President Donald Trump renewed fears of a global trade war after he vowed to slap steep tariffs on foreign aluminum and steel.
The tariffs haven’t even been formally proposed, yet other countries are already threatening countermeasures. The European Union, for example, promised to impose tariffs on iconic American products like Harley-Davidsons, Kentucky bourbon and blue jeans, while China, Australia and Canada all promised a response.
Brushing all that aside, the president tweeted that “trade wars are good.”
But what exactly is a trade war and what are its consequences?
As a historian of trade, I thought it would be worth recalling some illuminating examples, each of which led to disastrous results.
France and Italy go to ‘war’
Soon after Italy’s unification in 1871, the young nation turned to protectionism to foster its “infant” industries, whereupon it terminated its trade agreement with France in 1886.
Italy raised tariffs as high as 60 percent to protect its industries from French competition. The French government responded by refusing to negotiate and instead threatened the Italians with punitive tariffs if Italy did not lower its own.
Tariff retaliation followed tariff retaliation. In France, this resulted in the passage of the highly protectionist Méline Tariff of 1892, which famously signaled the death knell of the country’s flirtation with free trade.
Both nations felt the costs of the trade war, but the damage extended more widely. Franco-Italian trade fell drastically, followed by dislocations in countries where they got supplies.
Another unintended result was that it pushed Italy closer to Germany and Austria-Hungary in the years leading up to the First World War.
The GOP takes on the Canadians
Although the GOP has in recent times called itself the “party of free trade” – before Trump anyway – it wasn’t always thus. In the years following the U.S. Civil War, for example, when Republicans dominated the presidency, it was the proud party of protectionism and took efforts to solidify its economic nationalist platform.
The U.S. abrogated its reciprocity treaty with Canada in 1866, following which Canadian economic nationalists sought to pay their southern neighbor back “in their own coin” – that is, through tariff retaliation.
By 1879, Canadian Conservatives consolidated around their own national policy of protectionism. Some American companies – Singer Manufacturing, American Tobacco, Westinghouse and International Harvester – decided to move their production to Canada rather than pay the high import taxes. By the late 1880s, 65 U.S. manufacturing plants had relocated to Canada. In this case, far from halting outsourcing, protectionism caused it.
Trade tensions reached a breaking point in 1890. Republicans, in charge of the executive and the legislative branches, passed the highly protectionist McKinley Tariff. Agricultural exports to Canada fell by half from 1889 to 1892.
And when the Republicans passed the even more protectionist Dingley Tariff in 1897, Canada decided that the best response was a double dose of tariff retaliation and closer trade ties with the British empire rather than the United States.
It thereafter took nearly a century for free trade between the U.S. and Canada to develop.
Smoot-Hawley wars and the age of protectionism
Trade wars were by no means unique to the late 19th century. Far from it.
In a widely cited study from 1934, political economist Joseph M. Jones Jr. explored Europe’s retaliation. His study provided a warning about the trade wars that can arise when a single nation’s tariff policy “threatens with ruin” specialized industries in other countries, arousing “bitterness” throughout their populations.
To provide but one example from Jones’ study, the Italian public responded violently to the Smoot-Hawley Tariff. American-made cars were attacked and befouled on the streets of Italy. And in June 1930, Benito Mussolini vowed that “Italy will defend herself in her own way.” Tariff duties were increased on U.S. goods, and total U.S. exports to Italy plunged from US$211 million in 1928 to $58 million in 1932.
An indignant Italy added insult to injury by signing a commercial treaty with Soviet Russia in August 1930, followed by a nonaggression pact two years later.
More broadly, economist Douglas Irwin notes how the 1930 tariff “was very damaging from the standpoint of U.S. commerce” because it sparked tit-for-tat trade discrimination against the U.S. and “diverted existing trade away.”
Economist and New York Times columnist Paul Krugman has similarly reminded us that, although the Smoot-Hawley Tariff did not cause the Great Depression, the resulting international trade wars played a critical part “in preventing a recovery in trade when production recovered.”
