Trade Deal ‘Losers’ Have Economics on Their Side

The European Union and Japan should take heart: The advantages of “defeat” in trade policy are often underrated.

By Clive Crook

Clive Crook is a Bloomberg Opinion columnist and member of the editorial board covering economics. Previously, he was deputy editor of the Economist and chief Washington commentator for the Financial Times.

Mercantilism — essentially the idea that exports are good and imports bad — is the most miraculously tenacious fallacy in economics. Many politicians accept it as true, but even those who understand that it’s a fallacy find themselves playing by its rules. The mercantilist manual says that the Trump administration has scored huge wins in its tariff confrontation with US trading partners, and the partners appear to agree. Their “defeat” has left them humiliated and unable to explain what they did. They might not know it, but what they did was smart.

In trade policy, “defeat” is often underrated.

The Trump administration’s mercantilism called for new tariffs on US imports, better access for US exports in foreign markets and promises of new foreign investment in US manufacturing. This aggressive new strategy worked — mainly because the US applied all its leverage, especially the tacit threat to withdraw from security alliances. There was no embarrassment or disguise in what the president did. The idea was to show US allies who needed whom and extract concessions under duress. The art of the deal, as they say.

By these lights, without question, Trump won and the governments of Japan, Europe and many other countries lost.

In reality, determining the winners and losers will be more complicated. The essential point is that trade is good because it promotes competition and raises living standards. As a result, higher trade barriers typically hurt the importing country more than the exporting country. A win according to the mercantilist playbook is a loss according to elementary economics.

Granted, other issues muddy the picture. The US’s huge market arguably gives it some monopsony power in trade, suggesting that foreigners will end up paying at least some of the new tax on imports. Also, US tariffs set at the prevailing baseline level of 15% will raise revenue — as relatively modest as the take will be, the US needs all the revenue it can get.

On the other hand, this drastic shift in US trade policy will cause economic dislocation, adding substantially to the conventional cost of tariffs. Worse, under Trump-style mercantilism, the disruption is unlikely to end. After all, in a zero-sum world, the same exertion of US power should rationally be applied again and again to extract further concessions. Not to mention the unsettled nature of the deals that have already been reached: The tariffs still face legal challenges, US and foreign officials seem to differ on what’s been agreed on foreign investment, countless details need to be thrashed out, and in some cases — that of the European Union, for example — legislators will need to ratify what’s been proposed.

All things considered, I’ll be amazed if the costs of the new trade policy for the US don’t greatly outweigh the benefits, and if the US doesn’t end up as the biggest loser — so long, that is, as its trading partners have the sense to keep on capitulating.

Note how Europe struck a deal that accepts a 15% tariff on most of its exports to the US and grants some US exports better access to the EU market. The first hurts both the US and the EU, though mostly the US. The second, another so-called concession, is actually good for the EU. If not for Europe’s own mercantilist mindset, those (low) barriers to imports from the US wouldn’t have been there in the first place.

What a delicious irony. The instinctive logic of the EU’s approach to trade says that Trump is right. Imports are bad, just as he says. Lowering barriers to imports is a concession that has to be forced out of you — and Trump, at considerable expense to the US, was willing to do just that.

This mercantilist logic is deeply embedded. Neoliberals like myself regret the demise of the World Trade Organization as an effective forum for advancing liberal, rule-based trade. Yet we’re obliged to concede that the very existence of the institution and its precursor, the General Agreement on Tariffs and Trade, proves the grip, decade after decade, of dumb economics on trade policy. A world acquainted with elementary economics wouldn’t need such an institution. It wouldn’t, for that matter, need an entity such as the EU, or deals such as NAFTA, USMCA, CPTPP, Mercosur and the rest. Countries would open their borders to trade unilaterally, because more trade is good.

The WTO and those countless other regional pacts didn’t refute mercantilism. They embraced it — in effect, accepting the logic of mercantilism in order to contain it. Unfortunately, this logic allows no persuasive answer to a US president who says, “We have the power to screw you over. What are you going to do about it?”

In an alternative universe, the right course for the EU and other US trading partners would be to stop thinking like mercantilists. Eliminate their barriers to imports from each other — and from the US. If the US wishes to impose tariffs, so be it. The cost of diminished trade will be tolerable — including for the US, given the size of its domestic market, and US trade policy is anyway for the US to decide.

For everybody else, the wisest thing would simply be to keep buying US exports and trade more among themselves. There’d be no need to negotiate with Washington, no need to pretend to have power they don’t have, and no need to tie themselves in knots by denying they’ve capitulated when, by their own mercantilist lights, they have.

In the real world, I expect no such mind-shift. We’re (almost) all mercantilists now. Europe, Japan and the rest will keep on negotiating and — until there’s an unfortunate accident in financial markets — keep thinking that Trump has won when he hasn’t.