The Return of Tariff Reform

As Trump's America pivots to national preference, it's now clear that global "free trade" was never anything of the kind

Towering Columns

In The Telegraph, Rian Chad Whitton says free trade has not made Britain prosperous.

The US has had anything but a free-trade attitude towards aerospace, perhaps the sector most critical to its military dominance. In the 1960s, the US allegedly made an IMF bailout loan contingent on scrapping its TSR-2 spy plane and buying the American F-111. Julien Amery directly accused the Johnson and Kennedy administrations of threatening to block loans to Britain if they participated in the Concorde project, which was competing with America’s own supersonic developments. The US, unlike Britain, has laws dating back to the 1930s dictating its federal services to actively prefer domestic suppliers. The Jones Act, passed in 1920 and still in effect, demands ships moving cargo between US ports be made domestically.

Regardless of the efficacy or validity of these individual actions, today’s trade is blended and contorted by millions of tariffs, bans, taxes, subsidies and veiled threats. America’s turning towards greater tariffs is part of a broader trend. China, through asymmetric protectionism, government assistance and currency manipulation, has soaked up global productive capacity, which is chasing stagnating levels of consumption. Faced with this, countries can either let their productive sectors wither, or they can act.

Some will insist that, even if the world turns protectionist, Britain should pursue free trade unilaterally. But these people have to ask, why has such a strategy been compatible with greater regulation, bureaucratisation and stagnation at home? One could argue that our onerous planning system and constrictive Net Zero strategy have been enabled by free trade: why are steel, cement, glass, ceramics or rare earth magnet production necessary if you can just offload the negative externalities onto someone else? Trade is already near a record 65 per cent of our GDP. Foreigners already own 60 per cent of British public stocks. Greater openness is not making us more competitive. Perhaps we ought to be more open to a closing world.

And in The Times, Juliet Samuel says free trade as currently practised is nothing of the kind: aggressive surplus strategies are inflicting deindustrialisation and rising debt on economies like the UK.

So we post-industrial countries have remained determinedly sanguine about what we persist in calling free trade even as the effect has expanded, first into modern kit of all sorts, such as phones and computers, then into stuff we have never even made at scale, like car batteries and fourth-generation nuclear reactors.

But what if this story is completely wrong? What if it misses out something big? As economists such as Michael Pettis argue, it misses out the true cost of letting domestic industries go to the wall. This cost takes various forms. The most obvious are unemployment and lost skills in former industrial areas. But because leaving people on the scrapheap is politically unpalatable, governments in the US and Europe have tended to spend and encourage spending to compensate: that is, we’ve created jobs in the state sector, handed out ever more benefits and kept interest rates low so everyone can keep borrowing. This has just about kept demand and activity ticking along, though at great cost in productivity and mounting debts.

As we are just discovering, there are other costs to losing your industrial base. It turns out that not having trusted suppliers of things like ammunition, nuclear power, electronics and rare metals is a bit of a problem. For the hegemonic superpower that is the US it may be an existential problem; even for smaller countries like the UK it’s rather suboptimal. Tooling back up, or having your allies tool back up so you can buy this stuff from a friendly country, is vastly expensive and difficult. In short, subsidies don’t ultimately impose their primary cost on the governments handing them out if they can simply dump all their excess production on global markets. This is not true free trade and we should not feel queasy about rejecting it.

For UnHerd, Thomas Fazi says the EU’s proposed economic strategy has no substance, and that Europe cannot reform while it remains wedded to supranational neoliberalism.

Another issue [besides the Euro] is the EU’s historical bias against robust industrial policy. Since its inception, the EU has been deeply influenced by neoliberal economic doctrines that emphasise the supposedly “distortionary” nature of industrial policies. Stringent state aid rules broadly prohibit any support granted by member states that could favour certain companies or industries, unless explicitly allowed under specific exceptions. The idea is that allowing member states to support their domestic industries could lead to an uneven playing field, creating conditions where companies with state backing have an advantage over others. But this leaves Europe dramatically ill-prepared to compete with countries such as China and the US, which have relied heavily on state-led industrial policies — such as the CHIPS and Science Act and the Inflation Reduction Act (IRA) — to achieve a competitive edge, especially in recent years.