This is an updated version of an article originally published on March 22, 2016.
A populist wave that began with Brexit in June reached the United States in stunning fashion on Tuesday night. In one of the biggest upsets in American political history, Donald Trump won a truly historic victory in the U.S. presidential election.
Then, at the beginning of October, the uproar over Trump’s lewd and offensive remarks on the “Access Hollywood” videotape, combined with the escalating number of women who accused Trump of sexual assault, seemed to finish off his campaign. Right up until Tuesday afternoon, therefore, a comfortable victory for Clinton seemed like a foregone conclusion.
But I was dead wrong. Trump won a sweeping victory in the presidential race. His night began with critical victories in Florida, North Carolina and Ohio, three states essential to his path to 270 electoral votes. As the night wore on, Clinton’s “blue wall” collapsed amid a red tide that swept across the country from the Atlantic coast to the Rocky Mountains. The blue states of Pennsylvania, Michigan, Wisconsin and Iowa fell to Trump like dominoes. The election returns made clear that Trump would carry over 300 electoral votes, more than enough to win the presidency.
It’s extremely early to draw conclusions about the 2016 election results, but here are five factors that at least partially explain what happened.
1. Silent Trump vote
There really was a silent Trump vote that the polls failed to pick up on. The nationwide polling average gave Clinton about a 3-point lead overall, and the state-by-state polls indicated that she would win at least 300 electoral votes.
But the polls were as wrong as the pundits. Problems with the polls’ methodologies will undoubtedly be identified in the days and weeks ahead.
It seems equally reasonable to conclude that many Trump voters kept their intentions to themselves and refused to cooperate with the pollsters.
The extraordinary role of FBI Director James Comey in the presidential campaign cannot be underestimated either. Two weeks ago Clinton seemed on the verge of winning a double-digit victory. But Comey’s Oct. 28 letter to Congress, which announced that the FBI was reopening its investigation into Clinton’s State Department emails, changed the momentum of the race. Clinton retook the polling lead at the end of last week, but the final polls masked the lasting damage that the Comey letter had done to her campaign.
Whatever the ultimate explanation for the polls’ failure to predict the election’s outcome, the future of the polling industry is in question after Tuesday. Trump’s astounding victory demonstrated that the polls simply cannot be trusted.
2. Celebrity beat organization
A longstanding assumption of political campaigns is that a first-rate “Get out the Vote” organization is indispensable. The conventional wisdom in 2016 thus held that Trump’s lack of a grassroots organization was a huge liability for his campaign.
But as it turned out, he didn’t need an organization. Trump has been in the public eye for over 30 years, which meant that he entered the race with nearly 100 percent name recognition. Trump’s longstanding status as a celebrity enabled him to garner relentless media attention from the moment he entered the race. One study found that by May 2016 Trump had received the equivalent of US$3 billion in free advertising from the media coverage his campaign commanded. Trump seemed to intuitively understand that the controversial things he said on the campaign trail captured the voters’ attention in a way that serious policy speeches never could.
Most important of all, he had highly motivated voters. Trump’s populist rhetoric and open contempt for civility and basic standards of decency enabled him to connect with the Republican base like no candidate since Ronald Reagan. Trump didn’t play by the normal rules of politics, and his voters loved him for it.
Trump’s victory would seem to herald a new era of celebrity politicians. He showed that a charismatic media-savvy outsider has significant advantages over traditional politicians and conventional political organizations in the internet age. In the future, we may see many more unconventional politicians in the Trump mold.
3. Populist revolt against immigration and trade
It will take days to sort through the data to figure out what issues resonated mostly deeply with Trump’s base.
But immigration and trade seem virtually certain to be at the top of the list. Trump bet his whole campaign on the idea that popular hostility to liberal immigration and free trade policies would propel him to the White House.
