced by the evolution that occured in the US national security doctrine. A fact that has been often overlooked and overshadowed.

But here again, the Clinton Administration strongly believed that Russia and China — eventhough the latter remained a fundamentally centralised economy, led by a leninist-style Party — should join the global multilateral order and be allowed to rip the benefits of free trade and of free movement of capital across the world. It was also motivated by the same doctrine that extended the benefits of free trade and access to US markets to Europe and Japan after World War II. It was basically a way to prevent the development of anti-American forces and elites within these countries, by anchoring them solidly and durably to an American-led, Wall Street/Silicon Valley dominated, world order.

China has taken advantage of this ‘benign neglect policy’ to develop full steam its production apparatus, and to increase exponentially its exports, especially following its adhesion to WTO in 2001, — which was made possible only after the Clinton Administration granted it a Permanent Normal Trade Relations (PNTR) that was ratified by the US Congress in 2000. However, the situation is now radically different, as Chinese state-owned and state-sponsored companies such as Huawei, ZTE and the likes of Baidu, Tencent and Ali Baba, favoured by state subsidies and restricted access to their domestic market, have emerged as formidable competitors to US companies in high tech areas deemed out of reach from foreign competition.

If China is the problem, then why imposing tariffs on basic goods from Western Europe, Canada and Mexico, on the ground of national security? Here is where matters get more complicated. It is impossible to understand that, if one does not consider the profound implications of the ongoing global revolution in the energy and transportation sectors. Indeed, the coming of age of AI-augmented manufacturing and the massification of the electric car industry, are perhaps the two most significant technological and economic developments of the XXIst century.

In this perspective, imposing import quotas on steel and aluminium — or tariffs for countries that did not agree with these quotas — is just one way of signalling the upcoming battle for the control of global supply chains, and of research and manufacturing capabilities that will shape these critical industries. This is directly linked to the development of the electric car industry in Europe, especially in Germany, whose automotive companies have invested billions of dollars to consolidate a strategic competitive advantage in the high end of the market. With China filling the ground in the low end.

All in all, this signals the return of strategic trade theory. Indeed, technology-intensive industries are monopolistic in essence. The mantra of free trade and its subsequent “win win” benefits do not apply to these industries which are characterised by scale economies, intense learning-by-doing and increased returns. These industries, as convincingly argued by Joseph Stieglitz and Bruce Greenwald in their latest book — The new learning society, are also the most capable of stimulating productivity in the rest of the economy, as a result of R&D spillovers effect and of forward and backward, as well as lateral, linkages. In this respect, despite the initial success of Tesla, the future of the electric car will depend on massification and substantial investments across the industry, and in the related infrastructure and supporting services, to make electric cars truly available to the masses. In this regard, US automotive majors — the likes of GM, Ford and Chrysler — are still laggards in this global race.

Hence, the policies of the Trump administration make sense from this point of view. What they don’t get right, unfortunately, is that the US economy is now deeply intertwined and connected with its Canadian and Mexican neighbours. Therefore, the success or failure of the United States in the upcoming technological race — against competitors in China or in Europe — relies on its capacity to integrate even further — not less — Canada and Mexico to its own supply chains and research networks. Whether he likes it or not, the success of the economic nationalism doctrine of Donald J. Trump will depend on his ability to accommodate the interests of his close neighbours and fellow NAFTA member states.

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