In response, EU leaders have been talking more about the need for a “Made in Europe” strategy to counterbalance the potential economic impacts of the “America First” policies. But the reality is that the EU’s institutional framework makes it seriously unfit for confronting the new 21st-century geopolitical landscape of state-led economic renationalisation. In this context, even if the Competitiveness Compass recognises the importance of boosting technological sovereignty or strengthening European manufacturing, member states will find it challenging to implement the sort of targeted, industry-specific measures that could truly spur innovation or anchor supply chains.

The EU’s complex governance framework poses an additional challenge. The bloc operates through multiple layers of decision-making, involving not only the member states but also several key institutions. This highly bureaucratised, multi-level apparatus results in a slow and convoluted decision-making process, which often leads to fragmented and inconsistent policy responses. This is why, for instance, the limited investments and industrial policies that do take place remain fragmented and split along national lines, as well as between member states and the EU.

Also for UnHerd, Juan David Rojas argues that stopping mass migration should reverse the suppression of American labour’s rights and wages - as enabled by the progressive left and libertarian right.

Back [in the 1980s and 1990s], it was free-market Republicans like Ronald Reagan who celebrated the exploitation of illicit labour in jobs “Americans won’t do”. Never mind that these jobs were overwhelmingly occupied by Americans prior to the arrival of millions of illicit workers. Never mind, too, that native-born workers still form the majority of the workforce in sectors with large numbers of illegal employees, such as construction, household labour, dry cleaning, and landscaping.

An earlier generation of labour leaders and social democrats viewed mass illegal migration as one component in a broader suite of policies, including outsourcing and union-busting, meant to squeeze wages. United Farm Workers founder Cesar Chavez, for example, repeatedly denounced illegal migration and would make a point of alerting the authorities to employers hiring such workers. In 2007, Bernie Sanders said: “On one hand you have large multinationals trying to shut down plants in America, and on the other hand, you have the service industry bringing in low-wage workers from abroad”. The result: “wages go down”…

…Progressives should back [efforts to stop mass migration]. As it is, their simultaneous defence of unrestricted low-skilled immigration and opposition to H1B visas serves the class interest of their professional constituents. After all, the exploitation of H1B workers directly undercuts the bargaining power of high-skilled college graduates — the same group that benefit from a ready supply of undocumented maids and landscapers. But this policy mix has proved deeply unpopular with the non-college majority that decides US elections. In the same vein, it’s telling that the immigration rhetoric of populist Republicans — such as Vice President JD Vance — echoes that of pre-Trump labour Democrats. This isn’t to say that the comparably oligarchic Republican Party is truly representative of working-class interests. It does, however, speak to the changing nature of both parties’ coalitions.

On ConservativeHome, Miriam Cates says a society-wide effort is needed to tackle children’s addiction to smartphones in the form of a national ban.

It is absolutely a parent’s role to protect children. But parents do not raise children in isolation. If we are to be successful in keeping children safe, we need wider society to play a part in setting and upholding moral norms, and collectively challenge powerful commercial interests that threaten children. Road regulation is an example of this. Of course, good parents teach their children to cross the road safely. But if there were no speed limits, no crossing places, no minimum age for driving and no criminal consequences for breaking the rules then no parent, however conscientious, could teach their child to cross the road safely.

Even the two per cent of parents who don’t give in to the immense pressure for smartphones can’t keep their children safe; I know a mother whose child was severely traumatized after being shown a violent sexual image on a friend’s phone. Increasingly, schools set homework and even classwork to be completed on smartphones, making it harder and harder for parents to protect their children.

There is a compelling argument for government to act, as it has done in the past to prevent children from working down mines, or being sold as prostitutes. In an industrialised society, law and regulation have an undeniable role in child protection. As conservatives, we can sometimes be so preoccupied with resisting state overreach that we fail to notice the much greater (and far less democratic) control that Big Tech now has over our lives.

On his Understanding America Substack, Oren Cass says Trump’s tariffs are poorly designed for long-term benefit, but that the US should aim to create a Western hemisphere free-trade bloc that excludes China.

