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The Changing Face of Trade

If there were one idea that most developed economies embraced after World War II, it’s that free trade—or, at least, as free as politically possible—was an economic good. While most economists still defend that position, it is increasingly being challenged by governments around the world. 

Singapore and Hong Kong have historically been the purest examples of free trade economies, imposing virtually no tariffs on imports regardless of what their trading partners imposed. And the United States may have been the best example of a major economy, generally imposing lower or no tariffs on its major trading partners than they did on the U.S., according to the World Trade Organization.

As a presidential candidate, Donald Trump argued that other countries were taking advantage of the U.S. and promised to change the U.S. policy from free trade to “fair trade.” He began implementing his vision in early 2018. 

It’s probably fair to say that the road to achieving his goal has been bumpier than he anticipated, especially with China. 

Now, with the economic turmoil created by the coronavirus pandemic, it’s anybody’s guess how trade will look in the future. 

For one thing, developed economies are funneling massive economic aid to most of their major industries just to help companies survive the government-imposed lockdowns. While understandable, that’s a problem for a free trade vision, since the goal has been to eliminate all such state-sponsored subsidies in order to create a level playing field. 

There is also a growing effort by governments to limit or prohibit foreign-based companies from buying domestic companies. The Wall Street Journal reports that in addition to Great Britain, “The European Union has also signaled its own clampdown, announcing plans last week to tighten its defenses against subsidized foreign companies, as part of its effort to assert ‘strategic autonomy’ from China and the U.S., while defending its economic interests.” 

Not to be out-protected, Bloomberg quotes U.S. Trade Representative Robert Lighthizer as saying, “I am a firm believer that the things we need to fight the pandemic should be made in America. … I’m not in favor of reducing tariffs on the things we need. I would be far more in favor of increasing tariffs on the things we need.” 

Of course, President Trump successfully renegotiated a U.S. trade deal with Canada and Mexico, which should mean those countries are off the trade-war hot seat. But Bloomberg says, “The Trump administration is considering re-imposing tariffs on aluminum imports from Canada and an announcement could come by the end of the week.” 

Surprisingly, the trade and pandemic challenges haven’t had that big of an impact on U.S. trade flows so far. As the U.S. Census Bureau shows (here), U.S. exports of goods have remained relatively consistent for several years. Imports, by contrast, have declined recently, but not by that much. 

What will come of all this trade turmoil is anybody’s guess. Perhaps the only thing that can be said with certainty is the post-war vision of a world of free trade is on hold—perhaps permanently.