Biff-Bang

Donald Trump​ likes to tell us that ‘tariff’ is ‘the most beautiful word in the dictionary’. He does not remind us that the word comes from the Arabic ta’rif, or that such duties were first applied by medieval sheikhs and sultans in some of the places he has designated as ‘shithole countries’. They were not really things of beauty either, being modest tolls to raise a little revenue, not intended to keep out foreign stuff, and were seldom charged at more than 5 per cent. It was the same in ancient Greece and Rome: customs duties were charged at ports of entry at rates of between 1 and 5 per cent. In Rome, the portoria on luxury imports – silk, pearls, incense, pepper – could go much higher, up to 12 or even 25 per cent, but these were sumptuary taxes, to appease killjoys such as Seneca and Pliny. They too were not protective, being levied on goods that Rome could not produce itself.

Trump once scribbled a note on the way back from a frustrating G20 conference: ‘TRADE is BAD.’ Classical thinkers would have tended to agree, if not on quite the same grounds. Aristotle thought that the life of tradesmen and mechanics was ‘ignoble and inimical to virtue’. He rather approved of the way that Thebes disqualified business types from public office until they had been retired for ten years. In The Laws, Plato deplores people living near harbours: ‘Although there is sweetness in proximity for the uses of daily life; for by filling the markets of the city with foreign merchandise and retail trading, and by breeding in men’s souls knavish and tricky ways, it renders the city faithless and loveless.’ Self-sufficiency, autarkeia, was always preferable, trade at best a necessary evil. Only Pericles, according to Thucydides, had positive things to say about an open commercial society:

The greatness of our city brings it about that all the good things from all over the world flow in to us, so that to us it seems just as natural to enjoy foreign goods as our own local products … Our city is open to the world, and we have no periodical deportations in order to prevent people observing or finding out secrets which might be of military advantage to the enemy.

It was also Pericles, however, who brought in a law forbidding foreign-born Athenians from claiming full citizenship, which would certainly have appealed to Trump (though his wife would have fallen foul of the law, as indeed did the second wife of Pericles).

We do not often find in the ancient world the fierce determination actually to keep out foreign imports, and foreigners too, in the sort of language the president uses, which Ben Chu quotes at the start of his sharp analysis of modern tariff mania: ‘There never has been a time in the history of the United States when tariff protection was more essential to the welfare of the American people than at present.’ Such a plonking plank of policy finds little or no support in economic theory. More than a thousand economists wrote to the White House imploring the president to think again. Undaunted, he persisted with tariffs across the board, twinning them with the repatriation of more than a million Mexicans (half of whom were US citizens). The president that Chu is quoting was of course Herbert Hoover in 1932. Very little that Trump has actually done is without parallel in the Hoover years, and neither is the reaction from mainstream economic theory. A thousand economists delivered exactly the same message to Trump in 2018, making just as little impact as their predecessors. All that is different today is the saucy, teasing rhetoric of the incumbent, of which the buttoned-up Herbert would have been incapable.

This is an unnerving parallel, and not the least unnerving aspect of the rise of the tendencies – isolationist, nationalist, populist or a combination of all three – which have so abruptly turned ‘globalist’ into a term of abuse. Chu, a BBC journalist of Chinese descent brought up in the North of England, is an acute guide, both to the historical resonances and the present economic realities, which leave even the most cocksure of us breathless and not a little baffled. We might start at the very least by looking further back beyond the 1930s, to try to trace the peculiar origins of protectionism as a weapon of choice in the armoury of modern governments. Trade history is too often a sideline reserved for economic historians, yet any effective study of the past four hundred years ought to move it to centre stage, as a prime generator of war and peace, stability and chaos, prosperity and dearth. As Clausewitz might have said, shooting wars are trade wars carried on by other means. Napoleon’s invasion of Russia, for instance, came after the tsar quit the Continental Blockade.

