Things can only get worse

Posted on

There would appear to be unanimity amongst the informed media that the resignation of  Gary Cohn as Trump’s senior economics adviser is bad news.

As it happens, this blog rarely laments the resignation from public office of a person who got the job because they were previously at Goldman Sachs, but there have to be exceptions to rules. This is one such occasion.

Cohn has resigned because he was unable to  stop Trump's   plan to impose an additional 25% tariff on imports of steel and aluminium into the USA.  This is a move targeted on China, which has implications way beyond that, including for the UK and the EU.

As a matter of  fact I am not opposed to all tariffs. In fact, in the case of lower income countries I think that tariffs often have a strong and positive role to play in the development of economies,  firstly by protecting local business and secondly by providing an easy, cost-effective, and desirable tax base that is charged on the effective rent that they are due for the loss of their natural resources.

That said,  the USA is not a low-income country.  Nor is it the victim of a trade war:  its deficits are all of its own making. And  the motivation for this tariff is not economic: it is a deliberate escalation of aggression towards China, in particular, that is entirely dogmatically motivated.

And therein lies the  danger. If anyone could believe that this policy was, in any sense justifiable,  then maybe ( just, maybe)  it could have been imposed without too much world reaction.  But, the fact is that everyone reads this as the deliberate opening salvo of a tariff war driven by political intent.

That's the problem.  There are occasions when the country caught subsidising its exports except the tariff by shrugging shoulders and saying 'fair cop'.  But this is not one of them.  China is going to respond to this. So is the EU. It's almost a fact to say that they cannot:  their own industries require it.

This is precisely why  for years wise people have tried to avoid such wars. There can never be winners, even if Trump thinks that ' beautiful outcomes' are possible. Tariffs are intended to  increase separation. Their intention is to provoke.  More aggressive environments follow.  But so too, necessarily, in situations such as this (but not in the case of low income countries, as I previously described) well-being is reduced because whilst there are, undoubtedly, problems with the Ricardian theory of trade, it is also undoubtedly true that some countries do have a competitive advantage over others in some activities, and it is to the overall benefit of all that they be permitted to exploit that advantage so long as others are able to do so in their own area of advantage as well.

So where are we heading? Trade war: that's where. And like all economic wars (including tax competition) these are proxies for the ultimate in aggression, and can escalate.

So why does Cohn's departure matter? Because he opposed this and now there is no one in the White House to do so.

Things can only get worse.

Worry.

And note: in the midst of all this our neo-Trumpians are doing Brexit. It is no coincidence.