Trade Wars and Real Wars
Europe's economic model is not fit for the realities of global conflict
Towering Columns
In The Telegraph, Nick Timothy says our economic dependency on China represents a failure of liberal ideology.
As manufacturing production and the bulk of world trade was surrendered to China, and following these things the vast flows of capital that enabled the mass subsidy of newer technologies – aided of course by industrial-scale theft of intellectual property – rapid economic growth has allowed Beijing to challenge US power. The risk of confrontation and war with China is why America is having its strategic clear-out – first from the Middle East and now from Europe – and why instability in different regions of the world will now remain a fact of life.
All this followed the hubris of leaders convinced by the old – and disproved – assumptions of ideological liberalism. These held that liberal values are universal; the rest of the world wants to become more like the West; more trade and migration makes war impossible; cultural, institutional and historical contexts matter little; and trade liberalisation leads inexorably to open societies and democratic politics.
Delusions like these on the world stage were matched by those at home, because the late model of liberalism and globalisation made possible – and actively promoted – luxury policies that made no sense on their own terms. But now, around the world the ideological adherence to free trade and its associated theories is starting to weaken. Mass immigration and asymmetric multiculturalism – which seeks to protect minority cultures but not our own – are challenged by mainstream political parties. Defence spending is rising, and in Britain aid spending has been cut twice, first by Rishi Sunak and now by Keir Starmer.
In the Financial Times, Martin Wolf says Britain must now spend much more on defence - but that this represents an economic opportunity.
Given the scale and urgency of these pressures, spending on defence will need to rise substantially. Note that it was 5 per cent of UK GDP, or more, in the 1970s and 1980s. It may not need to be at those levels in the long term: modern Russia is not the Soviet Union. Yet it may need to be as high as that during the build-up, especially if the US does withdraw. It may be sensible to finance the temporary increase in investment with borrowing. But if defence spending is to be permanently higher, taxes must rise, unless the government can find sufficient spending cuts, which is doubtful…
…Fortunately, the UK can also realistically expect economic returns on its defence investments. Historically, wars have been the mother of innovation. This was spectacularly true of the second world war. Israel’s “start up economy” began in its army. The Ukrainians now have revolutionised drone warfare. John Van Reenen, chair of the council of economic advisers to the UK’s chancellor of the exchequer, Rachel Reeves, has co-authored a paper arguing that a 10 per cent increase in defence research and development triggers a 4 per cent increase in private R&D. In another co-authored paper, he argues that these benefits depend on open and competitive funding of defence innovation.
The crucial point, however, is that the need to spend significantly more on defence should be viewed as more than just a necessity and also more than just a cost, though both are true. If done in the right way, it is also an economic opportunity. Today, the UK confronts a grim new reality. This is unlikely to be temporary. As Russia is emboldened and the US withdraws, the UK government must not pretend that almost nothing has changed and few extra costs needs to be borne. Starmer has to persuade the public to recognise today’s realities. Until now, he has been far too timid.
Also in the Financial Times, Nat Dyer says Trump’s tariff policy reflects a turn against Ricardian theory in favour of a greater realism about global free trade.
In the 1980s, fears of the rise of a new protectionism pushed policymakers to create a vast web of bilateral, regional, and global trade agreements. Political parties whether on the right or left embraced a very specific type of globalisation, which was sometimes seen as a universal law akin to gravity. “Free trade” became a dogma that was used, in part, to tilt the global trading system in favour of large multinational corporations and Wall Street, giving them new rights and powers and plumping their profits. CEO pay skyrocketed while regular, working people often lost out, for example, the millions of Americans who lost their livelihoods with the China Shock — after China joined the WTO in 2001 and flooded the US with cheap products. All the while, economists touted the benefits of trade as long as their models showed that the winners could theoretically compensate the losers, regardless of whether it happened or not. Another aspect excluded from economists’ models was global power competition, making them increasingly less relevant to a political class fixated on a resurgent China.
