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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The writer is the author of A Random Walk Down Wall Street
A shaky, temporary truce may have been declared in the trade war between the US and China but it is clear the world has regrettably entered a new era of increased friction in the flow of goods and services. That will carry a big cost for growth in the global economy.
There could be legitimate arguments for limited and targeted tariffs designed to enhance national security or to help negotiate a lowering of trade barriers imposed by other nations. But a policy of imposing higher permanent general tariffs allegedly to increase US wealth is completely misguided. It will not achieve the goal of restoring American manufacturing.
Most economists would agree with the determination of David Ricardo, who wrote in the early 1800s that free international trade can increase the overall welfare of nations. What Ricardo argued was that the availability of goods and services of both of two trading nations could be increased if each country specialised in the products on which they had a relative advantage.
If each country did this and imported goods in areas where they were relatively inefficient, the total amount of output available for both countries would be larger than if each country produced everything themselves. International trade was not a zero-sum game. Trade can make both countries richer.
A simple illustration will show the benefits of trade. Think of two countries, Britain and France, each of which has only 100 hours of labour available. Suppose if Britain devoted half its labour — 50 hours — to cloth, it could produce 50 units of that. The remaining 50 hours if devoted to wine could produce 10 barrels. France, however, could produce 50 barrels of wine by devoting 50 hours to wine production but only 20 units of cloth with the remaining 50 hours of labour. Total production in both countries would be 70 cloth and 60 wine.
Now suppose instead that each country specialises with its 100 hours of labour. Britain produces 100 units of cloth. France concentrates exclusively on wine, making 100 barrels. Total combined production is far greater. By engaging in specialisation and trade both countries are better off. If Britain trades 40 units of its cloth for 40 units of wine, it can consume 60 units of cloth and 40 barrels of wine. France can have 60 wine and 40 cloth. This was Ricardo’s universally accepted contribution over 200 years ago
Consider now an actual example of aluminium and wheat production in the US and Canada. Canada has a comparative (and absolute) advantage over the US in the production of aluminium because it is able to rely exclusively on inexpensive, clean, reliable and renewable hydropower. Clearly efficiency is maximised by having Canada produce aluminium and trade with the US by importing wheat. Indeed, this is precisely what has happened when markets have been allowed to function without restraint. But now misguided policy seeks to eliminate the positive benefits of trade by imposing punitive tariffs on Canada, our previously friendly trading partner.
Would it even be possible to substitute US production of primary aluminium for Canadian sources? In a recent interview, William Oplinger, the chief executive of Alcoa, was asked that question. He did indicate that it might be possible but that it would take seven to 10 years to build the production facilities required. Moreover, investment of billions of dollars would be required, and it is far from certain that such funds could be raised. Oplinger also warned in February the tariffs could cost about 20,000 US aluminium industry jobs and further 80,000 jobs in sectors that support it.
But it is very unlikely that a new crop of production plants could be run. Aluminum production requires availability of enormous power, and the US power grid would be unable to handle the smelting demand. There are already concerns that power supplies will not be able to meet the increased use of artificial intelligence. Reshoring of aluminium smelting may not even be possible.
To be sure, we do need to be concerned for the losers created by unfettered trade. But the solution lies in using our educational system to provide training for the good jobs that will be required in areas such as energy generation, telecommunications, skilled repair and healthcare, and in facilitating the geographic mobility needed to take advantage of the new economic opportunities.
Cutting ourselves off from the benefits of free trade will not make us richer in the long run. Permanent general tariffs will only make the US and foreign nations considerably poorer.