"The free trade era ended on January 26th, 2017. Survivors of the "great trade war" would call it Judgement Day. They lived only to face a new nightmare: mass joblessness, the widespread destruction of wealth and rising poverty."
If economists do one day possess an Arnold Schwarzenegger-style Terminator, capable of travelling back in time to alter the future, Australia Day 2017 is shaping up as a pretty good day to pick. The economists' Terminator would have to sneak on board Air Force One to stop White House press secretary Sean Spicer from briefing journalists on a proposed 20 per cent tax on imports from countries, including Mexico, to fund that wall.
Or perhaps – we can't know yet – the Terminator might choose a date – still in the future – on which Donald Trump signs, as promised, an executive order imposing a 45 per cent tariff on Chinese imports. To believe the most pessimistic of commentators, the first salvos have already been fired in a global trade war that will engulf economies, overturn a half century of liberal world economic order and bring to an end the longest period of prosperity in human history.
Is this too alarmist? Perhaps. No tariffs have yet been imposed. Trump has rejected the Trans Pacific Partnership deal, denying the US and Australia some minor benefits. But it's another step altogether to impose new tariffs. It may yet prove that Mr Spicer, by airing nascent plans, has actually sown the seeds for it not to happen. Many large and politically well-connected American corporations, like Boeing and Apple, that rely heavily on imported goods to make their products will do doubt be beating a path to Capitol Hill.
Consumers, too, confronted for the first time with the reality of paying 20 per cent more for petrol, margaritas and Coronas, may finally realise what all this anti-free trade rhetoric really amounts to. It is poorer people, after all, who suffer the most when everyday consumer prices rise, because they make up a more sizeable chunk of their income.
A retreat to protectionism would indeed mark a stark reversal of the trend of the past half-century ,which has, since the signing of the General Agreement on Tariffs and Trade in 1947, been marked by countries cutting tariffs and other trade barriers. Average tariffs have fallen to about 5 per cent, down about 22 per cent in the immediate post-World War II era.
Trump's 20 per cent Mexican tariff would transport the world back 70 years. A 45 per cent China tariff would take us back almost a century to the 1930 Smoot-Hawley Tariff Act, which imposed tariffs in excess of 50 per cent. This protectionist act – named after two Republican senators and signed by a Republican president, Herbert Hoover – caused a slump in US exports as other countries retaliated and is widely accepted to have prolonged the Great Depression.
Surely Trump will not doom America to repeat these mistakes of the past? And yet, many respected economic commentators, most notably Barry Eichengreen, the world's foremost expert on the Great Depression, do expect Donald Trump to do do exactly that and impose tariffs. Why? Because he can.
"I think Trump is anxious to do something visible in terms of policy, especially toward China, at the outset of his administration," Eichengreen told a Reuters forum this month. "Labelling China a currency manipulator, followed by imposing some kind of trade sanction, is the one thing a new president can do unilaterally."
Various US laws grant the President the unilateral power to impose tariffs, including the hundred-year-old 1917 Trading with the Enemy Act. What would happen then? Well, retaliation would be swift. As a member of the World Trade Organisation (the great-great-grandson of GATT), any move by the US to impose a discriminatory tariff would trigger rights for other countries to retaliate. It'd be 1930 all over again. If other countries slap tariffs on American goods, this would hurt US exports and tend to increase the US trade deficit, the very thing Trump seeks to shrink.
Of course, imports would also likely shrink, over time, as American producers of previously imported goods reopened. Americans would also pay more for these products. And it's not clear many axed jobs would return. Likely these firms would reopen with new technologies that require fewer workers anyway. So consumers would suffer, with no guarantee of regaining their lost jobs. Growth would stall, in America and across the world.
In such a world, demand for Australian commodity exports would be lower. Incomes and wages growth here would be even more sluggish, if not negative. Interest rates would remain low. Much would turn on whether the many US firms with outposts here decided to lay off staff. Many commentators worried about Donald Trump being handed the codes to America's nuclear arsenal.
But the risk of a nuclear attack has decreased ever since weapon stockpiles reached such levels that any antagonist knows initiating an attack on an enemy would only ensure their own complete annihilation through retaliation. Known as the doctrine of "mutually assured destruction", or MAD, countries have lived in relative peace, despite the destructive power in their hands. The likelihood of a global trade war now looms as a more clear and present threat.
Of course, the human costs of a trade or nuclear war can not be sensibly compared. But the wounds inflicted by a global retreat to protectionism would be real, and scarring.
While some special interests may be protected, global consumers – Americans foremost among them – would pay more to live, while also missing out on the opportunity to be employed by genuinely productive firms, specialised in what their country is relatively best at producing, and thus with long-term prospects and the ability to pay higher wages. It would be one of the biggest deliberate campaigns to destroy wealth in modern history. We must hope President Trump keeps his finger off the trade war trigger. Only time will tell how MAD this president really is.
Jessica Irvine is a Fairfax Media columnist.
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