The G7 meeting this weekend is expected to dissolve into bitter fighting over trade, with President Trump on one side and everyone else, led by Canada’s Justin Trudeau (the host) and France’s Emmanuel Macron, on the other. Following the United States’ imposition of tariffs on steel and aluminum imports, it appears that those other nations are engaging in tit-for-tat retaliation, raising tariffs on American exports (as the British newspaper City AM put it, “Hit the Chevy with a levy, tax your whisky and rye.”) This is a losing game for both sides. Both the U.S. tariffs and the retaliatory tariffs are serious mistakes that will harm the American economy.
The reason why neither side realizes this is because no one involved in national trade policy these days seems to recognize that, for the most part, nations don’t trade with one another—individuals and businesses do.
Moreover, very few people recognize that exports are simply the way we pay for imports of the things we want, rather than a good in and of themselves. A country that seeks to restrict imports is simply harming itself, raising prices artificially for the domestic version of the imported good.
That’s why when nations go to war, they blockade each other—to prevent imports. If the logic of trade tariffs held, this would do wonders for the blockaded economy. There’d be more jobs and higher wealth. Of course, this is not the case. That’s because barriers to trade harm the nation’s economy.
Economists are now in general agreement that the Smoot-Hawley tariff of the 1930s prolonged the Great Depression. It was the realization of the harms of tariffs that led the postwar U.S. leadership to come together with other nations to create the General Agreement on Tariffs and Trade (GATT), which (together with its successor, the World Trade Organization) led to significant reductions in tariff barriers around the globe. According to Dartmouth economist Doug Irwin:
The prosperity of the world economy over the past half century owes a great deal to the growth of world trade which, in turn, is partly the result of farsighted officials who created the GATT. They established a set of procedures giving stability to the trade-policy environment and thereby facilitating the rapid growth of world trade. With the long run in view, the original GATT conferees helped put the world economy on a sound foundation and thereby improved the livelihood of hundreds of millions of people around the world.
This is why the seemingly imminent breakdown of the world trade system would be catastrophic. Not only would America suffer, all those nations that instituted their own tariffs would also suffer. Domestically, the looming trade war threatens to undo all the economic progress made from lower taxes and less regulation.
That’s why the correct response of the other G7 nations to America’s self-destructive trade policy would simply be to do nothing. Unfortunately, their leaders are likely to listen to the siren voices of their exporters, rather than the quieter yet more numerous voices of those who benefit from imports. And that is exactly the mistake the administration is making here.