Through the Middle Ages, there seems to have been a presumption that unimpeded, if not untaxed, trade was a good thing. The door needed to be kicked open now and then, as, for example, by Clause 41 of the Great Charter of 1215: ‘All merchants may enter or leave England unharmed and without fear, and may stay or travel within it, by land or water, for purposes of trade, free from all illegal exactions, in accordance with ancient and lawful customs.’ There were toll points on bridges, mountain passes and harbours, but the goods got through, often facilitated by local colonies of foreign traders, such as the German merchants on the Rialto.

It is only with improved trading links and the appearance of ambitious and energetic rulers that the idea of blocking imports or subsidising exports comes into play. The period that historians have designated as early modern Europe has been associated with several things: the Reformation, and the rise of capitalism and of colonialism, to name just a few. But what it is certainly soaked in is the rise of protectionism, as both an economic tool and a demonstration of national virility. Henry VIII’s declaration in his 1533 Statute in Restraint of Appeals that ‘this realm of England is an empire’ has been a rallying cry for nationalists ever since. The sense of a separate national identity and of an increasingly manifest destiny becomes unmistakable.

Sceptics such as the historian William Bouwsma have argued that even the roi soleil did not always get his own way. Monarchs who wanted to throw their weight about remained as short of cash as ever. Even under Jean-Baptiste Colbert, the greatest of mercantilists (as proponents of the new orthodoxy later came to be called), the government’s deficit went on rising.

Mercantilism usually means cronyism. As soon as a government resorts to protection, it is besieged and then manipulated by entrepreneurs angling for contracts and subsidies. That certainly happened in France, where Colbert’s friends and relations collected most of the taxes and then dished out the proceeds to their own businesses. Samuel Daliès de la Tour, for example, was not only chief tax collector for the Dauphiné but also a big supplier of timber and iron to the rapidly growing navy, with a nice sideline in textiles and sugar and also shares in the great colonial companies – quite a match for the Rockefellers and Musks of the modern era. Rather than ‘l’État, c’est moi,’ Daniel Dessert writes in his scorching demolition of the Colbert myth, Colbert ou le mythe de l’absolutisme (2019), it was a case of ‘l’État, c’est eux!’ The same nexus of omnivorous oligarchs was to be seen in America’s Gilded Age, and now in the mob of tech bros crowding into the photo at Trump’s second inauguration. The itch to have it all had come to stay, along with a willingness to deploy every tool that came to hand: tariffs, blockades, monopolies.

In England, the impulse for national control seemed to grow regardless of party or regime, king or Commonwealth, Protestant or crypto-Catholic, Whig or Tory. Edward I slapped taxes on the wool trade, which helped to pay for the ring of magnificent castles with which he encircled Wales, a forerunner of Trump’s ‘beautiful wall’ along the Mexican border. Good Queen Bess promoted her trade and navigation acts to develop British control of the seas and of colonial trade. So did Cromwell and the Stuarts in an obsessive sequence of new laws to make sure that English trade was carried only on English bottoms – 1650, 1651, 1663, 1673 and on to 1696. Import bans whistled through Parliaments, most repellently the Irish Cattle Acts of 1663 and 1666, resisted only in the House of Lords by absentee Irish landlords who had their own cattle to flog. The welfare of the Irish people was no part of the equation. Nor did the Glorious Revolution stem the tide. The ban on French goods of 1693-96 lasted nearly a century, until the Eden Act of 1786. Import duties of between 10 and 20 per cent were devised to pay for the war with France and began to create the tariff wall that was to endure into the 19th century. These duties were tidied up by Walpole and upped in 1747 and 1759 to make a baseline of 25 per cent, plus an additional levy of anything between 5 and 20 per cent on most goods.