Fuelled in part by the backlash to globalisation, Donald Trump won the White House and is now back for a second time. He has made good on his promise to turn away from free trade surrounding himself with advisors such as, Peter Navarro, who has argued that: “Ricardo is dead!” Navarro, of course, is not worried about how the West exploited the wealth of its formal and informal colonies but how in the 21st century the USA has, in his eyes, been unfairly taken advantage of by China’s state capitalism. America’s turn to tariffs is a recognition of its fragility, not strength. Progressives will disagree with many of his solutions, but Navarro is surely right that “the economics profession must do a much better job than David Ricardo of modelling trade in the real world.”
Now, Trump is speaking loudly and hitting allies and enemies alike with a big stick labelled ‘tariffs’. He has mobilised a real, justified complaint against hyper-globalisation to promote a highly divisive and potentially damaging policy. Along the way, he has made the power and politics of trade policy, so often concealed or denied, plain for all to see. The constitutional wrecking ball of Trump’s first few weeks of his second term have rightly outraged many. But on the issue of tariffs, a desire to return to the “old Ricardian verities” and argue that they are always and everywhere bad is a road to nowhere. Trying to counter Trump with ‘fairy tale’ economic theories that helped fuel his rise is like trying to put out a house fire with matches. Opposition to Trump’s harmful and damaging policies requires a more solid footing.
In Foreign Policy, Charles Yang says the Trump Administration should pursue policies to onshore automotive manufacturing and redress China’s trade distortions.
Starting in the mid-1980s, China famously only allowed U.S. auto manufacturers into the country through joint ventures with domestic auto companies and placed foreign equity caps on those ventures. The Chinese companies have subsequently had decades to benefit from U.S. engineering and know-how as well as positive spillovers from foreign direct investment. Beijing also placed tariffs on car imports and excluded imported cars from generous consumer subsidies. As a result, China spent decades incubating a nascent auto manufacturing industry in part by stifling foreign competition and stealing technology from Western auto manufacturers.
The United States now has an opportunity to use Reagan’s playbook to save domestic auto manufacturing and take back what China stole from the U.S. auto manufacturing industry. President Donald Trump suggested on the campaign trail in March 2024 that if Chinese auto manufacturers are willing to build factories in the United States and staff them with American workers, then they should be allowed to sell their cars there. But the Trump administration should go even further—if Chinese companies want to sell cars in the United States, then they should not only have to manufacture them in the country, but also be required to do so through joint ventures with U.S. companies. These joint ventures could also be structured to ensure compliance with regulations regarding foreign entities of concern.
This approach should certainly be combined with restrictions on Chinese-made imports, including through tariffs. However, tariffs alone would not be sufficient. While they may provide U.S. auto manufacturers a temporary respite in the U.S. market, tariffs do not promote global competitiveness for those manufacturers. To do that will require capital and technology. As a result, it is important for U.S. auto manufacturers to continue to be exposed to competitive technologies and techniques to prevent stagnation or complacency. Forcing domestic joint ventures essentially subsidizes investment and U.S. jobs without requiring government subsidies, all while ensuring that U.S. auto manufacturers are able to compete in a global marketplace.
In The Telegraph, Kallum Pickering says net zero has caused the crippling energy prices that are driving Britain’s productivity crisis.
Up until about 10 years ago, UK electricity prices were only slightly above the average for International Energy Agency (IEA) members. Occasionally, UK prices even fell below the average. But since 2014, UK prices have remained consistently above average. By 2023, the UK had the highest domestic electricity prices in the IEA – at some 80pc above the average.
Why does this matter? Well, peak UK electricity coincides with the stagnation in UK productivity and living standards. This stalling of living standards has been, for two decades, the all-important puzzle that policymakers have repeatedly failed to solve. But what if the answer to this puzzle is that the UK is suffering from a chronic and self-inflicted energy shortage?
The economics are simple. Everything requires energy. The more you have at a cheap price, the more quality goods and services can be produced for consumption. It is easy to show this by stepping back from a narrow focus on the UK and looking at the experience around the world. Data for 189 countries – almost the whole world – show a clear positive relationship between GDP per capita – which is the result of productivity growth – and energy consumption per capita. Put differently, rich countries tend to be rich partly because they supply themselves with and utilise more energy than poorer countries. In 2005, when UK electricity supply peaked, energy consumption per capita was 50pc of the US level – and our living standards were around 79pc of the US level. But by 2022, UK per capita energy consumption had declined to around 38pc of the US level, while per capita GDP had fallen to 74pc.
