Trump’s tariff programme deepens protectionist tendencies in world economy

Trump is about to announce his new tariff package on what he termed ‘liberty day’. Commentators, politicians, diplomats and CEOs are scrambling to work out what is coming. Trump, characteristically, has kept everyone waiting. But although the details aren’t clear, the direction of travel is.

Trump is preparing a barrage of announcements on 2 April. His car tariffs, announced on 26 March, already caused jitters on the markets, particularly among European and Asian brands heavily dependent on the US market.

Trump seems to have settled on 25 percent as a good rate for tariffs. He has now announced tariffs at this level for Mexico, for Canada, for steel, aluminium, and now the car industry. It is entirely clear what his goal is: he wants to force companies to relocate production to the United States, and not just the assembly of vehicles, but the aluminium, the transmission, the engines and so on. And not just for cars, although it is a particularly important part of the world economy, but for pharmaceuticals, etc.

Whilst Mexico and the UK have attempted to sweet talk Trump into removing the tariffs, China, the EU, Japan and Canada are preparing to respond in kind, and Trump has repeatedly threatened to retaliate in turn, including in the middle of the night on 26 March. This is a recipe for a trade war. It wouldn’t be the first trade war Trump engaged in, of course. He already engaged in one with China in his first term, but this time, it’s not just China, but the whole world that he’s taking on.

What happened in the 1930s

Immediate parallels are being drawn with the 1930s, and there are some parallels. After the Wall Street Crash of 1929, the various nations in Europe and the United States resorted to protectionism to attempt to export the crisis.

The United States introduced the Smoot-Hawley Tariff Act in 1930, raising tariffs to an average of 20 percent. This and the counter-measures taken by other nations led US exports and imports to collapse. Like now, Canada was affected and retaliated. It’s not an accident that Trump is now using some forgotten measures from that act to impose this latest round of tariffs.

Initially, the law had the effect of reviving the US economy but as the recession bit in 1931 following the collapse of the Creditanstalt in Austria, the effects bit all the more severely. Both US exports and imports fell by about two thirds and, by 1932, industrial production had collapsed by 46 percent.

Many European nations followed suit. The UK introduced imperial preference in 1932, which made it harder to export to the UK from outside the British Empire, and other countries, like France, went even further in their protectionism.

But it wasn’t just formal trade barriers that formed part of the new trading relations. One after another, countries abandoned the gold standard. That is, they abandoned the fixed exchange rate between the currency (pound, dollar, franc, etc.) and gold.

The abandonment of the gold standard meant a collapse in the value of the currency, thus giving the countries in question a competitive edge over their rivals. It is therefore no surprise that those countries that stuck to the gold standard longest (France, the US) had to resort to more protectionist measures. Trotsky pointed this out in 1934: “Departures from the gold standard tear world economy apart even more successfully than do tariff walls.”

Overall, world trade fell by 66 percent, a devastating blow to the world economy. It was mirrored by a collapse in industrial production in Germany by 41 percent, in France by 24 percent, and in the UK by 23 percent. At the same time, because of mass unemployment and the general collapse in the economy, the price of products collapsed, exacerbating the endemic crisis of overproduction.

The crisis was, of course, not due to protectionism, but rather protectionism was a consequence of the crisis, which then, in turn, massively exacerbated the crisis itself.

The limitation of the nation state

The reason for this lay in the very development of the economy. Time and time again, Marxists have pointed out that as the productive forces (machinery, science, technology, education, etc.) develop, they come into collision with the boundaries of the nation state. Lenin made this point forcefully in Imperialism: The Highest Stage of Capitalism, for example. He explained in that book, how imperialism developed as monopolies outgrew the national market.

Now, what the politicians, under pressure from the crisis, were attempting to do, was to attempt to turn the clock back. There is a clear parallel with today. Trotsky wrote about the futile attempt:

“The progressive task of how to adopt the arena of economic and social relations to the new technology is turned upside down, and is made to seem a problem of how to restrain and cut down productive forces so as to fit them to the old national arena and to the old social relations. On both sides of the Atlantic no little mental energy is wasted on efforts to solve the fantastic problem of how to drive the crocodile back into the chicken egg. The ultra-modern economic nationalism is irrevocably doomed by its own reactionary character; it retards and lowers the productive forces of man.”

And that was precisely the effect of the various measures that governments took. By attempting to turn the clock back on the development of the productive forces, by forcing them back into the straight-jacket of the nation state, i.e. the national market, they succeeded, not in reviving the economy but in sinking it into depression.

