Trump Administration’s Tariff Policy and the case for Unilateral Free Trade

Countries should embrace Ricardo’s Comparative Advantage, open markets, remove tariffs and impediments to trade, give effect to their self interest while the US abandons its own interests.

The day that President Trump announced his reciprocal tariff regime which he called ‘liberation day’, I was in the French Loire, at Angers. My purpose was to see again the great tapestry commissioned by Louis I, Duke of Anjou. Its subject was the Apocalypse, an exploration of St John’s Book of Revelation. President Trump’s new trade policy was presented to a mind that had been sensitised to chaos by one of the greatest works of art bequeathed by medieval French culture.

Babylon Invaded by Demons depicted in the Apocalypse Tapestry of Angers

The Trump administration has thrown international trade policy into chaos by up-ending the USA’s own bilateral and multilateral trade commitments. The country whose economic agents will be principally damaged by this egregious episode of malign decision making will be the USA.

Mercantilism - an idea that was intellectually demolished at the end of the 18th century

Several themes have informed the Trump administration in framing its trade and international economic policy agenda. At the heart of the policy is a belief in mercantilism. Mercantilist trade theory has a long history. Merchants in 16th and 17th century England set out the basic assumptions of it. In 17th century France Louis XIV’s minister Jean Baptiste Colbert applied these theories in an integrated state policy of trade, regulation of production and industry. At the heart of mercantilism is the belief that exports are good, imports are bad and a balance of payments surplus is always good. These ideas were intellectually demolished in the 18th century and early 19th century by David Hume, Adam Smith and David Ricardo. The principle of the division of labour and law of comparative advantage were among the central analytical propositions established by the classical economists.

President Trump’s own version of businessman’s nostalgia

While mercantilism has a long historical lineage, the sort of ideas that inform President Trump's thinking is a straight forward form of businessman's economics that can routinely be encountered in a country club bar, a company directors’ dining room or a saloon bar. The President has held these ideas for many years. As a young man the trade bogey that was allegedly, unfairly competing America’s lunch away, was Japan in the 1970s and 1980s. Now in the President’s perception it is China. Much of the President’s neuralgia about trade is rooted in nostalgia. President Trump has, for example, vividly shared an elegiac attachment to the American furniture industry. This used to be concentrated in North Carolina. Mr Trump evocatively remembered traveling to the state ‘to buy furniture’ for hotels, ‘there was no place for furniture like North Carolina’. ‘My parents lived in Up-state New York and much of the furniture in their home was manufactured there. I still have some of it.’These are the classic complaints of a businessman commenting on international trade policy. At its heart is a misplaced fear of trade and its implications. Importing a good from abroad and using it is not some sort of economic failure. Instead it represents economic agents making the best use of their economic possibilities at home and abroad.

The Trump administration’s tariff policies will damage the functioning of the international economy and damage the functioning of the US economy. The tariff policy will impede the operation of international specialisation that will have a malign effect on the international economy as a whole. Its main effects will be on the US economy itself. It will reduce the choices that US economic agents have in terms of goods that they consume and use, the prices and quality of goods they chose to use. Lower external trade will reduce competition, contest and challenge in US domestic markets, aggravating monopolistic markets. A tariff policy directed at returning the production of manufactured goods to the USA will have the practical effect of reducing the production and consumption possibility frontiers of both consumers and businesses. It will work to protect producers that are less competitive in terms of price and quality. American economic agents will be impeded from adapting to new and improved products and technologies.

Trade is not about the opportunity to travel around the world taking products produced in a merchant's domestic market and obliging reluctant foreign economic agents to buy it. Instead it is about giving all economic agents in all countries the benefits of choice and access to the full range of economic specialisation.

Historically trade has been hindered by erroneous impediments such as tariffs, quotas and domestic regulation and controls that effectively exclude products. These barriers to trade principally damage the economies that impose them and make greatest use of them. They combine, however, to lower the intensity of trade across economies and result overall in lower levels of economic welfare than if the trade barriers were not in place.