For The Critic, Patrick Porter emphasises the twin dangers of capitulation and escalation in Ukraine.
Ukraine’s subsequent campaign to evict the aggressor has run up against fortified defences and a dug-in, determined occupier. Contrary to predictions Moscow would soon fall into economic collapse and isolation, Russia has traded with hedging neutral states and revived its defence industrial base. Where pre-war futurologists forecast an era of ambiguous, lighter, techno-centric “hybrid” clashes in the shadows, here was war of iron and mass, out in the open and undisguised.
These trend lines have not yet led to Kyiv’s capitulation or fall. For its part, Russia is still in the field and its despotic regime is intact. Any serious Russian domestic uprising is the dog that has not (yet) barked. Whether American arms and assistance will continue to flow in, supplying the lion’s share of Ukraine’s arsenal, remains uncertain. Now that Donald Trump is president, it is not clear whether Washington will cut Kyiv off, given Trump’s conflicting impulses. As things stand, a drawn-out, grinding stalemate leading to tacit compromise seems the likeliest future. But it is surely time to give cocksure prophecies a rest.
Though realists caution that the risks of more intense escalation in Ukraine are real, they aren’t united in their preferred policies. Some advocate early preparation to negotiate a settlement, others advocate arming and aiding within strict limits. But in common, they emphasise that the wisest course is to steer between the deficiency of doing nothing and the recklessness of assuming a passive opponent. Realists could be overstating the dangers, of course. Against dire warnings, major war beyond Ukraine has not yet erupted, and despite its rhetoric, Moscow has neither attacked NATO nor used nuclear weapons. So far, nightmare scenarios have proven premature. But we cannot know. In future, a more desperate adversary like Russia could be tempted to reach for its ultimate weapon to offset a defeat that looks threatening to the regime or country. We should take that possibility seriously.
Wonky Thinking
The Centre for Social Justice published Lost Boys, a report revealing that boys and young men are increasingly left behind, with the gender pay gap now reversed for 16-24 year-olds.
Boys and young men are in crisis. While the last hundred years have been marked by great leaps forward in outcomes and rights for women, in this generation it is boys who are being left behind. And by some margin.
From the day they start primary school, to the day they leave higher education, the progress of boys lags behind girls. The proportion of young men compared to young women failing to move from education into employment or training has been steadily growing for thirty years. Since the pandemic alone, the number of males aged 16 to 24 who are not in education, employment or training (NEET) has increased by a staggering 40 per cent compared to just seven per cent or females. For those young men who are in work, the much-vaunted gender pay gap has been reversed. Young men are now out-earned by their female peers, including among the university educated.
The growing divergence in boys’ and girls’ outcomes does not only apply to education and employment. We are also seeing a growing divide in the social and political attitudes of the sexes. In Britain, as in countries across the developed world, young men are increasingly drawn to conservative, traditionalist or right-wing political movements, whilst young women become ever more liberal and left-progressive. In an increasingly online existence, boys and girls no longer walk the same path from childhood to adulthood, with their interests, values and aims in life increasingly incompatible with each other. As Britain grapples with an epidemic of family breakdown, millions of boys are deprived of any positive model of manhood.
Perhaps in response to this shift, nearly half of Britons say women’s equality has gone ‘far enough’. In the emerging generation, an international study revealed that fully 60 per cent of men across 31 countries think women’s equality actively discriminates against them.
In our own exclusive polling for this project, the Centre for Social Justice has found that more than four in ten agree that society does not value traditional masculine values, such as courage, resilience and competitiveness.
At the same time, half of 18-24 men say that men are too often shown by the media as “a bit pathetic”. For boys and young men in Britain—especially those who are poor—the picture is an increasingly bleak one. And, where the divergence is particularly apparent, we also highlight different outcomes across certain ethnic groups.
