Why, trying to develop modern industry, will tariffs have to be used by everyone, including Germany?

"The public is in a state of shock over the tariffs imposed by the administration of the President of the United States of America, Donald Trump, on countries around the world, including allied countries in Europe, tariffs, which will soon be frozen for 90 days.

 

It has become a tradition that D. Trump's policy is viewed with skepticism: in other words, the tariffs imposed by the US presidential administration are illogical, archaic, and harmful to American consumers and will greatly harm the global economy.

 

As usual, the criticism is mainly directed by those who seek to maintain the status quo in the global economy at all costs. The logic of the latter is as follows: the United States should continue to participate in and support (as a hegemon) free global trade, because it is profitable for the United States itself, and not try to defend its economic interests with tariffs.

 

Only time will tell whether this criticism is justified. However, it should be noted that even D. Trump himself does not claim that everything will necessarily work out one hundred percent.

 

The US leader has made it clear that at first it may be difficult, various perturbations may occur, but the goal - the reindustrialization of the United States - justifies the means.

 

The US does not really have another way. Yes, the "treatment" is difficult, but it may end in recovery. Otherwise, i.e., if the current situation continues, the US (and therefore the global economy) is threatened with trouble: perhaps an economic-financial crisis, perhaps even the insolvency of the world's largest economy - the US.

 

The question of whether such a scenario would be beneficial to the West and Lithuania remains open.

 

Ignoring (cancelling) D. Trump or claiming that the United States presidential administration has conceived and is implementing an “illogical”, “unfounded” policy is equally illogical and unfounded, if you are at least a little interested in international political economy.

 

Free market and protectionism

 

In order to understand the logic of D. Trump’s administration’s decisions, one should briefly travel back to the 19th century. At that time, the German economist and politician Friedrich List criticized the free market and free foreign trade principles of Adam Smith, the so-called “father” of liberalism, and other liberals.

 

A. Smith held the view that free trade is one of the most important conditions for creating economic prosperity. According to him, countries will specialize – they will produce only those goods that they produce more efficiently than other countries, and then, by trading with other countries without obstacles, they will generate more global capital than by producing everything themselves. State interference in free trade (e.g., through tariffs or other trade restrictions), in A. Smith's view, reduces both efficiency and global wealth.

 

A. Smith's ideas were developed at the turn of the 18th and 19th centuries by the British [1] economist and politician David Ricardo, who formulated the so-called Theory of Comparative Advantage. According to it, countries should not produce everything, but only those goods whose production costs are the lowest compared to other goods that the country can produce. The remaining necessary goods, countries will be able to purchase on the free market from other countries and thus achieve greater overall economic benefit.

 

F. List did not claim that participation in free trade is useless. However, he emphasized that it is useful only for developed industrial countries. And for developing non-industrialized countries, including F. List's native Germany in the 19th century, participation in free trade does not bring advantages.

 

On the contrary, specialization slows down industrial development, since there are no incentives to create industry, since the missing goods can be purchased from other countries. Among other things, according to F. List, in world trade, countries trade different goods: some export higher, and others lower value-added products or raw materials.

 

Thus, if a country does not create industry, it remains a producer and exporter of low value-added products. Thus, it not only loses to developed countries (in terms of assets received), but also becomes dependent on them.

 

A country that does not have or has lost industry eventually loses its scientific potential and technologies, since industrial development is impossible without scientific and technological innovations.

 

Finally, a country that does not have or has lost industry eventually loses its scientific potential and technologies, since industrial development is impossible without scientific and technological innovations [2].

 

F. List's recipe is simple: in simple terms, a developing country can initially participate in free trade (e.g., trade in raw materials, agricultural products). Participation in free trade allows it to accumulate the necessary capital for the creation and development of industry. The country must then invest this capital in the creation of industry, development and technology, and to protect the young industry from foreign import competition, to introduce tariffs. Finally, when the new industry has grown and matured, the state returns to free trade - only this time as a developed and independent of other states, able to control the path of its development.

 

Will services and technology save it?

 

Apologists for the so-called "post-industrial society" concept, which claims that after the industrial revolution, societies move to a higher stage of economic development, dominated by services and the knowledge economy, rather than manufacturing and industry, explain that the service and technology creation sectors compensate for the loss of industry.

 

This is not absolutely true.

 

Neither services nor technology creation create the same added value as high-tech industrial production carried out in the state. This fact is quite well illustrated by the huge US budget deficit, which testifies that the service sector is not necessarily more profitable and stable than the industrial one.

 

What can we say about the deindustrialized regions of the United States, such as the so-called “Rust Belt,” which are today burdened by deep economic and social problems.

 

This situation once arose in the heart of American industry for several reasons: first, in the 1960s and 1970s, faced with economic competition from Japan and Germany, which had recovered from the war, the United States had an international trade deficit for the first time in post-war history. The United States had already resorted to protectionist measures at that time in order to defend its economic interests.

 

Second, at the same time, Washington and Beijing turned a new page in diplomatic relations, seeking to balance the power of the Soviet Union.

 

The so-called ping pong policy not only opened the door to the huge US market for Chinese manufacturers, but also ensured a source of foreign currency, necessary for the development of the agricultural and industrial sectors. Relatively cheap labor and the ability to freely sell products on the US market allowed Chinese industrial enterprises to grow rapidly.