The right response to the Trump administration’s trade policy: an assertion of the Principle of Comparative Advantage

The right response to the Trump administration’s trade policy should be a cogent reaffirmation of the principle of comparative advantage first set out by David Ricardo in On the Principles of Political Economy and Taxation in 1817. Differences in absolute comparative advantage or efficiency enable economies to specialise and expand their production and consumption frontiers.

Governments should do so not just in words and rhetoric, but in policy deeds. Governments should take systematic steps to implement unilateral free trade in their own economies. Economies subject to US protection should not respond in kind. They should take steps to make their own economies more exposed to trade. A matching policy response that punishes a protectionist economy damages the country that imposes reciprocal restraint on trade, as well as if not more than the country that is engaging in protection, and operates to impede overall international welfare.

Monetary implications of President Trump’s tariff policy

The initial effects of protection are to raise prices in the country imposing it. It will not necessarily set off a recurrent inflationary dynamic, provided there is a non-accommodating monetary policy in place. It will in the medium and long run lower the productive potential of an economy and imply a need for tighter monetary conditions to maintain price stability in a context where supply performance of the economy will be more constrained and the balance of trade is less able to take the strain of an overheating economy. Monetary policy will be complicated by a shock to demand that arises from the uncertainty generated by the disruption of the malign policy change and from the removal of demand for internationally produced goods in the USA. This demand shock would imply monetary loosening. Yet central banks should respond to a perceived fall in demand in a cautious and nuanced manner.

China, the EU and Canada engage in a dutch auction of protectionist rhetoric

So far Chinese, European and North American governments have competed to express aggravated outrage at the Trump administration’s tariff agenda. They have fallen over themselves to identify opportunities to impose tariffs on the US, while having spoken in high flown rhetoric about the benefits of globalisation. Instead they should systematically identify tariffs, quotas and non-tariff barriers that they have imposed for years and remove them, particularly in relation to textiles and agricultural products.

This would improve the functioning of their own economies. Lower tariffs, fewer quotas and an end to non-tariff regulatory barriers would expose their own economies to greater competition, contrast and challenge. The difficulty of many of these governments is that while they have been happy to excoriate the present US administration for a misguided trade policy that will damage both America and the world, they themselves have consistently spoken and acted on the basis of a forked tongue. This particularly applies to the European Union.

European Union’s mercantilist trade policy

The EU’s Single Market is an extension of its Common Market established after the Treaty of Rome in 1957. At its heart was a mercantilist approach to trade based around high external barriers to promote internal trade within its customs union. When the UK joined the European Economic Union in 1973, its Common Market imposed high external tariffs, with the result that for a liberal free trade economy such as the UK, it was a step towards protection. The Common Market’s illiberal trade regime was a significant reason why free trade economists in the Labour Party, such as the former Chancellor of the Exchequer Hugh Gaitskel, Douglas Jay who served as President of the Board of Trade and Peter Shore who held the offices of the Secretary of State for Economic Affairs and Trade.They opposed British entry into the EEC in the 1960s and 1970s. Not least, among their number was the late John Mills, whose funeral I attended last Friday.

John Mills 1938-2025 Labour Politician, Economist and International Businessman

John was an accomplished and interesting economist, a hugely successful international businessman and a consistent critic of EEC and later EU trade policy. He both acted as the National Agent for the Vote No campaign in the UK’s 1975 referendum on the EEC and convened and supported the Common Market Safeguards Committee.The Common Market’s mercantilism was central to John’s critique of the project.

The President of the European Commission who presided over the creation of the Single Market Jacques Delors and his Commissioner colleagues saw it as an exercise that protected the European Community against competition from dynamic economies such as America, the Asian Tiger economies and Japan. The Social Affairs Commissioner Mrs Vasso Papandreou and the German Labour and Social Affairs Minister Norbert Blum deliberately constructed an internal agenda of labour market regulation directed at preventing ‘social dumping’ that had the purpose of blunting the competitiveness of low income economies that had more flexible labour markets within the Single Market.