Policy Exchange published The Costs of Crime - And How to Reduce Them. The report finds that crime costs the UK around £170 billion per year, or 6.5% of GDP.
This paper shows that proliferating crime and the crisis of confidence in British criminal justice are imposing a profound economic cost on our society and economy. Individuals and businesses are voting with their feet in response to the fact they think crime is increasing in our country, and that there is scant chance of it being addressed effectively by our police, courts and prisons. They are closing stores, avoiding visiting high streets, deferring investment, and generally becoming more risk averse as a consequence of these trends.
We believe the economic consequences of these developments are profound. In fact, we think that in 2022/23 expressed in the prices of that year, the tangible costs of crime in the UK were over 6% of GDP. For the UK as a whole, this amounted to some £169bn and to about £151bn for England and Wales. (The distinction between parts of the UK is relevant because the justice system is a devolved competence and statistics relating to crime are available for the separate components of the union. Accordingly, in much of what follows, we base our analysis on data for England and Wales, and then gross up the numbers for the UK.) But this is only a partial estimate of the cost of crime because it does not include the intangible costs that result from altered behaviour because of the fear of crime. When these are included, the total cost could easily exceed 10% of GDP.
These figures are markedly higher than the figures that emerged from a 2018 Home Office study which put the cost of crime at about 3% of GDP.8 Updating the figures for inflation and changing caseloads, we estimate that the cost of crime today to be still about 3% of GDP - a figure of roughly £75 billion in England and Wales. But this Home Office methodology excludes about half of all crimes against business and all crimes against the public sector, while excluding entirely the costs deriving from the hard to-measure behavioural changes that come with increased fear of crime and heightened risk aversion in society.
Things are already at a tipping point in the UK. But we know how they might get even worse. The city of San Francisco provides a stark example on how crime can lead to the degeneration of even the most prosperous of places. Despite being a legendary city located in an area that is home to some of the biggest companies and wealthiest individuals in the world, a combination of progressive social policies has resulted in San Francisco becoming one of the least safe cities in America.
Drug use has been virtually decriminalised, antisocial behaviour is rife, and according to The Economist, in 2019 San Francisco had the highest rate of property crime across the US’s 20 largest cities. The result? Vacant office space in the urban centre, decreased economic activity, and companies like Tesla upping sticks and taking their investment to pastures new. The UK is at risk of becoming victim to these very same dynamics on a national scale.
But we also know the opportunity that tackling crime offers. In the 1980s under powerful leadership from the Mayor and Police Commissioner, New York turned its economic fortunes around through a targeted programme of crime reduction. In Singapore, a commitment to low crime and the maintenance of order has long been a cornerstone of its remarkable prosperity and ensures that it remains a highly attractive location for overseas investment. And in Switzerland, low levels of crime are married to a GDP per capita around twice as high as that in the UK. Order and safety are surely not the only reasons for Swiss prosperity, but we do not believe that low levels of crime and high levels of wealth are entirely unrelated either.
In this paper, we argue that a profound shift in British criminal justice policy is required. The problem with the way we currently approach the criminal justice system, and the reason why certain types of crimes and their societal costs are exploding, can be summarised in one word: permissiveness. Our police are too lax when it comes to minor crimes, the proliferation of which creates the conditions for more serious crime. Our courts are too lenient when it comes to sentencing, meaning repeat offenders are able to continue committing crime on our streets. And at a general level, we have given too much weight to the rights of offenders at the expense of the rights of the law-abiding majority.
Book of the Week
We recommend Metternich: Strategist and Visionary by Wolfram Siemann. This biography revisits one of Europe’s great statesmen and diplomats, famed for his supposed arch-conservatism and commitment to realpolitik. A representative of the ancien regime, he was fundamental to the ordering of 19th century Europe.