[Trump’s] message is exactly the right one to deliver, but this particular set of tariffs is a poor one to accompany that delivery. Tariffs that impose large costs immediately, without the likelihood of delivering economic upside, are more likely to leave free-traders saying “told you so” and Americans souring on the entire project. A less politically sustainable threat, in turn, has the substantive problem of appearing less credible, encouraging the threatened party to believe it can exercise leverage of its own by “calling the bluff” and heading down the path of rising pain on both sides.

The vision that we should be pursuing is one in which the United States anchors a free-trade bloc centered in our own hemisphere and including allies around the world similarly committed to the principles and legal framework of democratic capitalism. Participation in the bloc would require adhering to U.S.-defined requirements that ensured balanced trade, the revitalization of American industry, and the exclusion of China and its producers from supply chains and markets. Thus, all nations in the bloc would need to maintain parallel financial and trade barriers to entry for any nation outside the bloc. China would presumably have a bloc of its own, and those countries would likewise maintain barriers to entry for the American bloc.

While the end goal might be low tariffs amongst allies, we can likely get from the current system to the future one only through an intermediate step that threatens and even imposes tariffs worldwide, and then offers relief from them for nations that agree to our terms. The liberal internationalist hears this and scoffs, “why would they agree to our terms if we treat them badly?” The answer is that doing so will be in their interest, as compared to the alternatives of falling into the Chinese sphere or being excluded from both ours and theirs. Only while the United States offers the alternative of “take advantage of us and gain all the benefits of our alliance anyway” does the option of complying with U.S. demands seem strange.

Wonky Thinking

In Small State or Small Families? Economic Conservatism, Social Conservatism and the need for more children, for Policy Exchange, Paul Morland and Philip Pilkington argue that pro-family policies to reverse demographic decline are an essential precursor to reducing the size of the state.

Before investigating how demographic change is required to come to the rescue of small-state Conservatism - how Social Conservatism is required in the service of Economic Conservatism - it is necessary to understand the role the former has already played in the historic success of the latter. The argument, in a nutshell, is that during the triumph of the Thatcherite years, the UK was benefiting from a little-noticed ‘demographic dividend’…

…Britain, along with much of the West, was blessed with a baby boom after the Second World War. In the UK, this saw fertility rates rise to nearly 2.5 children per woman in the early 1950s and to not much short of three in the early 1960s. This second spike meant a particularly large cohort of young workers entering the labour market in the first half of the 1980s. On the other hand, the fertility rate by then was well below replacement level, and so, in a mild way, the UK in the period benefited from many of the characteristics we now associate with demographic dividends we witness in the developing world. Relative to the population as a whole, the elderly were a modest share (over-65s were still less than 15% of the population in 1980 compared with approaching 20% now) requiring correspondingly modest pensions and healthcare spend, while the under-fifteens were likewise relatively small in number (reduced from around 30% to 25% between 1970 and 1990).

Buoyed by a young and relatively unshackled working-age population, the country was poised to flourish. Fortuitously, North Sea oil revenues began to flow at the same time, providing the country with a double fillip. This was not guaranteed – the right policies were essential – and the downside of a swell of young entrants to the workplace and a highly-valued quasi-petrocurrency was persistent unemployment even as the economy recovered from its early-1980s recession. Yet a confluence of wise macro and micro-economic management and favourable demography laid the foundations for economic growth and national recovery…

…Business was able to recruit the young plentiful young labour available, and this was an essential part of its dynamism in the middle and later Thatcher period, and some years beyond. It was under these conditions that tax revenues grew in spite of tax cuts and state expenditure was brought under control in spite of the costs of unemployment pay. Within a few years of the accession to power of Margaret Thatcher, the worst of a deep recession was over. The 1983 election may in part have been such a triumph for the Conservatives because of the Falklands Effect, but four years into the Thatcher experiment, it was clear that the economic prospects were improving. The long forward advance of the state that had been proceeding since the Second World War was at least halted and even slightly reversed. Thatcher’s sound economic policies were given an invaluable tailwind via the benefits of the demographic dividend.

