Whatever else follows from Donald Trump’s tariff offensive, it’s plainly the death sentence on a trade world order created only 30 years ago.

Run your finger along the broad back of history, and you will find it thickly crusted with tariffs. They’ve been the rule rather than the exception, and it’s not hard to see why. 

To economists it may seem obvious that open markets deliver, through competition, the greatest efficiency and lowest prices to consumers.  But to governments, tariffs have always looked like a win-win: more money in their coffers and “protection” for their industries (even if few politicians understood that you couldn’t have both at once).

So it should be no surprise that the US President should have found the tariff word, er - beautiful. What has been more of a shock is the extremist language of victimhood, from the leader of the world’s biggest economy. And what’s also seemed strange, from this side of the Atlantic, is the sight of a right-wing government abandoning free markets, unwriting David Ricardo and Adam Smith and reverting to a mercantilist view of the world economy as a zero-sum game. 

Ever since, in the middle of the nineteenth century, Robert Peel saw off his own Conservative Party of affronted landowners to repeal the Corn Laws, in the UK free trade has been associated with the views of the right, trade union demands for direct or indirect protectionism with the views of the left. Of course there have been aberrations. It was a Conservative Chancellor (in a Labour-led Government) who slapped a Trumpian 10% tariff on all imports to the UK in 1932, although with an Imperialist twist that might also appeal to today’s US President. 

But fast forward to the aftermath of the second world war, and your finger is reaching the smooth neck of economic history - the beginning of a long trend towards the opening of global markets.

This reached its proud peak in 1995 with the replacement of the supposedly temporary General Agreement on Tariffs and Trade (GATT) by a permanent institution of independent authority intended to ensure fair play. 

Critically, this embedded in rules the GATT principle, rather confusingly named, of “Most Favoured Nation”. This was the rule under which members might not (outside of recognised trading blocs) offer one trading partner a deal it was not prepared to offer others. And - equally critically - even the biggest and most powerful members agreed to abide by its rulings on trade disputes. What’s more, the US was as good as its word, early on accepting a judgement against it.

It’s worth looking back at the christening of the World Trade Organisation (WTO). The godparents were two US Presidents, George Bush senior and Bill Clinton, spanning the US political divide, supported by a Conservative British Prime Minister, John Major. And he had followed a British leader who was the most passionate believer in free markets ever to enter Downing Street. For Margaret Thatcher economic liberalism was an essential element of the politics of the right, a view she shared with her US contemporary, Republican President Ronald Reagan. 

It was Bush and Clinton who faced down Japan and the Europe Union (in both of which protectionist sentiment was far from dead) to achieve the reductions in tariffs that made it possible to launch the WTO. But to give everyone their due, it was actually a European (Pascal Lamy, a French politican-cum-commissioner of the EU) who achieved the remarkable first major opening of Chinese markets that made that country’s entry into the WTO possible. 

Happy days, when the growth in world trade certainly underpinned world economic growth in the nineties and noughties. But also, of course, unusual days, before disillusion began to set in. The new rules were far from perfect, protectionist recidivism persisted and attempts to launch further “trade rounds” to lower barriers failed miserably. China’s entry into the WTO, said many Americans, let the wolf into the sheep pen. The free trade pendulum was already in reverse before Donald Trump won his first trip to the White House. How far will the current toxic mixture of politics and economics swing it that way?

Nowhere more than in trade policy are economics confused by nationalism. In the end, it will be economic results that win the argument; but these are not so easy to measure, as disagreement amongst economists as to the precise effects of past bursts of protectionism persist, decades later.

It used to be taken as a given that American protectionism in the 1920s fuelled the problems that led to the Great Crash, and that UK protectionism in the 1930s deepened the depression there too. However, the strength of these effects is still contested. 

Most economists would agree that it is normally a mistake to protect old and decaying industries (and there were plenty of those in Britain in the 1930s). It simply delays the shift of resources to new ones. But when unemployment is very high (as, again, it was in the 1930s), tariffs can bring temporary relief. And their use to protect “infant industries” is a recognised exception to the advantages of free trade.  This is deep in the American psyche: there’s a foretaste of MAGA in Alexander Hamilton’s “American System”, which set the scene for protectionism in the newly independent United States.