Thus, in the decade when Adam Smith, himself a customs officer, was gathering material for The Wealth of Nations (1776), the British state achieved an intensity of protectionism never seen before or since. This pervasive system deeply affected both the pride and the pockets of the American colonists, just as it impoverished the cattle breeders and linen drapers of Ireland and the weavers of Bengal, who had once enjoyed a 25 per cent share of global trade, but of whom a 19th-century proconsul, Lord William Bentinck, was to write: ‘The misery hardly finds a parallel in the history of commerce. The bones of the cotton weavers are bleaching the plains of India.’

The impact of these harsh tariffs on actual trade levels remains disputed. Sugar, tobacco, iron, coffee and rice continued to flood into Britain as fast as the colonies could produce them, despite the steepling duties. A lot of the pricier goods like silk and wine were ‘smuggled’ (that beguiling figure of the ‘smuggler’, the word imported from Dutch/Low German, first appears in 1661). But the legal imports of these irresistible luxuries boomed too. On the whole, as the economic historian Ralph Davis concludes, ‘the consumer paid what he was asked.’ In any case, the government would have been miffed if the revenue had been seriously damaged, for these were still primarily revenue-raising taxes to pay for foreign wars.

The effect on political sensitivity in the colonies and in Britain’s other island was another matter. You could well argue that justifiable resentment at the selfishness of the mother country was the real and lasting legacy of protectionism. Forget the ‘special relationship’. The underlying emotional history of British relations with the Americans, as with the Indians and the Irish, has been one long Boston Tea Party.

There is no mention of it in the musical about him, but if American protectionism is the legacy of any one man, it is Alexander Hamilton. As early as 1782, writing in the Continentalist, he declared that ‘to preserve the balance of trade in favour of a nation ought to be a leading aim of its policy.’ Imposts on trade were ‘one of the most eligible species of taxation’. Import duties could help late starters to catch up. ‘France was much later in commercial improvements, nor would her trade have been at this time in so prosperous a condition had it not been for the abilities and indefatigable endeavours of the great COLBERT.’ A decade later, in his Report on Manufactures to Congress, Hamilton reiterated George Washington’s instruction that ‘a free people ought to promote such manufactories as tend to render them independent of others for essential, particularly for military, supplies’; everything from gunpowder to uniforms must be made in America. And since other nations showered their companies with subsidies, America must do so too. But Hamilton went further in putting his vision into practice. He worked hand in glove with two of Richard Arkwright’s former apprentices, Samuel Slater and George Parkinson, to set up America’s first water-powered cotton mill. Both men had sworn on oath not to disclose the secrets of Arkwright’s water frame, and they were also breaking British laws against the export of new technology. President Jackson later dubbed Slater ‘the father of the American industrial revolution’. Back home in Derbyshire, he was ‘Slater the Traitor’. Thus Hamilton was not only the father of the strong presidency and the American banking system, for which he is already renowned, he was also the father both of US protectionism and of US industrial espionage – something worth remembering when Trump’s flunkeys profess to be horrified by China’s unscrupulous theft of American technology.

International trade was one of the few functions clearly reserved for the government under the US constitution. Import duties were especially appealing to the infant government, which had no other source of income. The first version of a federal income tax was not devised until the pressing emergency of the Civil War, and only made permanent under the Sixteenth Amendment of 1913, under the shadow of another dire emergency.

George Washington’s Farewell Address of 1796 laid down the guidelines for American exceptionalism:

Against the insidious wiles of foreign influence … the jealousy of a free people ought to be constantly awake, since history and experience prove that foreign influence is one of the most baneful foes of republican government … The great rule of conduct for us in regard to foreign nations is, in extending our commercial relations, to have with them as little political connection as possible … Our detached and distant situation invites and enables us to pursue a different course … Why forego the advantages of so peculiar a situation? … It is our true policy to steer clear of permanent alliances with any portion of the foreign world.

This memorable advice feeds into the instinctive protectionism that one finds in the speeches of Washington’s successors, Madison and Monroe; the same theme comes loud and strong from Andrew Jackson, and at the end of the 19th century from Trump’s special hero, President McKinley. From the start, tariffs were baked into what became known as the American System. The arguments seemed rather less convincing to Adam Smith, and to most economists then and now. After all, early US governments may have been short of revenue, but they did rule over an enormous domestic free-trade area, with endless natural resources and intoxicating possibilities of territorial expansion, not to mention an adventurous and industrious population.