When asked to account for the disappointment of Economic Conservatives in reducing state spend relative to the economy, the standard responses are likely to mention Covid and the war in Ukraine, the latter resulting in a spike in energy prices and compensatory subsidies for household fuel bills. Those who appreciate the demographic or at least inter-generational underpinnings of our malaise are rare.

For sure, the upsets of Covid and the Ukraine-war related energy shocks have both made exceptional demands on the public purse, but as already noted, even as they recede, the State does not. It is true that government spend as a share of GDP was on a downward trajectory from 2010 to 2019 as the exceptional measures to deal with the fallout of the 2008 financial crisis ceased to be necessary. But so-called ‘austerity’ did no more than bring it back to the pre-2008 crisis level. With Covid now well behind us, and even though defence spending as a share of GDP is still well below its 2010 level, the government share of the national pie is reaching post-war peaks.

So, either government has struggled manfully to bring its spend under control against strong countervailing forces or it has allowed it to rise. In both cases, it has been battling against an underlying demographic reality that is sharply different to what faced the Tory administrations of the 1980s and 1990s. This is not to say that it would be impossible to reduce the size of the state, or to increase public sector productivity, in the face of demographic headwinds. It is simply that it adds significant additional challenges to doing so.

The results of fifty years of below-replacement level fertility rates are being felt in the labour force and in the welfare state, and this is the reason why solid achievements in rolling back the state or even in preventing it from rolling forward have been so difficult. It is possible to change the retirement age, and some progress has been made in doing this. But the impacts are small compared to the rise in the older population. Since the mid-1980s, the share of over-65s relative to the working-age population (essentially aged 20-65) has grown from a quarter to a third. By the middle of this century, in just twenty-five years’ time, it projected to be around a half. Unsurprisingly, pensions spending has risen; from less than 4% of GDP in the 1980s to over 7% today.

Disappointing economic growth and sluggish productivity gains have also played their role in constraining what government could achieve financially, forcing a higher level of taxation for a given level of spending and borrowing. Some argue that the declines in productivity may in part be put down to ageing and a loss of inventiveness, innovation and dynamism associated with younger populations. On the other hand, some studies have shown productivity rises with age – up to a point. So waning rises in productivity can be viewed as at least in part exogenous to the demographic structure and at least in part not explainable by them.

The story of the demographic dividend and its reversal can be seen in the following chart…The chart plots the average birth rate lagged by 40 years24 against the average real GDP growth for a given period. As we can see, during the Thatcher-Major years the demographic dividend was still robust with the 40 year-lagged birth rate at around 17.2 babies per 1,000 people. The Blair-Brown years were still riding high on the baby boom with an average 40-year lagged birth rate of 17.5. But the recent series of Tory governments have inherited a demographic lemon: the average 40-year lagged birth rate has fallen 13.4. Economic growth has followed the 40-year lagged birth rate almost exactly. This is not surprising as GDP growth is determined by working-age population growth and labour productivity growth. If the former sags, it is an almost an arithmetical certainty that GDP will fall – and this is precisely what we see.

It is not only the pensions bill which has swollen with the rising age of the population. So too has the healthcare bill. The dramatic rise in spending on the NHS matched by declining perceptions of what it is able to deliver can best be understood in the context of the ageing population. It is reckoned that someone aged 85 requires six or seven times as much healthcare spend as someone in their twenties, thirties or early forties.25 Since the mid-1980s, those aged over 85 have more than doubled as a share of the UK population; by the end of the current century, it is forecast that they will more than have tripled again.26 Recent Tory governments have seen the upward trend in healthcare spending that has been triggered by this shift, as can be seen in the following chart…

..Burgeoning demands on the public purse combined with a rising unmet demand for labour and consequent loss of tax revenue are having the effect of bloating the state. In such circumstances, strong economic growth and major increases to public sector productivity might be able to stave off the increase in government spend as a share of GDP. But where these are lacking – as they have been in recent years – the result is ever increasing state spending. Before we go on to model and quantify the impact of long-term low fertility rates on the size of the state relative to the economy, two questions need to be dealt with. First; will an increase in the birth rate and a rise in the number of young worsen the dependency ratio, making still further demands on government spend, in this case for school provision and childcare, without providing workers and taxpayers for decades? And second, can immigration resolve this problem by providing readymade and minted workers to fill our requirements and rebalance the demographic pyramid.

