RW Johnson: Trump’s ignorance of economics ensures Golden Age boast is hollow

Key topics.Trump's tariffs revive outdated mercantilist economic theories.U.S. trade deficits persist due to fiscal deficits and full employment.Tariffs risk stagflation and harm U.S. industries, supply chains, and farmers..Sign up for your early morning brew of the BizNews Insider to keep you up to speed with the content that matters. The newsletter will land in your inbox at 5:30am weekdays. Register here..Support South Africa's bastion of independent journalism, offering balanced insights on investments, business, and the political economy, by joining BizNews Premium. Register here..If you prefer WhatsApp for updates, sign up to the BizNews channel here..By RW Johnson___STEADY_PAYWALL___.Maynard Keynes once commented that serving on government committees meant one often came up against businessmen who made clear their contempt for theory and their preference for "common sense". But what they called common sense invariably turned out to be the now discredited theory of some long dead economist. This story has been much in my mind while watching Donald Trump roll out tariffs based entirely on the mercantilist theory which was dominant in Europe from the late Renaissance period to the 18th century. Essentially the theory holds that imports are bad and exports are good and that a state should do everything to achieve a positive trade balance and minimise its imports. .Mercantilist theory collapsed under the criticisms of Adam Smith and the classical economists who pointed out that some nations have a comparative advantage in producing particular goods better or more cheaply than others. In which case it is advantageous to a state to import these better or cheaper goods and concentrate on exporting goods or services where one's own state has a comparative advantage. Achieving a positive trade balance with a particular state is not the name of the game..Perhaps the most famous vindication of this theory came in 1846 with Peel's Repeal of the Corn Laws. The Corn Laws, passed in 1815, slapped tariffs on imported foreign foodstuffs – to the enormous enrichment of the British landed classes. But Peel rightly pointed out that Britain's comparative advantage lay in the export of manufactured goods and that it would be far better to import food from wherever it was cheaper. The new policy was hugely successful. .Donald Trump doesn't read books and has clearly not heard about any of this, so he is firmly stuck in the mid-18th century. No doubt, like Henry Ford, he believes "history is bunk" (or possibly "fake news") for he just invents whatever history he wants, claiming, for example, that the EU was set up in order to "screw America". In fact, of course, the EU's over-riding aim was to achieve sufficient economic integration to ensure there could never be another European war. American presidents were all extremely encouraging of it. .And it has all worked very much to America's benefit. America has been able to import the very best that Europe has to offer – German cars, Italian shoes, French fashions, cheese and wine, Scotch whiskey, Belgian chocolate etc – and because the dollar is the world's reserve currency, America has been able to run a large trade deficit without its currency depreciating – what De Gaulle used to refer to angrily as "America's inordinate privilege". .Read more: 🔒 Trump's boldest speech yet: Tariffs, taxes, and tumult – and the truth behind his claims.What is even more primitive – for Trump is as economically illiterate as a caveman – is that Trump only counts trade in goods, ignoring trade in services or other revenue flows. If in fact you include trade in services and the large revenue flows that American companies receive from their investments in Europe, you find that actually US-EU trade is in balance and there is no deficit for Trump to get upset about. It's all quite embarrassing: the American president would clearly fail even school-level economics. .In any case, if America is at full employment, it tends to consume more than it produces, so a trade deficit is always more or less certain. This is particularly so if the US continues to run a large fiscal deficit – currently running at 6% of GDP – because with government spending far outpacing its revenue it is effectively pushing huge sums into the market which lead inexorably to more imports. The only way for America to run a trade surplus would be for it to have a really deep recession. .But, of course, America doesn't need to do that because the current situation works so well for it: it can enjoy all the foreign imports it wants and both the Europeans and Asians are only too keen to buy American stocks and bonds, so there are huge investment flows into the US, more than balancing the trade deficit, and as a result the American economy keeps growing far faster than Europe. It's the best of all possible worlds. Yet Trump is simply too dim to see that. Contrary to the fact