Malcolm Turnbull says it is ludicrous for leaders to become just a conga line of sycophants to gain an exemption on tariffs being levied on their economies by Donald Trump. It is true that a negotiating strategy based solely on managing the ego of a volatile President is foolhardy and precarious. But many are also falling into the trap of assuming that there is no reason or method to Trump’s trade policies, which they dismissed as quixotic, self-defeating, popularist, and absurd.
Continuing to do that is the surest way of putting oneself in the worst possible position to not just gain an acceptable agreement with Trump but also prepare our economy for what is ahead. The temptation is to suck up but implicitly talk down to a supposedly economically illiterate president.
I wonder how many of our political and diplomatic negotiators are genuinely trying to understand where the administration is coming from. Better to begin with an inquiring mind. On economics and trade, there is sophisticated reasoning and method behind what Trump is doing.
The reindustrialisation of America and the revival of innovation is the driving force behind Trump’s love of tariffs.
One may still strongly disagree with it, but understanding is necessary for dealing constructively with the administration on these matters.
The consensus in Australia about free trade is an intuitively seductive one and based on the idea of competitive advantage which can be traced back to 18th century economists such as David Ricardo. We export what we are good at producing and import those goods and services that others can do better or cheaper. Of course, there are some national security considerations. But apart from those, the freer the trade, the better off we all are.
This logic does not fully resonate with the Trump administration. Put aside tariffs that are being imposed for coercive negotiating purposes (such as those against Mexico and Canada) and against China for geopolitical reasons. More important is to understand the economic philosophy and thinking behind general tariffs not being imposed for negotiating leverage or geopolitical reasons.
The White House does not dismiss the theory and practice of comparative advantage in trade but believes it is limited and incomplete. It argues that the prevailing anti-tariff mindset elevates and prioritises the short-term interest of the consumer in the form of cheaper goods above all else in a way that is increasingly detrimental to society and the national interest.
As the reasoning goes, such an overarching focus on consumer welfarism has a cost. Free trade is disinterested in whether other needs of the community and nation are advanced. For the current administration, cheap and reliable energy production and manufacturing remain essential to the long-term prosperity and security of all large nations and complex societies.
Industrial resilience
This is because energy is the lifeblood of almost all economic activity, while making things (not just providing services) is the foundation for industrial resilience. It is also essential for innovation. For example, in the case of Taiwan, it was not the invisible hand but a deliberate policy decision that enabled the country to lead the world in semiconductor fabrication. Doing so leads to other supposedly “natural” advantages. It is difficult for a country to create clusters of innovation if it is not producing real goods.
The reindustrialisation of America and the revival of innovation is the driving force behind Trump’s love of tariffs. Tariffs are designed to give domestic producers an advantage in the US market over foreign firms. The administration concedes that its tariff strategy will fail if it doesn’t lower costs and increase efficiency in other areas.
This explains energy, deregulation, industrial relations, taxation, and financial policies being rolled out to assist and incentivise American-based firms on the supply side. As far as they are concerned, economists railing against tariffs are those overly wedded to blindly maximising consumerism in the immediate term and have lost sight of the national and social importance of making things.
At this point, Trump’s advisers might point to no less an authority as Adam Smith who argues in The Wealth of Nations that “some burden upon foreign (entities) for the encouragement of domestic industry” is appropriate when doing so is required for national security.
In the 18th century, this referred to things such as ship sails and gunpowder. In the modern world, defence and national security cover much more: from critical minerals and steel to industrial chemicals and AI data centres. Additionally, the COVID-19 pandemic has only increased the number of sectors identified as critical.
Australia the case study
For the White House, an increase in energy costs and a decline in manufacturing prowess leads to a loss of economic complexity in addition to indigenous innovation. Some in the administration consider Australia a salutary case study. We are champions of free trade. Yet, in Harvard University’s ranking of Economic Complexity, which compares the complexity of products and services produced by various countries, our ranking has declined from 53rd in 1995 to 102nd in 2022 – sandwiched in between Senegal and Yemen.
Such indicators are not simply about bragging rights. Given the absence of supply-side reforms, and if our manufacturing and innovative capabilities remain in structural decline, there is serious scepticism that Australia can step up and achieve the objectives laid out by both pillars of AUKUS.
It may be that the administration’s tariffs and domestic changes will not achieve the outcome that it wants. But persuasively making that case needs more than dismissing Trump and his advisers as economic simpletons.