Donald Trump can’t bully Adam Smith

Nearly 40 years ago, during her transformative and market-driven prime ministership of the United Kingdom, Margaret Thatcher famously said: “You can’t buck the markets”. She was right.

But US President Donald Trump thought he could do just that when he imposed what appeared to be a largely random selection of tariffs on America’s trading partners. Within weeks, Trump has been, to quote another great conservative thinker, Irving Kristol, “mugged by reality”.

Various aspects of that reality, indeed, queued up to mug him after that decision. Not only did Wall Street (and the rest of the world’s stock markets) go into free fall, but, most terrifying of all for the American government, other investors started to avoid buying its debt. And if America can’t sell its debt, it enters uncharted waters.

As a consequence, the value of the dollar plunged as people fled for gold as a safe haven. And Trump’s popularity began to cave in, as Americans realised that his preposterously high tariffs on the Chinese could lead to an iPhone costing $US3000 ($4700).

Trump had tried to buck the markets and the markets mugged him. He panicked and began an incremental process of backing down. As he did, the markets steadily recovered.

The question now is whether Trump really has learned his lesson. After all, in a capitalist system, governments that wish to abide by capitalism must respect the markets.

In fairness, Trump recognises that communist China uses unfair trade practices to undercut the competitiveness of the US and other Western states. He is right to try to punish Beijing for its rampant intellectual property theft, dumping, pollution havens, export subsidies, currency manipulation and state-owned enterprises.

All true. But in launching an economic attack on US allies, who are highly anxious about the Chinese Communist Party’s bully-boy conduct, Trump overreached. He appears to have only the crudest understanding of economics, and no understanding of liberal economics. He failed to see that tariffs are a tax, and the higher taxes go the less they bring in.

He failed to understand how much of his blue-collar core support has been put out of work by technological change, and that the clock cannot be turned back. He also seemed to imagine that importers could set up factories in America overnight and avoid his tariffs.

When Jerome Powell, the chairman of the Federal Reserve Bank, pointed out the damage Trump was doing, notably in terms of inflation and growth, Trump abused him and threatened to sack him. The Dow Jones plunged again, and another bout of chaos erupted.

Having already been forced to impose a 90-day “pause” on his tariff policy, and exempted imports of computers and their components from tariffs because someone had made him realise the catastrophic effects the opposite would have on businesses and consumers, Trump then had to say that Powell was safe in his job.

The humiliations kept on coming, but he appeared to take no notice of them. The markets, however, do. Barely 100 days into his presidency, he has lost much credibility, and one fears there may yet be worse to come.

Trump appears to have embarked on the course that he did out of a mixture of arrogance and ignorance. As the conservative Wall Street Journal editorial page said of him, he is a “bully”. He thinks that bullying alone will secure his ends, even if the pursuit of those ends defies reality. But he can’t bully Adam Smith.

The wonderful thing about markets is that they comprise the free will of sometimes millions of actors; they are an expression of liberty. Trump’s tariffs were not only entirely illiberal, and (as in all protectionist regimes) would, if persisted with, undermine the entire American economy. They also confirmed the capriciousness and lack of serious thought behind the major policy decisions of the supposed leader of the free world.

The greatest irony is that free trade has been of immense benefit to America, as it has been to the rest of the world. Whereas in 1990, at the height of the unipolar moment following the collapse of the Soviet empire, the US economy accounted for 40 per cent of the G7 GDP, today, it’s nearly 60 per cent.

Far from leading to “sweatshops”, “exploitation” and “environmental degradation”, as the anti-globalisation left claim, capitalism has lifted living standards and reduced poverty across the world.

The lesson: markets are the ultimate check on wayward presidents, and the more open a nation’s economy, the better off its people. We must hope Trump has learned the lesson: sadly, neither the markets nor the rest of us can yet be entirely sure.

Tom Switzer is executive director of the Centre for Independent Studies.