From the beginning to the end of his campaign, he returned time and again to those two cornerstone issues. In his announcement speech, he promised to build a wall on the Mexican border and deport 11 million unauthorized immigrants. He also pledged to tear up free trade agreements and bring back manufacturing jobs. From day one, he made xenophobic and nationalistic policies the centerpiece of his campaign.
Critics rightfully condemned his vicious attacks on Mexicans and Muslims, but Trump clearly understood that hostility toward immigration and globalization ran deep among a critical mass of American voters.
His decision to focus on immigration and trade paid off in spades on Election Day. It’s no coincidence that Trump did exceptionally well in the traditionally blue states of Wisconsin, Michigan and Pennsylvania, all of which have large populations of white working-class voters. Previous Republican nominees such as John McCain, who embraced generous immigration policies, and Mitt Romney, who advocated free trade, never managed to connect with blue-collar voters in the Great Lakes region.
But Trump’s anti-immigration and protectionist trade policies gave him a unique opening with white working-class voters, and he made the most of it.
4. Outsiders against insiders
Trump will be the first president without elective office experience since Dwight Eisenhower in the 1950s. Eisenhower, however, served as supreme allied commander in Europe during World War II and had unrivaled expertise in foreign affairs.
So how did Trump make his lack of government experience an asset in the campaign?
The answer lay in the intense and widespread public hostility to the political, media and business establishments that lead the country. Trust in institutions is at an all-time low and a majority of Americans believe the country is headed in the wrong direction.. The angry and volatile public mood made 2016 the ultimate change election.
Amid such a potent anti-establishment spirit, Trump’s vulgar, intemperate and unorthodox style struck voters as far more genuine than the highly cautious and controlled Hillary Clinton. As the brash and unpredictable Trump positioned himself as an agent of change, Clinton seemed like the establishment’s candidate, an impression that proved fatal to her campaign. Indeed, Trump used Clinton’s deep experience in the White House, Senate and State Department against her by citing it as evidence that she represented the status quo.
Ironically, Bill Clinton won the White House 24 years ago using a similar anti-establishment strategy. In the 1992 election, he successfully depicted incumbent President George H. W. Bush as an out-of-touch elitist. Eight years later Bush’s son, George W. Bush, employed the same tactic to defeat Vice President Al Gore. And in 2008 Barack Obama successfully ran as an outsider against John McCain.
Trump is thus the fourth consecutive president to win the White House by running as an “outsider” candidate. That is a lesson that future presidential candidates forget at their peril.
5. America, the divided
Above all, the 2016 election made clear that America is a nation deeply divided along racial, cultural, gender and class lines.
Under normal circumstances, one would expect the new president to attempt to rally the nation behind a message of unity.
But Trump will not be a normal president. He won the White House by waging one of the most divisive and polarizing campaigns in American political history. It is entirely possible that he may choose to govern using the same strategy of divide and conquer.
In any case, Trump will soon be the most powerful person in the world. He will enter office on Jan. 20 with Republican majorities in the House and Senate, which means Republicans will dictate the nation’s policy agenda and control Supreme Court appointments for the next four years. It seems highly likely therefore that Nov. 8, 2016 will go down in the history books as a major turning point in American history.
The 2016 election defied the conventional wisdom from start to finish. It is probably a safe bet that the Trump presidency will be just as unpredictable.
2016 will go down as a watershed year for all the wrong reasons: Britain’s EU exit faces strong opposition; Syria remains plunged in civil war; and in the wake of the US election politics in the two major Anglosphere democracies are now deeply polarised.
In Britain and the US, the majority of voters have embraced candidates and movements that eschew globalisation, immigration and free markets. Instead, they preach nationalism, closed borders and protectionism.
But it is hyperbolic to suggest that the post-2008 financial crisis era is beginning to look very much like the 1930s in the wake of the Wall Street crash. This is not a clash between fascism, communism and democracy. But what the Brexit and US presidential votes do show is that modern democracies have proven incapable of dealing adequately with income inequality, unemployment and declining opportunity.