Jacques Delors constructed a European economic agenda based on a protected mercantilist economy, sometimes referred to as a ‘fortress Europe’, with an active labour and industrial policy based on training, research, European structural funds and public sector infrastructure investment in ‘trans european networks’. This agenda was laid out in the Delors White Paper on Employment, Competitiveness and Growth in1993. The White Papers mercantilism was vividly expressed:

"We increasingly think in terms of competitive advantage rather than comparative advantages. Comparative advantages traditionally relate to endowment in factors such as natural resources and therefore are fairly rigid. Competitive advantages are based on more qualitative factors and can thus be influenced, to a large degree, by corporate strategies and public policies. In such a context, factor mobility and the capacity to combine factors effectively and to organise the social consensus on the share out of value added are becoming much more important than initial factor endowment.’

Trade policy in the EU has been framed within a context where trade takes place in a framework of regulation, rules, social protection framed around and aversion to risk and innovation. This is reflected in legislation following from the Biotechnology Directive, the Chemicals Directive and regulation that prohibits the use of Genetically Modified crops and applications of new technologies, such as gene editing. The mercantilist trade policy of the EU has been further entrenched by a determined commitment to the Common Agricultural Policy that has impeded progress on multilateral liberalisation for over thirty-five years.

In trade policy terms Brexit was a test for the EU. When the UK left the EU the Commission and member states had a choice. They could keep trade barriers with the UK outside the Single Market and Customs Union to a minimum or erect barriers to trade. While the EU and UK agreed a trade agreement with no tariffs, the EU chose to erect non-tariff barriers and maximise things such as rules of origin in application of tariffs to impede trade as much as possible. Trade in fish and food is impeded by food safety rules that have no logic and only serve as barriers to trade. This was regarded by the EU’s Brexit negotiator as a sort of achievement because the EU was able to impose what it perceived as a punishment on the UK.

Friend shoring, green industrial policies and strategic military industrial complexes

Some of the loudest critics of President Trump’s aversion to free trade have themselves been in the vanguard of embracing new forms of intervention and protection that impede international trade. The Covid public health emergency stimulated interest in ‘friend shorering’as US Treasury Secretary Janet Yellen put it. The Biden administration engaged in a green domestic industry strategy, along with a trade policy that was pretty much ‘continuity Trump’.

The crisis in international relations provoked by the Russian invasion of Ukraine’s most striking policy response in Europe has not been so much a recognition of the need for an expeditious increase in defence spending, but an excitement about strategic industries and the way that increased defence spending could be used to create a state financed manufacturing industry directed at defence. Contributors to the Financial Times have even invoked Alexander Hamilton’s 1791 Report on Manufacturers in aid of industrial policy. Even the British Labour Government that has avoided unwise rhetoric and taken a cautious pragmatic approach to the new US administration has enthusiastically embraced British Steel as a strategic industry, to be preserved through specific interventions enabled in the Steel Industry (Special Measures) Act 2025.n

Take Joan Robinson’s advice

President Trump’s irritated trade partners should follow the advice of Joan Robinson, the distinguished Cambridge marxian economist that ‘even if your trading partner dumps rocks into his harbour to obstruct arriving cargo ships, you do not make yourself better off by dumping rocks into your own harbour’.

Professor Joan Robinson doyenne of the Cambridge neo-Ricardian school

They should engage in identifying their own trade barriers and then set about systematically dismantling them. By exposing their own economies to greater competition and increasing their own economic agents' range of choices, such policies would both improve their own economic welfare and their economic performance.

What should be done : unilateral free trade, open markets up

The Prime Minister of Canada Mark Carney has suggested that countries apart from the US should consider creating what appear to be free trading relationships or areas outside the US. Free trade agreements are slow to negotiate, offer great opportunities for rent seeking by producer interests and usually involve an element of trade diversion that results in a loss of economic welfare. It would be better if all countries systematically embraced the principles of free trade and dismantled their own barriers to trade. The great advantage of unilateral free trade is that it can be swiftly implemented and is not dependent on the actions of other parties. It avoids providing rent seeking opportunities and the deformation of trade distorted by free trade areas.

Warwick Lightfoot

5 May 2025

Warwick Lightfoot is an economist and was Special Adviser to the Chancellor of the Exchequer between 1989 and 1992.