Yet tariffs have never ceased to be a divisive issue in American politics, not least in the ongoing hostility between the manufacturers of the North, who insisted on tariffs, and the cotton and tobacco growers of the Southern states, who wanted to trade freely. The so-called Tariff of Abominations of 1828 nearly provoked South Carolina to break away from the union in the Nullification Crisis; the continuing friction was a contributory cause of the Civil War. The South had Gladstone’s sympathy, because they were free-traders and Lincoln was blockading the Confederate ports, through which came four-fifths of Britain’s cotton and a quarter of its food supplies. The blockade caused great distress in Gladstone’s beloved Lancashire. By comparison, slavery seemed to him, initially anyway, a less pressing issue, though he later confessed that this had been ‘a palpable error’. But the heat has never gone out of the tariff question.

Robert​ Lighthizer has been wrestling with US trade policy since Reagan’s day. In No Trade Is Free, he gives a passionate defence of the tariffs that he personally negotiated in Trump’s first term. For him, Trump can do no wrong, and with innocent pleasure he records whenever Trump returns the compliment: ‘Bob Lighthizer is great. I’ve heard it for years. I said: “If ever I do this, I want to get Lighthizer to represent us,” because he felt the way I did.’ And he does. According to Lighthizer, free trade is ‘a theory that has never worked anywhere’. Or, as the great protectionist Henry Clay of Kentucky put it more picturesquely in 1832, during the Nullification Crisis, ‘the call for free trade is as unavailing as the cry of a spoiled child, in its nurse’s arms, for the moon or the stars that glitter in the firmament of heaven. It never has existed; it never will exist.’

Lighthizer argues forcefully against the view that what President Trump had been trying to bring about was unprecedented: ‘This claim is upside down. The dangerous change actually took place in the early 1990s, when American policymakers effectively decided to let the rest of the world make our trade policy.’ This ‘crazy experiment’ was itself unprecedented. Its catastrophic results led to Trump’s election, and one of his major goals ‘was to return US trade policy to its realistic and pragmatic roots’. Historically, as we have seen, this is a justifiable claim. Lighthizer has every right to argue that ‘protecting American trade interests was one of the very reasons for our revolution. Further, the America First policies of President Trump really were the heirs of the “American System” policy that guided our nation for decades.’ And, Lighthizer adds, ‘that made it great.’ But did it? Post hoc, ergo propter hoc?

Lighthizer never really addresses the question of why he thinks tariffs are a uniquely effective remedy for the nation’s more vulnerable spots. He also fails to demonstrate the benefits of Trump’s first batch of tariffs or to spell out the extra costs they entailed for consumers and for the manufacturers who used the steel and the rare earths and all the other items that had suddenly shot up in price. The 2018 Trump tariffs failed to increase the number of domestic steelmaking jobs, and according to the non-partisan Tax Foundation, the knock-on effects reduced long-term US GDP, wages and employment by the equivalent of 166,000 full-time jobs. The steel tariffs imposed by Carter, Reagan and George W. Bush had been equally ineffective – and costly. Trump’s yo-yoing between threats and hints at deals in the past few months are no more likely to do anybody much good, except of course the US Treasury, which according to Chu’s report for BBC Verify in July is now hauling in $28 billion per month in import duties, triple the rate last year. It is slowly dawning on the American public that, at the end of these tedious tussles, they are likely to be paying around 15 per cent more for their imports (18.2 per cent is Chu’s latest average figure, up from a mere 2.4 per cent under Biden, and the highest level since 1934). Trump is already trying to soften the blow by hinting at some kind of cashback from the Treasury to US taxpayers – which would only make the whole exasperating carousel seem more pointless still.