On his Substack, David Skelton contrasts the success of the American GOP at consolidating a working-class realignment, prioritising immigration and reindustrialisation, with the British Conservatives’ failure.

Probably the greatest commonality between the Realignments in Britain and in the United States is the importance of communities that were devastated by the closure of heavy industry. In England, all but one of the former coalfields voted in favour of Brexit and communities that had once been dominated by coal, steel and manufacturing voted Tory for the first time in 2019. In the United States, the rustbelt communities that had once been dominated by heavy industry became decisive voters in the past three Presidential elections.

Reindustrialisation, reshoring and “bringing manufacturing back home” became an essential part of the American conservative offer. Oren Cass, one of the most influential intellectuals on the American right has cogently set out the “Conservative case for reindustrialization” and the think tank he leads has led a concerted effort on the US right to build a case for the renewal of domestic manufacturing, through an activist industrial policy, with an element of tariffs. Rebuilding American industry is now a policy with cross-party support in the United States.

Such support for reindustrialisation had a short-lived upsurge of interest on the British right. Indeed, I made the case on the BBC’s Rethink series and in Little Platoons. Theresa May became an enthusiast for industrial policy. Levelling Up done properly would have been based around reviving manufacturing in post-industrial places. The Levelling Up White Paper was clear that government “must support high-growth businesses and reverse the historic decline in manufacturing in the UK.”

Book of the Week

We recommend President McKinley: Architect of the American Century, an acclaimed biography by Robert W. Merry. The author revisits the relevance of this sometimes forgotten president who paved the way for his more flamboyant successor, Teddy Roosevelt. Invoking the legacy of founding father Alexander Hamilton, McKinley laid out a new vision for America’s commercial relationship with the world.

As he ascended the stand and reached the speaking podium, the president pulled from his coat pocket a speech produced by his own hand but with substantial research assistance from his loyal and highly competent secretary, George Cortelyou. As always, however, he had solicited advice from friends and colleagues on the fine points of expression. His theme, as so often in the past, was the upward trajectory of the human experience—and the imperative of maintaining it through unfettered economic energy. Expositions helped in that regard, he said, because they were “the timekeepers of progress. They record the world’s advancement.” And this particular Exposition, he added, illustrated “the progress of the human family in the Western Hemisphere.”

The president then moved quickly to the state of global commerce, America’s role in it, and the lessons to be learned from big advances in cross-border trade. The significance of these observations extended beyond McKinley’s words and concepts. Since its inception, the Republican Party, McKinley’s party, had been the party of protectionism: high tariffs not just for revenue but also to protect domestic enterprise from foreign competitors. This had been the philosophy also of the Republicans’ antecedent party, the Whigs, and, before them, the Federalists. Thus did high-tariff principles go back to the beginning of the Republic—indeed, all the way to its first treasury secretary, Alexander Hamilton. And throughout the intervening decades no politician personified this outlook more solemnly than William McKinley. As chairman of the House Ways and Means Committee, he had shepherded through Congress in 1890 a high-tariff bill named after him. Upon becoming president, he promptly pushed through a new protectionism measure to overturn the more free-trade policies of Democratic president Grover Cleveland. But now he set out to move his party and his country in a new direction, more in keeping with America’s new global position.

“Isolation is no longer possible or desirable,” said the president, noting the powerful advances in the movement of goods, people, and information across wide distances. That had brought the world closer together, fostering more and more international trade. America, with its vast productive capacity, stood positioned to exploit this development like no other country. But this could happen only if Americans embraced a policy he called reciprocity: mutual trade agreements designed to reduce tariffs and enhance trade. “Reciprocity,” he said, “is the natural outgrowth of our wonderful industrial development under the domestic policy now firmly established.” Echoing a fundamental free-trade tenet, he added, “We must not repose in fancied security that we can forever sell everything and buy little or nothing.” In other words, if the country wanted markets for its burgeoning products, it also would have to buy products from abroad. “The period of exclusiveness is past,” said the president. “Reciprocity treaties are in harmony with the spirit of the times; measures of retaliation are not.”

