There is a great deal of ruin in a nation, as Adam Smith once observed. The political economist would perhaps have felt grimly vindicated to see Donald Trump, whose wrong-headed ideas about trade contrast sharply with his own, imposing tariffs on a swath of imports to the US without much immediate effect on the American economy.
There is a great deal of ruin in a nation, as Adam Smith once observed. The political economist would perhaps have felt grimly vindicated to see Donald Trump, whose wrong-headed ideas about trade contrast sharply with his own, imposing tariffs on a swath of imports to the US without much immediate effect on the American economy.
This week, after faint hopes that renewed talks would head off the latest exchange of ordnance in the trade war, Mr Trump imposed 10 per cent tariffs on about $200bn-worth of goods from China. Nearly half of America’s goods imports from that source will now attract punitive trade duties, and Mr Trump is threatening to extend the coverage much further.
If they are kept in place for the medium term, the measures — a horribly misguided attempt to deal with a genuine problem of technology theft by Chinese companies and the state — cannot but inflict damage on the US economy. They will rupture the productivity-enhancing international supply chains that companies have painstakingly built up over the years.
In the shorter term, however, the effect of Mr Trump’s tariffs on growth has been quite muted. The economy has continued to grow healthily, and consumer confidence hit a near 18-year high in August. This week, as Mr Trump triumphantly tweeted, the S&P 500 stock market index reached an all-time peak.
The reality is that the US, for all the blame heaped upon globalisation by the likes of Mr Trump, has a relatively small exposure to trade compared with other advanced economies. Growth in the US has been steady for nearly a decade, with help from supportive monetary policy which is only gradually being tightened. On top of that, Mr Trump has unleashed a fiscal stimulus whose effects will continue probably until 2020.
Eventually, increased costs and weaker productivity growth from protectionism will take their toll, notwithstanding the confidence expressed this week by Wilbur Ross, the US commerce secretary, that consumers would not notice the higher prices. But such an effect is unlikely to come through quickly — and certainly not by November’s midterm elections.
In those ballots, the likelihood is that the Democrats will retake at least one of the houses of Congress. Yet trade policy is unlikely to be the main reason, certainly compared to an anti-incumbency effect and a judgment on Mr Trump’s overall performance and that of the Republican Congress.
True, Mr Trump’s tariffs are not popular with the electorate as a whole, albeit with a sharp partisan split between registered Republicans and Democrats. But most opinion poll respondents seem to think the tariffs have had little effect on them personally. It seems highly improbable that a tariff-induced slowdown in the overall economy is going to shift many votes between now and early November.
This, unfortunately, does not bode well for trade policy after the elections. Rather than recognising the damage that his policies are likely to wreak, Mr Trump may well choose to double down on punitive tariffs and dare a new Congress — whether or not controlled by the Democrats — to restrain him.
Decades, indeed centuries, of economic success in the US have given Mr Trump a lot of leeway to pursue destructive policies before their effects become apparent. The moment of reckoning cannot be indefinitely postponed. But it seems very unlikely to come as early as the midterms, when the electorate delivers its first real verdict on Mr Trump’s and his party’s popularity since his election as president.
