Globalisation Mark 2 – More Protectism, More Mercantilism

Donald Trump has made no secret of his love of protectionism and tariffs. Indeed, he likes to call tariffs his favourite word. During his first administration, the US president-elect took on globalisation’s flaws by, among other things, imposing tariffs on European steel and trying to block Huawei from Western 5G networks. In his second administration, he may go further still, because now he’s surrounded by advisors and ministers fully from the MAGA fold. But it won’t be an ideologically cohesive policy.

That makes it all the harder to plan for. Most of us, if asked to identify our favourite word, would opt for love, peace or some such. Not so Donald Trump. During the 2024 US election campaign, Trump repeatedly declared tariffs ​“the most beautiful word in the dictionary,” on the grounds that the United States is being taken advantage of by other countries. ​“The higher the tariff, the more likely it is that the company will come into the United States and build a factory in the United States, so it doesn’t have to pay the tariff,” he explained at a pre-election event at the Economic Club of Chicago.

At the event, Trump further outlined his thinking around tariffs, which were a cornerstone of his campaign stump speech (or perhaps one should call it his campaign trump speech): ​“If I’m going to be president of this country, I’m going to put a 100, 200, 2,000% tariff. They’re not going to sell one car into the United States, because we’re not going to destroy our country.”

Tariffs have two purposes, Trump explained: to generate government revenue and to force companies to move their production to the United States. ​“They’re not going to do it for 10[%], but [if] you make a 50% tariff, they’re going to come in,” he said, referring to manufacturers.

A short time later, Trump won a surprisingly decisive victory against Kamala Harris, and it didn’t take him long to start implementing his favourite word. ​“On January 20th, as one of my many first Executive Orders, I will sign all necessary documents to charge Mexico and Canada a 25% Tariff on ALL products coming into the United States, and its ridiculous Open Borders,” he announced in a post on Truth Social, his social-media platform, adding that “[t]his Tariff will remain in effect until such time as Drugs, in particular Fentanyl, and all Illegal Aliens stop this Invasion of our Country!”.

Trump likes to call tariffs his favourite word

Tariffs have two purposes, Trump explained: to generate government revenue and to force companies to move their production to the United States. ​“They’re not going to do it for 10[%], but [if] you make a 50% tariff, they’re going to come in,” he said, referring to manufacturers.

A short time later, Trump won a surprisingly decisive victory against Kamala Harris, and it didn’t take him long to start implementing his favourite word. ​“On January 20th, as one of my many first Executive Orders, I will sign all necessary documents to charge Mexico and Canada a 25% Tariff on ALL products coming into the United States, and its ridiculous Open Borders,” he announced in a post on Truth Social, his social-media platform, adding that “[t]his Tariff will remain in effect until such time as Drugs, in particular Fentanyl, and all Illegal Aliens stop this Invasion of our Country!”.

Soon afterwards, he announced he’d impose 10 per cent tariffs on all Chinese goods entering the United States.

“I have had many talks with China about the massive amounts of drugs, in particular Fentanyl, being sent into the United States – But to no avail. Representatives of China told me that they would institute their maximum penalty, that of death, for any drug dealers caught doing this but, unfortunately, they never followed through, and drugs are pouring into our Country, mostly through Mexico, at levels never seen before. Until such time as they stop, we will be charging China an additional 10% Tariff, above any additional Tariffs, on all of their many products coming into the United States of America.”

America’s fentanyl crisis is real, and it’s terrifying. Every day the synthetic drug, which is one hundred times more potent than morphine and extremely addictive, claims the lives of some 200 Americans. The fact that the drug is primarily made in Chinese underground labs and often smuggled into the United States via Mexico makes it an urgent issue to tackle through negotiations with these countries, or even pressure on them.

But the opioid is, of course, in no way connected with artificially cheap manufacturing components and manufactured goods legally arriving in America. The fact that Trump connected fentanyl and tariffs in one of his first announcements since winning the election gave an early indication of how he intends to reposition America in the globalised economy: it will be an unpredictable and often erratic process that aims towards protectionism but can include all manner of other aspects.

During his first tenure in the White House, Trump knew that he wanted to fix globalisation. As he viewed it, and indeed as countless others in America and the rest of the Western world viewed it, the globalised economy had become an uneven playing field that disadvantaged the West. In the 1980s and the 1990s, and even in the early 2000s,

China was globalisation’s Nirvana. It had strong and centralised decision-making, rapidly modernising transportation and other infrastructure, and it was cheap. Chinese companies, which lagged far behind Western ones in sophistication, rose to prominence by making cheap clothes and trainers that were sent to consumers in the West. Western companies, meanwhile, manufactured all manner of goods in China precisely because labour was cheap. Some of those goods were sold to China’s massive domestic market, but many were exported to the West. Early arrivals in China, such as Volkswagen, did spectacularly well.

But by the 2010s, Chinese firms were catching up with Western competitors. They were, of course, benefitting from their country’s low wages, but their prices were artificially made even lower thanks to government subsidies and other support, including the joint ventures Beijing forced Western companies to agree to if they wanted to do business in China. Beijing’s support for

domestic companies, which was crucial in China’s rapid rise from mediocre manufacturer of basic goods to high- end manufacturing superpower, also included the forced transfer of intellectual property from Western companies to Chinese ones – and widespread IP theft by Chinese intelligence officers in support of homegrown companies. Chinese companies added to that by liberally helping themselves to Western competitors’ IP.

