Swayze’s lesson to Trump

“Trade wars are good and easy to win”, declares Donald Trump. He should heed the lesson taught by that famous actor and, evidently, closet economist Patrick Swayze.

In his film Roadhouse, where he plays a two-fisted bouncer, his character is asked if he has ever won a fight. “No one ever wins a fight,” replies the bouncer cum philosopher cum closet economist.

Replace ‘fight’ with ‘trade war’, and the statement is unassailable. Yet Trump assails it in word, and possibly soon in deed.

If he doesn’t hold Swayze’s economic nous in high regard, perhaps he should listen to the founders of modern economics Adam Smith and David Ricardo. Say what you will about them, but they did understand economics rather well.

Thus for example Smith: “To give the monopoly of the home-market to the produce of domestic industry… must, in almost all cases, be either a useless or a hurtful regulation. If the produce of domestic can be bought there as cheap as that of foreign industry, the regulation is evidently useless. If it cannot, it must generally be hurtful.”

Ricardo went further, arguing in favour of even unilateral free trade. If a foreign country wants to punish its population by making our exports more expensive, let it. That’s no reason for us to retaliate by punishing our people as well.

The logic here is simple, and remains so until modern economists move in with their incessant effort of self-perpetuation. The economy is too simple for today’s economists to understand.

Using all sorts of graphs, charts, computer models and, their favourite word, paradigms, they’ll unfailingly complicate the bleeding obvious, typically pushing the economy towards ruin. If we listen to them, before long we’ll march to the soup kitchens, singing “Brother, can you paradigm”. (If you understand the pun, don’t admit it – you’ll date yourself.)

In this case, by slapping tariffs on imports in an attempt to protect domestic industry (which is recommended by many ‘liberal’ economists), the country will make imported goods more expensive for the consumer.

The consumer will thus have less money to buy other domestic goods, those that don’t have to rely on protectionism to compete. Funds will thereby be channelled away from the most, and into the least, productive areas. The jobs saved in the flagging industries will be lost in the successful ones, and they’ll soon stop being successful.

If, for example, Trump goes ahead with his plan to impose a 20 per cent tariff on imported steel, the price of goods made of this metal will go up (manufacturers tend to pass cost increases on to consumers). This will affect construction, motor trade, domestic goods and many other sectors.

Consumers will have to pinch in other areas, such as high-tech in which America excels, if with a little help from her Asian friends. The knock-on effect will kick in, and those dominoes will fall one by one – to the detriment of the whole economy.

Hence trade wars are neither good nor easy to win. What Trump should have said is that, if one side practises protectionism, a trade war is inevitable.

There’s no rational reason for it to be so, but people aren’t always, and never merely, rational. If attacked, and protectionist tariffs are doubtless offensive, human nature calls for retaliation in kind – whatever sage things Ricardo had to say on the subject.

Then there are also practical considerations. For in today’s world economics is inseparable from politics. That’s why political economy is a more valid academic subject than economics on its own.

A country is bound to respond to aggression, in this case economic, as a way of deterring further aggression, which may also manifest itself in other areas. That’s why protectionism seldom goes unpunished, whatever the purely economic reasons in favour of turning the other cheek.

Here we approach an important difference between the USA and the EU. The former, while seeking global political aims, still has to make good on the founding promise of happiness, which the Founders understood in economic terms.

The EU, on the other hand, is a predominantly political contrivance using economics as a smokescreen to hide each new step to its ultimate goal: the creation of a single European state. Hence it doesn’t mind having its member states suffer economic hardship as long as they march in step towards the bright future.

The EU doesn’t care whether or not its members, especially the marginal ones, are prosperous. It just wants to pretend it’s doing everything possible to make sure they are. That’s why the EU was conceived as a protectionist bloc: its subjects are told protectionism keeps their jobs safe so loudly that they don’t realise the actual damage they suffer because of it.

Trump, being a populist, has to make a good show of make-believe as well. He campaigned on the promise of protecting jobs in the Rust Belt, and the easiest way to do that is imposing tariffs on imports. On the other hand, he can’t allow all other economic indicators to dip too sharply, as the EU can.

This explains why the US retaliates against EU protectionism, but also why the tariffs it imposes tend to be lower than the EU’s tariffs on American products. For example, the EU slaps a 10 per cent tariff on American cars, while the US imposes only a 2.5 per cent one on European ones.

Trump’s threat of hiking the tariffs may come either from a perceived political need or, more likely, from ignorance, which is demonstrated by his statement about trade wars being good and easy to win. It’s no wonder Mrs May is running scared: at Brexit time Britain can ill-afford a trade war with America.

One way to avoid it would be to leave the EU immediately, without any shilly-shallying transitions. If Britain then removes tariffs from American goods, Trump would have to be especially bloody-minded to keep his own in place.

But in the end, both sides in a trade war end up losing. No one ever wins such a fight – the late Patrick Swayze was right about that.