Trump’s Tariff Threat

Donald Trump’s tweet that he might leave the World Trade Organisation (WTO) is probably just a negotiating ploy, but his gut reaction is correct.

The WTO is merely a name change that more accurately reflects the organisation of international trade that was set up after the Second World War by the United States and Great Britain.  They called this the General Agreement on Tariffs and Trade (GATT).  GATT was set up to help reduce tariffs, or import duties, in a series of equal negotiations.

GATT was specifically designed to favour the great exporting and trading nations, and the merchants therein.  Reducing tariffs meant that imports of raw materials would be cheaper, which they could then process and export as finished goods.  They could also sell these at to GATT countries and make more profit.

Those who suffered most would be the nations that imported the most.  Consumers in those nations might have found that the price of imported finished goods dropped but, as tax-payers, they would have to pay a higher price in sales or excise tax, or income taxes, to make up the lost government revenue.

At the time of GATT’s first round of negotiations, the only countries capable of mass production and shipping were the United States and Great Britain, so it was natural that they should enshrine their preferences in the agreement.  Britain had promoted the Freedom of the Seas since medieval times.  While England and then Britain were net exporters, and maintained a large fleet of merchant and warships, the strategy paid off.  The US was not a great exporter, relative to its production, but it was a great trading nation, importing raw materials.  It became a major exporter supplying European countries at war with each other.  In the period during and after the Second World War, it became the largest exporter in the world.  GATT was ideal to help it maximise its profit at this time.

Since 1975, the US has been a net importer.  It runs the world’s largest trade deficit.  It does not benefit at all from the low tariffs it imposed equitably when it had the power to do so.  Now, it merely invites low cost manufacturers to import their wares and receives little in return.

Protectionism, such as increased import tariffs, is not the solution to America’s economic problems; but it is a solution to their political problems.  Raising tariffs can only lead to a spiral of worsening trade figures, lower exports, and higher prices for imports.

To solve the country’s problems without creating worse ones would need more support than Trump is likely to win, even if he knew what to do.  In order to stay in power, leaving the WTO and raising tariffs may be the only thing he can do.