of America's stunning economic success Trump believes that recent American economic history is a sad story in which "the whole wold has been ripping us off". .Larry Summers, who was Clinton's Treasury Secretary and later President of Harvard, warns that Trump's measures will push the economy powerfully towards stagflation. "It's a self-imposed supply shock. It lowers the quantity of goods available to the American economy and raises their prices. The adverse stagflationary impulse exceeds the impulse that would come from a 50% (or more than $40 a barrel) oil price increase. I have never seen as irrational a consequential policy put in place by an American administration." .Summers also points out that the very success of NAFTA/USMCA means that in industry after industry there is now an integrated production process with inputs from all three countries. The result is that tariffs on Canada and Mexico are "a uniquely irrational form of protectionism, because of the reality of integrated North American production. It is American companies and American workers being disadvantaged relative to producers in Asia and Europe." .Thus by slapping steep tariffs on Canada and Mexico the US is actually attacking its own supply chain. "We are going to benefit the Chinese supply chain through Asia at the expense of integrated North American production", Summers adds. " The aluminium and steel tariffs will penalise export industries that employ 60 times as many people as the industries that are being protected." .It is worth noting that Howard Lutnick, Trump's Commerce Secretary, has continued to suggest that Trump will probably cut the Mexican and Canadian tariffs fairly quickly in favour of some sort of deal with these countries. In fact Trump exempted the car industry from these tariffs for a month at the last moment but has shown no other sign of wanting these tariffs to be short-lived. Indeed, he happily pronounces that next month will bring sweeping tariffs on the EU, South Korea, India and Brazil. The suspicion exists that Lutnick can see perfectly well how disastrous these policies are likely to be but, of course, doesn't feel able to say so. Thus far Trump has warned only that his policies will create "a little disturbance"..Trump has also said that he "loves American farmers" but they, of course, suffered most from his tariff wars during his first term and already the Chinese have slapped major tariffs on US agricultural imports. This going to create major problems for the (solidly Republican) farm states. Trump seems to think farmers can just concentrate on the domestic market but America has an enormous agricultural surplus: it's export or die. .Trump's speech to Congress was cheered to the echo – by Republicans delighted to be in power – but the applause may not last. Consumer spending fell in January and consumer confidence has fallen sharply. Already $3 trillion has been wiped off values in the US stockmarket. Investors and American CEOs are flummoxed and confused by the erratic and chaotic changes since Trump came to power. The dollar has fallen hard. Inflation is on the up again. Trump's boasts of a new golden age are beginning to look pretty hollow..Moreover, Trump is now in something of a bind. He says he "loves tariffs" and he has made tariff increases the central thrust of his whole administration. Yet he is woefully ignorant. Like many successful businessmen he thinks he knows all about economics but he is simply an unscrupulous property developer whose knowledge of macro-economics is pitiful. Everything suggests that he is en route to creating a tremendous mess which could cripple American industry and produce a major recession. .True, Trump makes up his mind from day to day and sees no need to be consistent. Indeed, on March 6 – at the very last possible moment – Trump suddenly reversed himself and backtracked on the tariffs supposed to come into force on Canada and Mexico – though only delaying them for a month. But given how central he has made tariffs to his presidency, it would be hard for him now to make a complete U-turn on this policy without damaging his credibility and looking very foolish. Moreover, he is drunk with his own power and has just spent an hour and forty minutes boasting to Congress about his immense achievements. He is not going to find it easy or comfortable to face up to the alarming new realities that he has created..Read also:.🔒 Canada hits back against Trump with 25% counter-tariffs on $107bn US importsTrump talks China, tariffs, aliens, and staff mistakes on Joe Rogan podcastJames Peron: Trump and Sanders both wrong – tariffs tax a nation's citizens

RW Johnson: Trump’s ignorance of economics ensures Golden Age boast is hollow

Related Stories

Cathy Buckle: Zimbabwe buries democracy in plain sight

Chris Hattingh: South Africa does not have the luxury to make mistakes

The Economist: America didn't just win AI. It owns the keys.

The DA doesn't fear the ANC. It should fear what comes next