McKinley ended his speech by advocating a number of initiatives that together demonstrated a coherent view of how multiple elements of an expansionist program should be commingled. He wanted to bolster the U.S. Merchant Marine. “Next in advantage to having the thing to sell,” he said, “is to have the conveyance to carry it to the buyer.” He hailed the U.S. ambition to build a canal through the Central American isthmus, something he had been promoting with his usual quiet determination throughout his presidency. And he averred that the “construction of a Pacific cable cannot be longer postponed.”

McKinley may not have been a man of vision in the vein of his contemporaries Theodore Roosevelt, Henry Cabot Lodge, and Alfred Thayer Mahan, all of whom perceived and promoted the American ascendancy long before events brought it into focus for others. But he was a man of perception who, once that focus emerged, knew how to formulate the vision and execute it. Under this concept, as applied by McKinley, America would push out on many related fronts: expanding global commerce and reducing barriers to it, augmenting naval power, controlling strategic points in the nearby Caribbean and far-off Asia, building a merchant marine, constructing and controlling an isthmian canal, enhancing cable communications around the world. As the London Standard would write of the Buffalo speech, “It is the utterance of a man who feels that he is at the head of a great nation, with vast ambitions and a new-born consciousness of strength.”

McKinley’s audience responded with particularly hearty applause to his call for reciprocity treaties, his advocacy of a Central American canal and a transpacific cable, and his warm words about Pan-American cooperation. After the speech, a number of people broke through the lines surrounding the podium to gather around the president, who avidly conducted an impromptu conversation with them for some fifteen minutes. This was a Secret Service nightmare: the president in close proximity to significant numbers of people who had not been properly scrutinized beforehand. As former attorney general John Griggs explained later, “I warned him against this very thing time and time again.” But the president, he added, “insisted that the American people were too intelligent and too loyal to their country to do any harm to their Chief Executive.” The next morning the president would sneak past his Secret Service detail to enjoy a solitary walk along Buffalo’s leafy Delaware Avenue. And he repeatedly rebuffed suggestions from Cortelyou and others that he cancel a reception-line event at the Exposition’s Temple of Music the day after the trade speech. “Why should I?” he responded. “No one would wish to hurt me.” The president loved shaking hands with fellow citizens and developed a system of moving people along so efficiently that he could shake as many as fifty hands a minute.

Quick Links

Sir Keir Starmer is due to forge ahead with a plan to hand £18 billion to Mauritius to hand over the Chagos Islands.

Interest rates were cut to 4.5% while the Bank of England halved its growth forecast and the pound plunged.

Inflation is expected to rise to 3.7%, partly due to the cost of energy and water.

GDP is expected to have fallen by 0.1% in Q4 2024.

The Energy Secretary, Ed Miliband, is under pressure to find ways of keeping bills down as energy prices are expected to soar.

A nuclear power plant in Anglesey was blocked due to concerns over the departure of Welsh language speakers.

A 15 year-old was stabbed to death in school by a pupil who had brought a knife into school before.

Labour ordered that the testing of asylum seekers’ age and citizenship should be stopped.

The Governor of the Bank of England, Andrew Bailey, said policymakers have been left with a “puzzle”, as growth has stalled despite the rising population.

The Government has chosen to dispose of 140 tonnes of civil plutonium.

China’s DeepSeek AI model appears to use much more energy than Meta on certain prompt tests.

The Government has defended its handling of AstraZeneca, which has ditched its planned £450m investment in Merseyside.

Angela Rayner is to lead an advisory council to create a definition of “Islamophobia.”

The average NHS hospital waiting list time is now 7.6 months, up from 2.3 months in 2010.

The Attorney-General said pledges to control the border are “dehumanising.”

A Pakistani asylum seeker was awarded over £100,000 in compensation for her treatment after over-staying her visa.

Lego can be anti-LGBT, according to a tour hosted by the Science Museum.

The UK’s head of counter-terrorism said social media is as big a risk to children as smoking.

Councils have used public money to train asylum seekers to report hate crimes.

Research showed that liberals are psychologically just as “obedient” as conservatives, but to different authority figures.