 

The development of Chinese industry was also contributed by investments, most of which the Chinese received from the United States. A significant number of American corporations not only moved factories to China and other cheap labor countries, but also supported initiatives to reduce the protection of the US domestic market.

 

Although it was argued that free trade would bring more benefits than harm, in the long run, imported products helped to push more expensive American goods out of the market. Due to competition from foreign manufacturers, thousands of American workers lost their jobs, and the US industrial sector suffered a shock.

 

Statistics confirm that the importance of the US industrial sector in the country's economy is declining. If in the 1950s the manufacturing sector accounted for about 21–25 percent of the US gross domestic product (GDP), and this sector employed about 30 percent of all US workers, then over the following decades (especially after 1970) the importance of manufacturing has consistently decreased: to 10 percent GDP (in 2021) and to 8–9 percent of all jobs in the United States (2020).

 

Moreover, as production moved from the United States to low-cost countries, including South Korea, Taiwan, China, etc., the latter countries not only created their own industry, but also technologically modernized it, using the capital accumulated from the export of industrial goods for this purpose.

 

Today, the aforementioned countries challenge the United States: not only are huge corporations in these countries forming and have been formed, but also the funds generated from the export of industrial products are being invested in the development and production of new technologies, an arms race is underway, and fierce competition for strategically important resources is taking place.

 

In other words, as the relative economic power of Southeast Asian countries grows in the world, the economic muscles of the United States, Europe, and other old power centers are contracting.

 

This is again confirmed by statistics: if after the Cold War the US share in the world economy fluctuated from 25 to 30 percent of global GDP, today this figure is 15-25 percent; accordingly, China's share in 1991 was about 2-3 percent of global GDP, and today it is almost 17 percent.

 

The US still leads the world in many aspects of power: from the so-called "hard" (e.g. economic, financial, military) to the "soft" (e.g. culture, diplomacy). However, history shows that the status of the hegemon of the international system is not eternal. And if no action is taken now, the US will eventually lose the competitive struggle.

 

The logic of Trump’s policies

 

Therefore, in a sense, what D. Trump is doing is both logical and consistent, and even inevitable.

 

The goal of the US presidential administration is to reindustrialize the country. And tariffs are a means to do so.  

 

Trump did not invent tariffs, nor was he the first to try them. One can think of Otto von Bismarck’s Germany (mid-to-late 19th century), Meiji Japan (1868–1912), and other countries that achieved impressive economic growth rates after industrialization.

 

Perhaps this is an archaic way to return manufacturing, perhaps this policy will succeed, perhaps not. That is not even important.

 

The important thing is that there is probably no other path to recovery.

 

Skeptics sarcastically joke that Trump is trying to bring back the textile industry from India, Bangladesh, Vietnam, or Pakistan to the US. Not quite. We are talking about higher value-added production: aviation, automotive, energy, computer and information technologies, microelectronics, biomedicine, etc.

 

The European Union’s Time Will Come

 

In general, the critics of the Trump administration need to admit this: if the logic of the US president’s decisions is negative or if attempts are made to ignore it, there is a risk of falling behind global processes.

 

For example, the European Union (EU) faces identical problems to the US. Moreover, these problems will become increasingly acute because, on the one hand, US tariffs will cause China and other global producers to look for places to export their surplus goods, and on the other hand, the US is turning from a payer of Europe’s security bills and guarantor of exclusive trade rights into an economic competitor. The clouds are gathering.

 

The strongest industrial country on the Old Continent, Germany, which still pulls the EU train like a locomotive, has been facing economic challenges for some time. Because the same laws of the free market that forced Trump to resort to protectionist instruments also apply here in Europe. The Germans and their industry, if not properly protected (yes, with the same tariffs), are facing similar problems as the US industry – i.e., the German industry, which is not properly protected, will eventually lose out in the competitive battle against relatively cheap manufacturers like China. And Chinese production is becoming more advanced every year, thus increasing the pressure on European products.

 

The COVID-19 pandemic has shown how vulnerable Europe is: with the collapse of global trade chains, the Community has been left without the components necessary for its industry. Even the EU did not have a microelectronics industry for a long time and has only now come to terms with it.

 

And this is not even the biggest problem: entire regions of the EU, including Eastern, Central and Southern Europe, are either drowning in debt or remain producers of low-value-added products and therefore applicants for European payments, instead of being industrialized high-tech zones that create real added value.

 

In 2004 having annexed huge territories, the EU has not been able to use them properly, because it is drowning in a swamp of inefficient and inert bureaucracy, and therefore cannot make any decisions that meet today's needs.

 

And those decisions will be needed: if the US manages to reindustrialize, Europe will have no other choice. But will it be able to?

 

Today, unfortunately, maintaining the flawed economic status quo is the most important goal and value of the EU, because the Brussels bureaucrats care about the process, not the result. However, in reality, the situation on the Old Continent is not much better than that of the US across the Atlantic."

 

We, the EU citizens, are entering the robotic economy without leaders, who understand what is going on here. We are entering the robotic economy therefore naked, not prepared to participate in the competition.

 

1. The British economist and politician David Ricardo, who formulated the so-called Theory of Comparative Advantage, had a good reason to push free trade on other countries. The British had strong industry in 19-th century, so they needed open markets to sell their goods. Only China is in such a position today.

 

2. Also, scientific and technological innovations are impossible without industrial development. How will you innovate industry, if you don’t have any industry? Your talents are not needed in your own country. You become one big group of stupid people. Just look into the mirror.