With Trump as president, US policy is likely to become more unpredictable, but the business of government and policy implementation must go on nevertheless.
Despite Republican majorities in Congress, Trump will not be able to treat the legislature as a mere rubber stamp. In the US system, Congress holds the whip hand. Moreover, Trump is at war with so many senior Republicans, he is unlikely to enjoy a smooth ride. Where congressional Republicans and Trump do agree is that tax cuts are needed.
In this respect, we are really navigating unknown waters as to how Trump will behave in office as president. Trump has no public sector background. He will be the first US president to enter the office without any gubernatorial or congressional experience, or any previous role in an administration.
Ronald Reagan, Bill Clinton and George W. Bush served as state governors; John F. Kennedy and Barack Obama were junior senators (Obama also served as a state senator from 1996); George H.W. Bush served in multiple roles, including the vice presidency. In the post-war period, only Eisenhower comes close to Trump as a political cleanskin. But Eisenhower had a substantial military career, a reputation as a war hero, and had been a key adviser to both the military and the Department of Defense before and after World War II.
Trump’s victory has been built on his image as a Washington outsider. But his isolationist, nationalist and protectionist policies are not new; the first US Secretary of the Treasury, Alexander Hamilton, was an unabashed protectionist, viewing American infant industries as central to the US’s commercial rivalry with industrial Britain.
On defence and trade policy, Trump is close to many of the positions articulated by the America First movement in the 1930s and 1940s. Substantial figures, such as Charles Lindbergh and future president Gerald Ford, sought to keep America out of the second world war. But once Washington entered the war, it did not make the same mistake it made after Versailles in 1919; instead, the US became a global economic and military superpower, eschewing the isolationism of 1920–41.
As a self-declared neo-isolationist, one of the keys to Trump’s victory was his denunciation of the free-trade orthodoxy that has dominated Washington’s economic agenda since the Bretton Woods conference of 1944, which created the IMF, World Bank and, later, the GATT, the predecessor to the World Trade Organisation.
Let’s take a look at the state of play of the US’s current and mooted free trade negotiations. We’ll also briefly canvass how President Trump is likely to deal with Janet Yellen and the Federal Reserve.
The Trans-Pacific Partnership (TPP)
The TPP was initiated under George W. Bush’s administration, but President Obama pushed the 12-member bloc, obtaining fast-track trade promotion authority from Congress in June 2015. This allowed him to press forward with the finalisation of the agreement, which was released in October 2015. However, Trump’s opposition to TPP, along with Hillary Clinton’s second thoughts about her support for it means the deal is unlikely to pushed through during Obama’s final weeks in office.
In November 2015, Trump declared TPP “insanity”. Trump’s anti-TPP campaign demonstrated how he and the Tea Partyists had so convincingly vanquished the traditionally pro free trade Republican Party. By July this year, Republicans began to erase all trace of TPP support from their websites. By September, staunch TPP supporters Marco Rubio and Pat Toomey performed a volte-face; having praised the TPP, now they sought to bury it. Both Obama and Hillary Clinton were depending on the pro-TPP Republicans to get the pact through Congress.
Verdict: Dead in the water. Many Australians will applaud Trump for killing the TPP, as it was far from popular.
The North American Free Trade Agreement (NAFTA)
NAFTA was a product of the Reagan-Bush years, building on its 1998 predecessor, the Canada-US Free Trade Agreement (CUSTA). George H.W. Bush’s administration did most of the heavy lifting, but Bill Clinton pushed NAFTA through Congress in 1993, expending considerable political capital as he faced off against the unions, the Democrats’ biggest supporters.
Trump has labelled NAFTA “the worst trade deal ever”. True, NAFTA may have destroyed 879,000 US jobs, according to one study. But it also provided a low cost labour base for both the US and Canada, as they strove to compete with Asian manufacturing and the EU’s newly opened eastern periphery.