By 2020, when Trump had won his first election, there was no doubt that China wasn’t playing by the rules of globalisation. But how to tackle the globalised economy’s fundamental flaws? It would have been extremely difficult, impossible in fact, to refashion globalisation

in one go. So, as I describe in Goodbye Globalization, Trump settled on Huawei. It was a powerful symbol of globalisation’s flaws and risks. And, as if to demonstrate that America’s fight was not just with China but also with its closest friends, the President imposed tariffs on steel and aluminium from the EU, Canada and Mexico.

Now, more than six years after those first shock announcements, Trump is signalling that he’s going to be using his favourite tool, indeed his favourite word, a whole lot more. Judging from announcements that

Mexico and China will be hit by tariffs because they allow illegal fentanyl export into the United States, the returning President will use tariffs not just to fix unfair business practices but also to get countries to take the action he wants to see in completely unrelated areas.

Will Trump, for example, impose tariffs on certain goods from the EU because some EU member states spend too little on defence? And if so, how high will the tariffs be? Judging from his comments at the Economic Club of Chicago, 2,000 per cent tariffs are not out of the question. Considering the United States’ importance as an export market, tariffs are a powerful threat to throw around.

But at their core, tariffs are not an omnibus weapon: they are a tax on foreign-made goods that are perceived to be too cheap. America has benefitted from such goods, but Trump’s contract with his voters is that he can grow the economy by bringing lots more manufacturing

to America. And he proposes to achieve that by making imports more expensive. The point, as he has repeatedly pointed out, is to make it so inconvenient (speak; expensive) to import that the only solution is to manufacture in America.That makes sense.

In fact, Trump’s vision for American manufacturing is a protectionist’s dream. But he seems to have forgotten about one part in this scheme: the manufacturing workers. Under President Joe Biden, the US government – together with a number of states – has enticed chip manufacturers to build impressive chip fabs in America. It’s a brilliant scheme, because it brings highly qualified manufacturing jobs to America and reduces the United States’ dependence on Chinese tech.

The US will pursue protectionist policies despite the risk of bumps along the way

But there are not enough workers. ​“We project the semiconductor industry’s workforce will grow by nearly 115,000 jobs by 2030, from approximately 345,000 jobs today to approximately 460,000 jobs by the end of the decade, representing 33% growth. Of these new jobs, we estimate roughly 67,000—or 58% of projected new jobs (and 80% of projected new technical jobs) – risk going unfilled at current degree completion rates.

Of the unfilled jobs, 39% will be technicians, most of whom will have certificates or two-year degrees; 35% will be engineers with four-year degrees or computer scientists; and 26% will be engineers at the master’s or PhD level,” the US Semiconductor Industry Association noted in a 2023 report. Last year, the Taiwanese chip- manufacturing giant TSMC delayed the launch of its much-trumpeted chip fab in Arizona due to a lack of workers. There aren’t even enough lorry drivers to bring the parts to and from the fab.

This is the thing about protectionism: to a protectionist mind, it looks like a perfect solution, but if the people who have to make it happen won’t turn up for the show (because they are employed elsewhere or don’t want to work in manufacturing), it’s not going to happen.

That’s why Trump’s new tariff-focused trade strategy is destined to become rather more turbulent than he envisages. What’s more, manufacturing in the 2020s is unlike the manufacturing that left America and other Western countries in the 1900s. It’s even more highly skilled; indeed, like chip-fab jobs it often requires certification. If Arizona, which has admirably been positioning itself for chip manufacturing by not just enticing construction but by also offering the appropriate qualifications through the Arizona State University system, is not fully succeeding, imagine the hurdles elsewhere.

Trump may well impose tariffs so punitive that foreign companies decide they want to manufacture in America. But if they then turn up, blueprints in hand, and make the same discovery as TSMC, the Trump administration would face a dilemma. Should it change its protectionist strategy because not enough qualified workers are available? Or, heaven forbid, should it ask Mexico, Canada and other countries for help providing such qualified workers? If America imposes tariffs on its friends, not only are they extremely unlikely to help Trump get the workers he needs for American manufacturing: they are also extremely likely to impose tariffs in return.

Unsurprisingly, the EU is already making plans for such a contingency.

“If you introduce protection, tariffs, restrictions on trade, they become matters for government-to-government wrangling and they are an enormous source of division,” Milton Friedman noted in a 1978 lecture at the Kansas State University. But since Friedman is hardly a prophet of the MAGA world, Trump and his advisors will pursue their protectionist policies, the risk of bumps notwithstanding.

And for America’s friends and partners, that determination combined with the revision that is bound to take place when reality hits, means four years of policy-making that will be hard to predict and harder still to plan for.

The past three and a half decades of intense global trade has been an astonishing feat, one that has lowered consumer prices and increased prosperity. The globalised economy was never perfect; indeed, in recent years it became clear that it had preciously few supporters. But to imagine that America can painlessly bring large chunks of manufacturing back is a naïve dream of which Trump will soon be disabused.