In the end, the economy did revive – after the destruction of enormous productive forces during the Second World War, and with the help of the Social Democratic and Communist Parties in stabilising capitalism. In the West, US imperialism emerged from the war completely dominant, and the economy found a new equilibrium.

The US cajoled French, German and British imperialism to co-operate in order to rebuild Europe after the war. A new institution tasked with opening up the markets was established, GATT, which gradually developed into the WTO.

In Europe, the Coal and Steel Community was established. Trotsky pointed this economic necessity out in 1923 already:

“At bottom of the [First World] war lay the need of the productive forces for a broader arena of development, unhampered by tariff walls. Similarly, in the occupation of the Ruhr so fatal to Europe and to mankind, we find a distorted expression of the need for uniting the coal of the Ruhr with the iron of Lorraine. Europe cannot develop economically within the state and customs frontiers imposed at Versailles. Europe is compelled either to remove these frontiers, or to face the threat of complete economic decay. But the methods adopted by the ruling bourgeoisie to overcome the frontiers it itself had created are only increasing the existing chaos and accelerating the disintegration.” (Is the Slogan “The United States of Europe” a Timely One?)

Already in 1923, in other words, Trotsky foresaw the economic need for this economic unity, which precisely united the coal and steel industries of France, West Germany, the Netherlands and Belgium. This was so because in the small nations of Europe, the limitations that the nation state placed on the development of the economy was all the greater.

As we know, the Coal and Steel Community proved insufficient. Over time, like GATT, it extended its reach and became the European Community and then the European Union. At every step of the way, US imperialism was present and supported Europe’s further integration, because it suited them at that time. The reason why the initial limited scope of these organisations had to be extended is not difficult to understand, if one starts from the point of view that the productive forces, as they develop, eventually outgrow the nation state.

Throughout the 1950s and 60s, productivity and wages rose. Workers in the West could be afforded living standards like they had never seen before. But all of this was precisely because the productive forces could continue to develop under a regime of increased specialisation, increased freedom of trade, etc. The world division of labour was essential for the continued development of the productive forces / Image: Public domain

That is, as monopolies developed in the European Union, in the new emerging industries, like car manufacturing and chemicals, they strained at the limitations of the nation state and needed an outlet on the European market. Therefore, they needed to remove one barrier after another. And because the economy, in general, was growing, a certain amicable division of the profits was possible. This was particularly so as the US, having the most advanced and productive industries, was there to keep pushing in the direction of further free trade.

The capitalist class in general benefitted from this new regime. In particular, it was a regime of relative political and social stability. There were enough profits to go around that significant concessions were even given to the workers. And, meanwhile, the Soviet Union was there as an ever present threat.

A new upturn of the economy was possible under these conditions and this regime. Productivity of labour increased massively by any measurement. Throughout the 1950s and 1960s, this was accompanied by corresponding real-terms wage increases. Because productivity rose, the workers in the West could be afforded a living standard the likes of which they had never had before: houses, cars, TV sets, education, healthcare, pensions, etc.

But all of this was precisely because the productive forces could continue to develop under a regime of increased specialisation, increased freedom of trade, etc. The world division of labour was essential for the continued development of the productive forces.

Alongside this development came naturally the development of massive monopolies that dominated the world market. The least productive companies – being less efficient and without the most advanced machinery – went bankrupt or were bought up by their bigger rivals. This is not the time to deal in detail with this question, but looking into any significant industry – be it raw materials, component parts, or finished products – today there are only a handful companies left.

But contrary to the dreams of the free marketeers, it is precisely the free competition that gives birth to these monopolies.

Protectionism today

Returning to the question of today, we have thus arrived in a world far more developed and far more economically integrated than in Trotsky’s day. Since 1960, the world economy has, in real terms, grown to roughly eight times its size. The volume of world trade, however, has grown by something like 20 times and in terms of value, even more.

When the US embarked on its protectionist streak in 1930, the ratio of trade to GDP was about 9 percent, now, it’s more like 25 percent. And for manufacturing it is even more decisive. The value of US manufacturing output is $2.3 trillion, but the value of US manufacturing exports is $1.6 trillion. That doesn’t mean that 70 percent of manufactured goods are produced for export (components can cross the border several times before they end up in the final product) but it shows the degree of integration of manufacturing with the world market.

So, when the US, and the rest of the world now embark on another protectionist binge, they are doing so from a very different starting point. If you wished to, as Trotsky put it, “drive the crocodile back into the chicken egg”, that entails tremendous destruction of the productive forces and untold misery.

The bourgeois economists are well aware of this fact, which is why they have declared ‘never again’ on protectionism. But like so many economic ‘never agains’, like printing money, it has had to give way to the real development of international and class antagonisms.