Lighthizer’s engaging polemic (on the flyleaf, Donald Trump hails it as ‘a masterpiece’, but then he would, wouldn’t he?) suffers from a crippling absence of economic argument, as has been the case in so much tariffist propaganda down the years. Indeed, one or two zealots, such as Richard W. Thompson of Indiana, secretary to the US navy in the 1870s, went so far as to argue that the economics of David Hume and Adam Smith was a bogus science, a put-up job: ‘This new science … would not, in all probability, have acquired the designation of a science at all, if it had not been found that its free-trade principles were necessary to the commercial interests of England.’

Where American companies such as Microsoft and Apple achieve global supremacy, we are told, it is because of American knowhow and get-up-and-go. When American industries sink, it is because of unfair competition, predatory pricing, forced transfer or intellectual theft. China’s ambition to lead the world is sinister; America’s determination to retain the No. 1 spot is nothing of the kind. Now and again, Lighthizer does admit that the US may have missed a trick. For example, he moans about the VAT systems of other countries, which reward exports and penalise imports, but expresses a stifled regret that Congress failed to ratify a similar system for the US, the so-called ‘House Blueprint’. The idea has surfaced again in the Republican zealots’ pet project of the ‘FairTax Act’. This would abolish the federal income tax in favour of a national sales tax, exempting exports, and thus returning to the American System of the early 19th century.

A more pressing difficulty for the tariff-fanciers is that the US, like the rest of the world, enjoyed a great leap in prosperity during the years of unprecedentedly free trade between 1945 and 1993, as Lighthizer freely acknowledges. Successive rounds of GATT (General Agreement on Tariffs and Trade) negotiations resolved most of the thorniest difficulties, and millions around the world were lifted out of poverty.

The rot set in, as Lighthizer sees it, in the 1990s, when the World Trade Organisation acquired legal power to resolve trade disputes and usually ruled against the US, which prompted the Trump administration to scupper the WTO court by refusing to appoint fresh justices to its bench. ‘A crucial mistake,’ according to Lighthizer, had been to let China into the WTO and treat it as just another country like America’s free-market allies. The result was that millions of well-paid jobs in US manufacturing disappeared, as more and more work was outsourced and offshored. China flooded every market with cheap goods and the wages of American workers stagnated or sank. This supposed chain of cause and effect seems a little shaky. The US steel industry had been in the doldrums for years, and the rise of Far East manufacturers a long time coming over the horizon. Losing a few cases in the WTO could scarcely effect such a cataclysmic shift. More likely culprits are automation, an overvalued dollar and the reluctance of the federal government to bestir itself to look after the casualties. As Chu puts it, ‘the overall economic gains have been more than sufficient for the governments of those countries – whether America, France, Britain or Germany – to compensate those workers and communities’ who had lost out. There are a few encouraging exceptions: for example, the rebirth of Pittsburgh after the loss of its huge steel mills. But the trouble is that, by and large, there has been no New New Deal. In the UK, governments of both parties have been shamefully feeble in their efforts to revive derelict coal-mining areas or the mill towns of Lancashire or down-at-heel seaside resorts.

‘Trade wars are easy to win,’ Trump claims. Only if you don’t bother to count how much they’ve cost you. These mano a mano jousts in front of the cameras take little account of consequences in the real world. Trump’s tariffs on Chinese imports, for example, have lifted the import taxes hitting one educational toy manufacturer in Illinois from $2.3 million a year to more than $100 million, causing him to move production, not to the US but to Vietnam and India (Lighthizer is almost as fiercely down on Modi as he is on the Chinese, describing India as ‘the most protectionist country on earth’). Canadian manufacturers, who often trade both in Canada and in the US, face a double hit on their supply chains, from Trump’s duties on Canadian imports and Canada’s retaliatory duties on American goods. And so on and on.

