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Roula Khalaf, editor of the FT, selects her favorite stories in this weekly newsletter.
The writer is the author of A random walk on Wall Street
An unstable temporary truce may have been declared in the commercial war between the United States and China, but it is clear that the world has unfortunately entered into a new era of greater friction in the flow of goods and services. That will have a great growth cost in the global economy.
There could be legitimate arguments for limited and specific rates designed to improve national security or to help negotiate a decrease in commercial barriers imposed by other nations. But a policy of imposing permanent general rates supposedly to increase American wealth is completely wrong. It will not achieve the objective of restoring US manufacturing.
Most economists would agree with the determination of David Ricardo, who wrote in the early 1800s in which free international trade can increase the general welfare of nations. What Ricardo argued was that the availability of goods and services of both commercial nations could increase if each country specialized in the products in which they had a relative advantage.
If each country did this and imported goods in areas where they were relatively inefficient, the total amount of production available for both countries would be greater than each country produced all of themselves. International trade was not a zero sum game. Commerce can enrich both countries.
A simple illustration will show the benefits of trade. Think of two countries, Great Britain and France, each of which has only 100 hours of work available. Suppose if Britain dedicated half of his work, 50 hours, to the fabric, could produce 50 units of that. The remaining 50 hours if they are dedicated to wine could produce 10 barrels. However, France could produce 50 barrels of wine dedicating 50 hours to the production of wine, but only 20 units of fabric with the remaining 50 hours of delivery. Total production in both countries would be 70 fabrics and 60 wine.
Now suppose that each country specializes with their 100 hours of work. Great Britain produces 100 units of fabric. France concentrates exclusively on wine, making 100 barrels. Combined total production is much higher. By participating in specialization and commerce, both countries are better. If Britain exchanges 40 units of your fabric for 40 units of wine, you can consume 60 units of fabric and 40 barrels of wine. France can have 60 wine and 40 fabrics. This was Ricardo’s universally accepted contribution more than 200 years ago
Consider now a real example of aluminum and wheat production in the United States and Canada. Canada has a comparative (and absolute) advantage over the US in aluminum production because it is capable of trusting exclusively in economic, clean, reliable and renewable hydroelectric energy. Clearly, efficiency is maximized by making Canada produce aluminum and merchant with the US. When importing wheat. In fact, this is precisely what has happened when markets have been functioning without restrictions. But now the wrong policy seeks to eliminate the positive benefits of trade by imposing punitive rates on Canada, our previously friendly commercial partner.
Would it be possible to replace American primary aluminum production by Canadian sources? In a recent one interviewWilliam Opperinger, the executive director of Alcoa, asked that question. He indicated that it could be possible, but that it would take from seven to 10 years to build the required production facilities. In addition, the investment of billions of dollars would be required, and it is far from being sure that these funds could be collected. Oppinger also warned in February that tariffs could cost around 20,000 jobs in the US aluminum industry and more 80,000 jobs in sectors that support it.
But it is very unlikely that a new harvest of production plants will be executed. Aluminum production requires availability of enormous power, and the US electric network could not handle the smelting demand. There are already concerns that energy supplies will not be able to comply with the greatest use of artificial intelligence. The restart of the aluminum smelting is not even possible.
Without a doubt, we must worry about the losers created by trade without restrictions. But the solution lies in using our educational system to provide training for the good jobs that will be required in areas such as energy generation, telecommunications, qualified reparation and medical care, and in facilitating the necessary geographical mobility to take advantage of the new economic opportunities.
Nicing the benefits of free trade will not make us richer in the long term. Permanent general tariffs will only make the United States and foreign nations considerably poorer.