Verdict: No happily ever NAFTA. Likely to stay, but regulatory changes will be made.
The Transatlantic Trade and Investment Partnership (TTIP)
TTIP may be dead already, mostly due to the fact that it’s as popular as Hillary Clinton. It is in Europe that TTIP has found its strongest opponents, with thousands protesting against it.
Clinton, Sanders and Trump’s position against TTIP coalesced early, as it was clear it was a vote loser within all three candidates’ voter bases. In a pitch to Sanders supporters, Clinton declared she would quash any deal that hurt American jobs.
Clinton’s opposition to free trade deals demonstrated how decisive both the Sanders and Trump campaigns had been in shaping the narrative of the anti-free trade debate. Equally, the union base of the Democratic Party had always opposed FTAs. Had Clinton won the election, it is likely she would have attempted to revive TTIP during her tenure, as both the EU and US had pushed for a transatlantic FTA in some form since 1990.
President Obama infamously intervened in the UK Brexit debate earlier this year, declaring Britain would go “to the back of the queue” if it left the EU and sought a FTA with the US. Theresa May, Boris Johnson and Liam Fox will be hoping that President-elect Trump will welcome a special free trade relationship.
During the campaign, Trump advisers indicated that he would be willing to discuss a FTA with the UK. Indeed, Trump stated that Britain would “always be at the front of the line” when it came to trade deals. This would be critical to Brexit Britain; the US is the UK’s largest third-country market, with more than £30 billion in exports.
But the UK also enjoys a trade surplus in goods and services with the US, and Trump’s administration is unlikely to grant substantial concessions to an ally that already makes substantial hay from its existing tariff arrangements.
In other words, why would President Trump do a deal that gives UK firms more access to the US market?
Verdict: Boris needs to grab that American passport of his, head for Washington and start speed-dating. Soon.
Audit the Fed!
What future for Janet Yellen, Federal Reserve Chair? The Donald has expressed his dislike of the Federal Reserve chair on more than one occasion.
“I can say emphatically that partisan politics plays no role in our decisions…We do not discuss politics at our meetings.”
It’s unknown whether Trump would seriously attempt to remove Yellen. But in May this year, he did state that he would “most likely” replace her as she was “not a Republican”. In September, Trump’s position hardened; he said he would audit the Fed and replace Yellen in the first 100 days of his administration.
There are precedents; in 1981, US Treasury Secretary Donald Regan began to brow-beat Fed Chair Paul Volcker for maintaining his tight monetary policies as the Reagan administration sought to introduce wide ranging tax cuts. Despite Reagan’s early support for Volcker (a Carter appointee), by 1987, the President had had enough; he ended Volcker’s tenure, bringing in Alan Greenspan.
Verdict: Anyone looking for a central bank chief? Used for one term only. Low, low interest rates.
Another brick in the wall
Trump’s triumph is partly built upon faulty and drastically over-simplified conceptualisations of the operation of the US and the global economy. Corporations, banks, finance and even consumers are no longer “national” entities. They have not been for many years. Manufacturing and services are not local but global. This complex web of interdependence has manifested itself over many decades.
Globalisation has even brought jobs back to America; but in the post-GFC environment, this has produced US jobs that, on average, pay 23% lower than they did prior to 2008.
Mexican walls, Chinese trade negotiations and bans on Muslims: if Trump were to implement some of these initiatives it may have some impact upon people movements. But low-tech manufacturing jobs en masse are not coming back to America. The US used to build vast numbers of radios and TVs; these have not been made in America for a long, long time. Similarly, Apple is not about to repatriate iPhone production and establish manufacturing onshore. And US corporations are not about to stop doing business with the rest of the world.
This is the brutal reality that Trump cannot smash, but his supporters appear to believe he can. He is wrong and they are wrong. And they will be bitterly disappointed.