Fake versus True Free Trade
I have never been a supporter of trade tariffs. Whilst some will find the jingoistic arguments for trade barriers superficially appealing, in the end the consumer pays every time.
A realistic approach to trade is to accept that some countries have a competitive advantage in the production of certain goods and services, meaning they can use their resources with maximum efficiency. Some nations have inexpensive labour, some abundant minerals, others will have fertile agricultural land, plentiful water or any number of other national blessings.
Everyone benefits when resources are used prudently to maximise economic returns whilst satisfying domestic and international consumer demand. Private enterprise and market economics are the most efficient drivers of the innovation and job creation necessary to fuel growing prosperity. That is the simple essence of the free trade argument – which is under growing threat globally.
Governments, as usual, generally prove to be the impediment to delivering maximum benefits for the rest of us. Meddling governments place imposts at almost every point of development, stifling long-term investment, jobs and enterprise growth.
The biggest shot against the trade-for-prosperity mantra in recent times has been fired by President Trump in the United States. This week he announced a 25 per cent tariff on steel and aluminium imported into the US which sent shockwaves throughout the world. This decision has huge implications for many countries but most notably Canada and Mexico, both of whom are among the largest suppliers of these products into the US.
At first I thought Trump had suspended common sense in favour of nationalistic fervour but on reflection I am beginning to more fully understand his approach.
Many conservatives were rightly concerned about Trump’s anti-trade rhetoric during his campaign. At the time, I said that I chose to believe his rhetoric was more about ensuring appropriate review of established free trade agreements rather than promoting “Fortress America”. After all, no prudent business would commit to a perpetual contract without periodic review and yet that is what many lazy governments have done when negotiating trade agreements.
So Trump’s tariff has effectively signalled the start of that review process and his announcement suggests the first agreement he wants to renegotiate is NAFTA (the North American Free Trade Agreement) – a deal he derided throughout his candidacy.
As mentioned earlier, Canada and Mexico are among the nations that will be penalised most by Trump’s tariff wall. This announcement gives him maximum leverage when it comes to carving out changes to NAFTA in future negotiations.
The process has begun in the usual Trump fashion. Anyone who has read one of his books knows that the Trump style of negotiation is to ask for the stars and settle for the moon. I consider that is what he is doing here. Time will tell if that supposition is correct.
However, the broader implications of Trump’s policy approach could spark changes around the world. Many of those who support free trade also know that there isn’t a level playing field. Behind the visible first line of trade defence are the second, boggy lines of many hidden barriers imposed by nation-states.
These can be delays on certifications or quarantine services, rejection of goods on spurious grounds or innumerable other government-imposed penalties. Nations make a public, hand-shaking spectacle of removing trade barriers then snigger as their competitors pick through the boggy ground left undrained to protect their own patch.
Those are the reasons why, in reality, we have fake free trade, not true free trade that will uphold our national interest. To ensure trade agreements are truly working in our interests and delivering the benefits promised at inception, they need to be periodically reviewed and possibly renegotiated when the hidden barriers are exposed.
It remains to be seen if the Trump approach will be replicated elsewhere. As President of the largest consumer economy in the world, he is dealing from a position of strength that few others can compete with. In the eyes of his many supporters, this will be seen as fulfilling his promise to “make America great again.”