But the past is truly another country, and the US is no longer an economic infant, nor does it suffer from high unemployment. Moreover, today’s lurch into protectionism comes after free trade has created global supply chains. Like so much post-millenial innovation, these are brilliant when they work, but terribly vulnerable to interruptions. Donald Trump’s hunger for Ukrainian raw materials shows even he doesn’t want to block all imports. Disentangling the effects of tariffs on these supply chains won’t be quick or easy for US businesses. 

Secondly, the tariff war comes at the time when a bulging share of gdp is earned in a digital world not easily subject to physical boundaries, and not easily regulated except on a multilateral basis. This is linked to a shift from manufacturing to services, where trade restrictions are frequent but hard to pin down, being embedded in regulatory systems which often have other defined purposes. 

Thirdly, the world’s dependence on the dollar has constantly increased. This has given the US Treasury a massively advantageous ability to borrow cheaply (eat your heart out, Rachel Reeves), but has also driven the dollar to the point where US manufacturing is howling about its inability to compete. But you can’t have your cake and eat it, and US government borrowing is way above historic levels. 

Tariffs are, at heart, a tax on the consumers of the country that imposes them; which is why protectionism usually adds to prices (something US consumers won’t like at al and will complicate US monetary policy). At best, tariffs simply squeeze the margins of retailers - but these are part of the tariff-raising economy, too. All of which explains why it seldom makes sense to retaliate.

However, voters won’t be impressed with governments that don’t stand up to a bully, so the US’s trading “partners” need to talk tough and act savvy. An optimistic view would be that they will give way on a some barriers (mostly non-tariff) that Trump doesn’t like, he’ll cut most of his tariffs again (except across the Pacific) and fairly free trade will resume, with all sides declaring victory. Right now, however, escalation looks more likely. Even if it does not take the form of retaliatory tariffs everywhere, there can be trade guerrilla warfare. For example, US companies are likely to find a less friendly regulatory environment for their European subsidiaries, which will feed resentment back in the White House. 

So everybody loses, but as some have already pointed out, in the long term the US is likely to suffer proportionately less than others, which in the zero sum game of mercantilism is a “victory”. Although very large in themselves, its imports and exports make up a relatively small proportion of GDP, and its home market is big enough to enjoy internal competition and wide markets for growing businesses. But there is no clear path to the golden age of the President’s rhetoric, and a lot of chaos and uncertainty on the way, creating a dim climate for investment, as unsettled US stock markets illustrate.

Countries with small home markets will suffer most, which is why those proclaiming that the imposition of tariffs of “only” 10 per cent on UK exports proves Brexit to have been a success miss the point. Now more than ever the UK needs access to the European single market. Canada badly needs access to the United States market: but it is reasonably well protected by its raw material resources and the close cross-border dependence of the northern US economy on these. (It’s a good time to have an economically literate Prime Minister, too.}

Those likely to suffer most are developing countries high on the Trump hit list (which includes some pretty monstrous tariffs on some little countries). Many have been put in the dock at least partly because they have recently been benefitting from the tariffs placed by the US on Chinese goods. In this maelstrom there seems little point in appealing to the WTO, whose authority has been destroyed by Trump at a stroke. In his world, “most favoured nation” means the one with which he has just done a deal. Already suffering from US reluctance to pay its subscription, the WTO has received a death sentence.

“Trade not aid” used to be the mantra of right-wing politicians: give developing countries access to markets rather than subsidies that disappear into their corrupt leaders’ pockets. But that was before the populists ousted the economic liberals from governments of the right and decided to give neither. President Reagan’s portrait now, for the first time, hangs in the Oval Office. On his present successor’s rejection of free market economics in favour of mercantilism (to say nothing of Trump’s dangerous faith in President Putin), it’s time for The Gipper to come out of his frame and Have A Word.

Guest Author: Baroness Sarah Hogg, Former Frontier Economics Chairman