What Ben Chu sets out so effectively in Exile Economics is the way complex global supply chains and swirling patterns of supply and demand make the biff-bang of tariff wars so damaging; bulls in China shops tread lightly by comparison. Take soy, the ‘magic bean’, which is now the principal component of everything from animal feed to biodiesel and is the most widely sown crop in the US. The result is that American soy fattens Chinese pigs, which fatten Chinese citizens, who make the world’s computers, clothes and TV sets. It’s crazy to start tariffing soy, as several major producers now do; the world can’t get enough of the stuff. Again, China may still be the world’s largest fossil-fuel polluter, but it also produces 85 per cent of the world’s solar panels and 66 per cent of the world’s wind turbines, thereby reducing their costs to levels where they are cheaper to run than fossil-fuel power plants.

Or by contrast, take steel, since the days of Hamilton the prime target for tariffs. There is now a huge world oversupply of steel – which is indeed largely China’s fault and now China’s problem – but it is also the case that Western countries with an ailing steel industry, such as the UK, have, over the years, accumulated enough scrap for recycling to be able to meet most of their future demand for steel. They have only to offer a little judicious support to the necessary electric arc furnaces. The problem is eminently soluble without resort to tariffs, like so many other problems, such as the fact that the majority of the world’s advanced chips are manufactured, not in China, but in Taiwan by the Taiwan Semiconductor Manufacturing Corporation.

China in fact spends more on importing chips than on its next biggest import, crude oil. These dear little things, Chu tells us, are the most globally traded products in human history, often crossing borders more than seventy times before completion, with parts drawn from Dutch, German, American and Japanese firms, and the profits derived from the final product going largely to American megafirms. Which has not stopped the Americans from panicking and under the Biden administration passing the CHIPS Act, to begin the hoped-for ‘reshoring’ of the manufacturing process. The first great effort in this direction is the building of a $65 billion chip factory in Phoenix. To make a go of it, the factory is importing a complete workforce of nimble-fingered Taiwanese. Morris Chang, father of the Taiwanese chip industry, has predicted nevertheless that such efforts by the US and others will ‘prove a wasteful and expensive exercise in futility’.

Of course, it would be equally bigoted to claim that tariffs never work. Little protected corners of the industrial scene may tick over nicely for years. Lighthizer has a particular soft spot for the American small-trucks tariff of 25 per cent, which manages to keep out all imports. It’s the small-trucks sector that supplies the bulk of the profits of US automobile companies. Many would not survive otherwise. And even free-trade enthusiasts may develop a sudden infatuation for tariffs. In 1933, during the Great Depression, John Maynard Keynes changed his mind (as he famously claimed he had every right to do) and conceded, as it turned out wrongly, that ‘a greater measure of national self-sufficiency and economic isolation between countries, than existed in 1914, may tend to serve the cause of peace rather than otherwise.’ Even Adam Smith was ready to concede that

humanity may in this case require … that the freedom of trade should be restored only by slow gradations, and with a good deal of reserve and circumspection. Were those high duties and prohibitions taken away all at once, cheaper foreign goods of the same kind might be poured so fast into the home market as to deprive all at once many thousands of our people of their ordinary employment and means of subsistence.

Smith was also ready to see some merit in the ‘infant-industries’ argument for protecting new experimental businesses: ‘A temporary monopoly of this kind may be vindicated upon the same principles upon which a like monopoly of a new machine is granted to an inventor, and that of a new book to its author.’

But the thesis that an economy can prosper only if it shelters behind an impassable tariff wall, and that these ingenious defences have no downside, is hard to maintain, especially if you look back at the dire history of the 1930s and then contrast it with the golden years after the war. It seems unlikely that tariffs will turn out to be the deciding factor of the late 2020s and early 2030s. It is the least convincing cliché of the age that ‘globalisation has passed its sell-by date.’ On the contrary, tariff mania seems like a frantic attempt to resurrect the past, not unlike those nostalgic monarchs who tried to keep the medieval tournament alive in the age of muskets and gunpowder.