Trump's global trade bust-up is really all about politics

Donald Trump

Back in 1817, the economist David Ricardo propounded and proved the law of comparative advantage.

This economic law was based on the theory of the benefits of specialisation and the division of labour, between individuals, firms and countries. Basically, individuals, companies and countries should concentrate on what they do best and trade with others for the goods and services that that they are not as good at producing.

David Ricardo proved that the welfare and prosperity of both sides of the transaction would benefit. In other words, free trade and specialisation represented a win-win situation. Adam Smith had originally theorised about the benefits of specialisation, but David Ricardo developed it into a trade theory. This theory has formed the basis for free trade and modern economic thought.

Over the years, the barriers to free trade in goods and services have been gradually dismantled and the benefits have flowed. Trade has particularly helped developing economics to grow and reduce poverty.

While few would disagree with the benefits to be derived from trade, that few is expanding and becoming worryingly influential. In the run up to his election victory in November 2016, President Trump argued that free trade was costing blue-collar jobs in the US and he promised to do something about it in a very populist way, and he has done.

What Mr Trump, of course, fails to recognise is that technological developments are the biggest enemy of workers, particularly of the blue-collar variety, but few if any jobs do not potentially face extinction due to technology. It is easy and populist to blame free trade.

Last week, President Trump announced that he was going to increase tariffs on $200bn in Chinese imports to 25%. Naturally, China retaliated. This tit-for-tat trade dispute is threatening global growth prospects.

From a European perspective, apart from the threat to global growth from the threat to free trade, the danger that flows from all of this is that President Trump starts to deliver on his threat to increase tariffs on all car-related imports, on hold for now.

It is worrying that we are now seeing an escalation of an isolationist economic and political agenda around the world. If the global economy enters into a protracted and more serious trade war, global growth will be hit, and an economy like Ireland, for whom foreign direct investment is so important, and for whom exports make up such a disproportionate level of GDP, would be very exposed and vulnerable.

The reality is that the US and China have fundamentally different economic and political belief systems and this will be the defining rivalry of the 21st century.

The US wants China to buy more of its goods, ease rules that prevent US companies exercising the sort of control they would like to on their investments in China, address the theft of intellectual property rights by Chinese companies, and cease distorting competition by heavily subsidising its companies.

The political rivalry and differences between these two superpowers will not be solved easily, particularly with the isolationist attitude of President Trump and growing pressures for self-reliance in China.

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