Trump didn’t invent protectionism. There are now 4,650 import restrictions among the G20 countries, according to Global Trade Alert, which is 10 times the number in 2008. The US is attempting to clip the wings of the Chinese economy, which it has been trying to do since 2018. There are US and EU electrical vehicle tariffs against China. There’s Biden’s Inflation Reduction Act, various attempts to subsidise domestic chip production, and so on. All this preceded Trump’s second term in office. This was already the direction of travel before he came onto the scene again. Whilst for a whole historical period, world trade was growing faster than the world economy, this is no longer the case.

Trump’s trade war is certainly an acceleration in this direction. No one knows how far this war will go, but Fitch Ratings agency is speculating that the average US tariff rate might reach 18 percent, up from 8 percent, which would be the highest level since 1934.

Trump’s plans pose particular difficulties for the world economy, the logic of which are not just to impose tariffs on the final product (like cars), but across the board on all the component parts of the cars. This raises the prospect of being hit, not just by a one-off 25 percent tariff, but having to pay it multiple times, at various stages of the production process.

The Detroit Free Press quotes an analyst:

“Each time a part crosses a border, it will be taxed, he said. An example Abuelsamid gave is an automaker that he declined to name told him it gets the materials to make wire harnesses from Japan. Those materials go to Mexico to be made into the wiring harness, then those harnesses are shipped to Texas to be attached to an air bag. Those are then shipped back to the automaker’s plant in Mexico to be installed into a car seat. Then the vehicle is shipped back into the United States.”

When the car industry is estimating that it might end up adding anything between $4,000 and $12,000 to the price of the car, this is what they are referring to. This harness here effectively gets taxed twice. This will also mean that US exporters lose even more ability to compete on the world market, as they have to have their components taxed multiple times before exporting them.

What this across-the-board tariff does, and this is probably quite deliberate from Trump’s point of view, is to unwind global supply chains. But this is extremely costly to do. BMW, for example, has three main plants in Europe producing engines, each of them specialising in particular engines for particular models of cars. Building another factory to produce engines just for the US market would be extremely costly. The same goes for any other part of the car, which isn’t already produced in the US. Any counter-measures from the EU, China and Japan that affect US produced components will inevitably make the situation worse still. The long-term effect of this will be to push inflation upwards, causing even more misery for the working class.

A proletarian position

What then are the working class’ interests in all of this? The leader of the US car workers’ union UAW, Shawn Fain, has hailed Trump “for stepping up to end the free-trade disaster that has devastated working-class communities for decades.”

No doubt, he has a point. The dismantling of Michigan’s industrial base has had a devastating effect on the whole region. But it is not possible to put the genie back in the bottle, and Trump’s attempt to do so will have devastating consequences.

Nor can we defend the policy of free trade, precisely because they have brought us to this point in the first place. The policy of free trade is the policy of closing factories, devastating communities, all with the promise that in the long run it will all be for the best.

The German Social Democrats, on the eve of Hitler’s victory, put forward precisely such an insane policy. Let the crisis rip through the working class – eventually it will all be for the best. Only, the way to economic equilibrium went through fascism and world war. Today, that’s not on the cards in the immediate future, but the misery that free-trade capitalism brings is there for everyone to see.

Trotsky points out precisely how the end of free trade is linked to the crisis itself:

“Freedom of trade, like freedom of competition, like the prosperity of the middle class, belongs to the irrevocable past. To bring back yesterday, is now the sole prescription of the democratic reformers of capitalism.”

Those arguing on both sides – free traders and protectionists – want to restore society to its pre-crisis state, but neither have the ability to do so. Neither the restoration of freedom of trade, nor the erection of new tariff barriers will solve the crisis.

The truth is that it is precisely the development of the productive forces and the world market that have both made national capitalism possible, and created the most extensive economic crisis that the world has ever experienced. The whole situation is one where the productive forces are in revolt against the nation state and private ownership. We leave the last words to Trotsky:

“Therefore, to save society, it is not necessary either to check the development of technique, to shut down factories, to award premiums to farmers for sabotaging agriculture, to turn a third of the workers into paupers, or to call upon maniacs to be dictators. Not one of these measures, which are a shocking mockery of the interests of society, are necessary. What is indispensable and urgent is to separate the means of production from their present parasitic owners and to organise society in accordance with a rational plan. Then it would at once be possible really to cure society of its ills. All those able to work would find a job. The work-day would gradually decrease. The wants of all members of society would secure increasing satisfaction. The words “property,” “crisis,” “exploitation,” would drop out of circulation. Mankind would at last cross the threshold into true humanity.”