American tariffs and the return to 'fair trade'

Editor's note: Glenn Diesen is a professor at the University of South-Eastern Norway. The article reflects the author's opinions and not necessarily the views of CGTN.

US President Trump has referred frequently to "fair trade" instead of "free trade", and tariffs have become his preferred economic instrument to elevate the US in the international economy. What is the economic history behind these ideas and are they likely to succeed?

The economic dominance of Britain in the early 19th century created an aversion to free trade in the US, often derided as "free trade imperialism". The infant industries of the US (high cost, low quality) could not compete against the mature industries of the UK (low cost, high quality) under a free market. The UK could saturate the US market, thus limiting its industrial development, and even challenging the country's political sovereignty. The solution was the "American System", which involved using temporary subsidies and tariffs to defend and develop domestic industries until they matured and could compete in international markets.

The US switched from fair trade to free trade when it industrialized and became the most competitive economy in the world. Starting from the late 1980s, Washington augmented a US-centric approach to globalization by promoting an international division of labour in which the US would saturate global markets with technology, finance and the high-end of global value chains. Countries such as China would be responsible for the manufacturing, assembly and the low-end of global value chains. However, China industrialized and incrementally climbed up the global value chain in what has been hailed by many as the most spectacular development in modern human history. As America rapidly lost its manufacturing bases and could no longer monopolize on the high-end of global value chains, the US empire as it was known by some no longer exists.

The US simply cannot be the victor in a war of economics with China, and free trade is not seen as a winning strategy. The US has thus returned to "fair trade", where tariffs have once more been weaponized to defend national industries from more mature competitors, primarily from China. Tariffs and the threat of tariffs are also used to renegotiate trade agreements. US-centric globalization is over, supply chains are repatriated, and economic nationalism is back. But will the US be successful?

Technologies and markets have become more complex over the past two centuries. Excessive tariffs create uncertainties, disrupt supply chains and create inflation, and they should be complemented with industrial development to ensure they are temporary. Predictability is important in economics and the random threats of huge tariffs disincentivize investments as there are too many uncertainties. The manufacturing process consists of complex supply chains and the tariffs on imported components make the final product less competitive and have an overall inflationary impact on society as costs are always passed down to the final consumer.

The repatriation of supply chains will take decades. To ensure tariffs are temporary, there needs to be economic activity to enhance maturity and competitiveness – such as technological development, vigorous industrial policies and infrastructure investments. This has not been done in the US as the financialization of the economy and the oligarchy have created excessive rent-seeking. The economic war against China has made matters worse as banning export of advanced semiconductors has resulted in the loss of huge market shares, diminishing available funds for research and development. Lastly, the excessive use of tariffs breaks the multilateral rules agreed upon by the World Trade Organization, and other countries will retaliate.

Temporary and moderate tariffs can be a reasonable instrument to enhance competitiveness, yet they come with significant risks. The US insistence on dominating and preventing the rise of China, rather than accepting a new international division of labour between equal great powers, has resulted in the tariff instrument being used too aggressively and thus, making the US destined to fail.