How Donald Trump is challenging conventional wisdom with devious ways to achieve goals

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Published: April 9, 2018 1:42:51 AM

US President Donald Trump's tweets and policy moves continue to confound the media as well as the markets. Even Indian stock markets were spooked by his latest moves, which threaten a tariff war with China.

Donald Trump, Donald Trump president, trade war, tariff war, US, chinaUS President Donald Trump’s tweets and policy moves continue to confound the media as well as the markets. Even Indian stock markets were spooked by his latest moves, which threaten a tariff war with China.

US President Donald Trump’s tweets and policy moves continue to confound the media as well as the markets. Even Indian stock markets were spooked by his latest moves, which threaten a tariff war with China. (India can only gain from a US-China trade war.) Markets are, of course, short termists, and no one wants to be caught not reacting to ‘news’. Some news, as Trump would say, is fake. But, there is true news whose significance can be misread, and in case of Trump’s pronouncements, is frequently misread. The problem is ‘conventional wisdom’ as JK Galbraith used to call it—the miasma of common beliefs about how economies work. Conventional wisdom, as propounded in serious news media such as The Financial Times is that the present global economy has enjoyed unprecedented prosperity because of free trade and free movement of capital. This world was inaugurated after 1945, by the General Agreement on Trade and Tariffs undertaking repeated rounds of mutual tariff cuts among developed countries, and then, WTO establishing an agreed regime of low- /no-tariff regime agreed to by all members. This regime has delivered global prosperity since the early 1999.The idea that free trade is the best is deeply embedded in economists’ minds ever since David Ricardo argued in its favour in early 19th century. Trump is the first post-war American president who has challenged this wisdom.

He campaigned on a protectionist manifesto, and unlike most successful candidates, he stood by his promise after election. He has had to search high and wide for an economist who would agree with him. His threat of tariffs on US imports has sparked the panic of impending trade war between China and the US. China is playing its allotted part as expected by Trump. There is an expectation that mutual tariff-hikes would lead to a trade war, reminiscent for some of the Great Depression during which the US Congress passed the Smoot-Hawley Tariff Act . Conventional wisdom says that this Act worsened the Depression. First, the free trade issue. Through the development of modern capitalism since the 1780s, only the UK, impressed by Ricardo’s argument, practised free trade, unilaterally most times, since the mid-19th century. All other developed countries used tariffs to industrialise—the US and Germany most of all. Free trade became a policy norm only after the US became the lead industrial nation. Industrialisation of the Soviet bloc of economies was under a trade bloc, which put tariffs against imports from outside the bloc, with regulated trade within. The EU is based on the same Customs Union principle—free trade within and protection against outsiders. There are regional trade agreements (ASEAN,NAFTA, etc), that follow the same principle. Trump is an unconventional thinker. Notice his gambit in the case of North Korea. Six months ago, everyone was worried that he would start a nuclear war with Pyongyang. Instead, for the first time in the 65 years since the Korean Armistice, there is a serious prospect of peace talks between the two halves of Korea and even between the US and North Korea. This is a result of Trump’s unconventional bargaining strategy. He plays non-linear, multidimensional chess. For the elite US media, this is deplorable behaviour. They praised Obama’s policy of constructive neglect of North Korea.

Trump knows his goal as he starts his negotiation, but does not reveal his path towards the destination. He has always boasted about his deal-making ability, but the US media dismissed it as an empty boast. Reagan was treated with alarm and contempt when he proposed his Star Wars military threat. Yet, he achieved detente and the ultimate dissolution of the USSR without a shot being fired. Now, of course, he is hailed as a hero. Media memories are short. Expect a similar result in the present case of  ‘tariff wars’. Trump has announced his move but not dated its commencement. He has exempted the EU. At present, he is concentrating on China. My guess is that he wants to arrive at a comprehensive bilateral trade treaty with China, having scuppered the multi-nation Asia Pacific trade treaty, which was about to be signed when he became president. As in the case of North Korea, Trump views the world in a series of bilateral quarrels the US has to settle, rather than the multilateral view, which was the official American stance. In that view, which prevailed for over half a century after 1945, the US provided the most crucial global public good—security for trade and transport across the world. Trump has said the US cannot afford to pay unilaterally for that. This is why he wants NATO countries to contribute their share. He wants to renegotiate NAFTA. He wants a US-China trade deal. He has devious ways but he will get there. Markets should relax. Welcome to the Post-Ricardian world.

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