Are Trade Wars “Good and Easy to Win”?
By Pierre Lemieux
“Trade wars are good and easy to win,” President Donald Trump famously tweeted on March 2, 2018. (His circumstantial qualifications do not matter because they are based on a trade-balance fetish.) Anybody with reasonable knowledge, or perhaps even just a good intuition, of economic theory and history would beg to differ.
Adam Smith knew something about economics and economic history. In fact, he knew more than nearly all his contemporaries and more than Mr. Trump and his ignorant or sycophantic advisors. Smith was a moderate classical liberal, although very radical compared to the garden variety of today’s conservatives and “liberals.” He did not benefit from the future development of economic analysis that his own work would launch. He believed in exceptions to a free trade policy, which mainly had to do with national defense. But he certainly did not think that “trade wars are good and easy to win.”
He did consider that retaliatory tariffs could have a purpose, but with many qualifications as The Wealth of Nations explained:
There may be good policy in retaliations of this kind, when there is a probability that they will procure the repeal of the high duties or prohibitions complained of. The recovery of a great foreign market will generally more than compensate the transitory inconveniency of paying dearer during a short time for some sorts of goods. To judge whether such retaliations are likely to produce such an effect, does not, perhaps, belong so much to the science of a legislator, whose deliberations ought to be governed by general principles which are always the same, as to the skill of that insidious and crafty animal, vulgarly called a statesman or politician, whose councils are directed by the momentary fluctuations of affairs. When there is no probability that any such repeal can be procured, it seems a bad method of compensating the injury done to certain classes of our people, to do another injury ourselves, not only to those classes, but to almost all the other classes of them. When our neighbours prohibit some manufacture of ours, we generally prohibit, not only the same, for that alone would seldom affect them considerably, but some other manufacture of theirs. This may no doubt give encouragement to some particular class of workmen among ourselves, and by excluding some of their rivals, may enable them to raise their price in the home-market. Those workmen, however, who suffered by our neighbours prohibition will not be benefited by ours. On the contrary, they and almost all the other classes of our citizens will thereby be obliged to pay dearer than before for certain goods. Every such law, therefore, imposes a real tax upon the whole country, not in favour of that particular class of workmen who were injured by our neighbours prohibition, but of some other class.
A careful reading of this quote reveals interesting ideas close to contemporary interrogations in economics. Note Smith’s prevention against the state favoring some individuals by imposing costs on others. However, many if not most of today’s economists would argue that Smith underestimated the cost of retaliation even when it seems to work.
The point I want to emphasize here is different and more directly related to the economics of politics. From an intellectual viewpoint, we are very lucky in America to directly observe how an “insidious and crafty animal, vulgarly called a statesman or politician” is handling trade retaliation. It does not take a very pessimistic mind to think that the worst of the trade war is still to come.