Why do most Economists oppose Trump’s Nationalism? – Part One

This essay originally was entitled “Why do almost all economists oppose economic nationalism and how is this reflected in their views of trade and migration?”, but I have adapted it to focus also look at political nationalism’s impact on economic nationalism. To be published in 2 parts: the former focusing on trade, and the sequel focusing on immigration.

“Nothing, however, can be more absurd than this whole doctrine of the balance of trade, upon which, not only these restraints, but almost all the other regulations of commerce are founded.” (Adam Smith, The Wealth of Nations – 1776).

“We don’t have victories anymore. We used to have victories, but we don’t have them. When was the last time anybody saw us beating, let’s say, China in a trade deal? They kill us. I beat China all the time. All the time.”  (Donald Trump, Campaign Speech – 2016)

Despite the Economic Nationalism is a blanket term for the selection of economic policies that prioritise the prosperity and interests of one nation, over the interests of other nations. Generally, this comprises of the withdrawal from free trade agreements, and increased restriction on the movement of factors of production (labour, enterprise, capital and land). The rise in Populism has given impetus to the ideology that economic nationalism is the solution to the social backlash of globalisation, and the loss of local manufacturing jobs is a direct consequence of asymmetrically beneficial free trade agreements. In America, driven by the Trump administration, globalisation has become the scape-goat for the decline of industry and the deterioration of the balance of payments. However, despite the retreat of globalism, the majority of economists still choose to oppose its ideological antithesis- economic nationalism. To economists, the rise in economic nationalism represents a devolution of economic thought, such that by adopting nationalism, nations would not be maximising output, or designing a policy climate that best encourages prosperity through promotion of international competition and utilisation of inward immigration.

America Right wing

Indeed, David Ricardo’s Principle of Comparative Advantage states that even if one country has the absolute advantage in production of every good/service, the fact that other countries will have the comparative advantage in terms of production means that it is most beneficial for economies to specialise production, and then work in free trade agreements in order to maximise collective output. This would be the more effective alternative compared to functioning in a closed economy and attempting to domestically produce the entire spectrum of consumer demanded goods. The adoption of nationalist policies would naturally curtail trade due to increased tariffs. This would consequently reduce the ability to trade with countries who have a comparative advantage, and hence the reduction of consumer choice within a market will translate to reduced consumer utility.

Moreover, a politician may be attracted to the allure of nationalism as it stifles foreign market competition. By removing the more efficient overseas opposition, domestic firms and consumers are forced to purchase goods and services from domestic industries, rather than their cheaper overseas counterparts. This would supposedly lead to a subsequent increase in production for domestic industry, hence derived manufacturing employment would increase, and derived political support for said politician would presumably increase simultaneously. However, whereas the politician may revere the myopic social advantages to employment, economists must look to the long term implications for that country’s prosperity. By removing international competition through tariffs, there no longer exists incentive nor necessity for the domestic suppliers to invest in improving productivity, as the consumers have no choice but to purchase from the domestic suppliers. In terms of competitiveness, the country will then lag even further behind its foreign competition in terms of quality and efficiency. Hence, quality of good may fall, whereas price will rise unheeded. The curtailing of foreign competition through economic nationalist policies also makes the good’s demand more inelastic, which creates an economic climate more susceptible to potential cartelisation and ensuing market failure within an economy.

Trump appeal of nationalism

Furthermore, the trade restrictive nature of economic nationalism may have unintended consequences in terms of retaliation from other like-minded economies. If history does indeed repeat itself, then the Smoot-Hawley Tariff Act of 1930 is a menacing indicator of the consequences of overly-nationalist economic policies. The 1930 bill raised tariffs on over 20,000 US imports, in order to discourage economic leakages and encourage domestic industry. However, the Smoot-Hawley Tariff soon became dubbed as the Act that “intensified nationalism all over the world” (Lamont, T of J.P Morgan, 1930), and thrust America once more into isolationism. Foreign countries responded to American protectionism with their own tariffs aimed at American exports. In 1930 Canadian Prime Minister Mackenzie King imposed extra duties on American goods, whilst actually simultaneously cutting import tariffs for British Empire exports. By 1934, as many other developed economies followed suit, international trade had fallen by 66%, and the worldwide retaliation against American import tariffs meant that American export value fell from $5.2 billion to $1.7 billion per year. This global retaliation against nationalism was destructive to the American manufacturing industry, to the extent that even domestic demand could not maintain production levels, which combined with the impact of the 1929 Stock Market Crash, saw industrial unemployment increase by 4.3 million (35%) by 1933.

(Part 2 of this essay will be published in the coming days, and will focus on the impact of nationalism on border control and immigration)

Dealing with Trade – What Trump and Brexit mean for American and British Trade Deals

Trump and Brexit. “Make America Great Again” and “Take Back Control”. In 2016, both Britain and America took great steps against the development of modern trade norms. Trump wants wants to redesign the bulk of America’s trade deals, from South Korea to NAFTA, increasing import tariffs to encourage domestic industry and derived job creation. Whereas a hard Brexit’s promise to leave the European single market contradicts the economic principle that Free Trade is vital to sustain the theory of comparative advantage.

This is not to say that America and Britain have now entered a period of mercantilism, but rather the rejection of globalisation for a more economic nationalist approach is telling that Trump wishes to “Put America First.” Therefore, both nations must now act quickly to strike preferential trade deals in order to maintain trade and therefore justify their nationalist deviations. Who better to strike a trade deal with than each other?

At the G20 summit in July, Trump spoke of a “powerful deal” in development between Britain and America, stressing that it would be completed “very, very quickly.”

May and Trump

However, the spontaneity of these kind of trade deals may have long term repercussions for Britain’s feasibility to trade with Europe in the future. For instance, currently in the UK, the EU laws and regulations on financial and business services’ export potential has a “trade dampening effect equivalent of a tariff of 30%” (The Economist). Indeed, the recent controversy over American farmers’ potential to export chickens washed in chlorinated water to Britain is also symbolic of the bilateralism between the two nations. The conflicting laws and regulations between America and Britain gives Britain two options. Either, during Brexit negotiations, new British trade regulations can be more weighted towards EU legislation, or American legislation. Either way, this comes at the trade off of sacrificing potential trade for whoever Britain does not align with, as increased border checks and security reduces the attractiveness and ease of trade between nations.

Therefore, it is too simple to say that Brexit and Trump represent a return to isolationism. However, Britain should think carefully of the terms of trade it wishes to conduct with America, as this may come at the cost of losing out in European trade. Currently, British-EU trade accounts for 44% of British exports, whereas British-America exports accounts for 19%. Economists estimate that if Britain were to leave the European single market, then American trade would have to increase by 58% to make up for lost European trade. This is an improbable increase in trade, regardless of whether or not Britain ultimately agrees to allow the import of chlorinated chicken.