The first of Metternich’s seven epochs lasted from his early childhood to the formative years of his youth (1773–1788). He was a sensitive observer, and during those years he witnessed the splendour and apocalyptic atmosphere of the ancien régime, as well as the intellectual fascination of the Enlightenment sweeping through aristocratic and bourgeois circles. The years between 1766 and 1777, in particular,saw the formation of a coherent generation, which would go on to provide Europe with its leading intellectual, political, and military figures. It was for this generation, which we shall later have occasion to characterize more precisely, that the historiographical labels “Generation Metternich” (for those born around 1773) and, seen from the opposite end of the political spectrum, so to speak, “Generation Bonaparte” (beginning in 1769) were coined. All its members were embedded within the old cosmopolitan Europe of enlightened erudition as it could be found, in a more reserved style, in the busy metropolis of London, in fiery style in the seething intellectual hotbed that was Paris, and in a more measured and engaged style of laborious elaboration on the pulpits and in the offices of many German university and residential towns, where the attempt was made to combine the tradition of German public law, which reached back hundreds of years, with the challenges of enlightened rationality.
This old cosmopolitan Europe disintegrated under the onslaught of a dual crisis. When the Atlantic revolutions captured the old Continent in the form of the French Revolution in 1789, they drew in the young Metternich and his family as they steamrolled over the Rhineland, the Austrian Netherlands, and the United Provinces. In a first war (1792–1797), a coalition of German, Dutch, Spanish, British, Italian, and Russian troops tried to fend off the new age that was dawning. While some of his contemporaries still harboured timid hopes for a reform of the old “German freedom,” others believed that they would not be able to break the resistance of the old powers without terror.
In the almost twenty-five years from 1792 to 1815, which saw an almost uninterrupted world war raging (and, given what scholars have established about these years, it is no exaggeration to say this), Metternich experienced this new kind of clash between nations and empires, first as an envoy, then as the foreign minister of the Austrian monarchy. Napoleon, the alleged “world soul on horseback,” in Hegel’s words, put his stamp on this conflict. For some he was the “man of the century,” for others an example of the worst kind of military despot. It was an epoch which confused those living through it, not least the peoples that were subjected to foreign rule: it produced bloody wars of unprecedented proportions at the same time as it promised freedom and moral progress for mankind. The Napoleonic myth seemed to embody this Janus-faced nature almost perfectly. What war actually meant, what it brought about, and how one might use it in new ways for the purpose of progress and in order to ruthlessly destroy one’s enemies—these were among the questions which occupied the Metternich generation.
The following epoch comprises the years 1815 to 1830. It saw what Paul Schroeder called the “construction of the nineteenth-century system” of European states, which remained in place between the Vienna Congress of 1814–1815 and the European revolutions of 1848–1849. This system functioned as a large and effective mechanism for the prevention of wars and revolutions, and within it Metternich acted as the “coachman of Europe,” to go by the not entirely accurate epithet he was given. He himself believed that the fragile European structure could only, at best, be patched up and given a series of makeshift repairs that might, perhaps, succeed in avoiding another great European war. Such a war, he believed, would be more devastating than any of the previous ones. To his enemies, this was the politics of Metternich’s “restoration.” In 1830, this new war, so feared by Metternich, seemed to be in the cards. Starting out from Paris, the July Revolution spread to most of the European Continent, especially to its southern parts. From then on, people’s expectations oscillated between two poles. On the one hand, there were hopes for a “spring of nations,” which, however, could be brought about only by a large uprising, or perhaps by a massive war waged by an alliance of the enslaved peoples. This outcome was propagated by the “Young Germany,” the “Young” Poland, Italy, or Hungary. On the other hand, there was the constant fear of a renewed outbreak of an uncontrollable terror which might entail the collapse of all civilization.
The sixth epochal experience emerged out of the European revolutions of 1848–1849. For some, these signalled a move toward unified nation-states with free and democratic Constitutions. For others, Metternich among them, the revolutions meant the beginning of a time in exile and represented an unresolved crisis within the process of modernization. It was this crisis which fueled the growth of nationalism in the first place and thus destroyed the relations between the old states of Europe.
The seventh epoch, finally, comprised the mastery of the revolutions, the “reaction,” and—in the case of the Habsburg Monarchy—a long-overdue bureaucratic modernization in the form of neo-absolutism. Metternich, as his first major biographer, Heinrich von Srbik, wrote, observed all this “from his box seat.” Nevertheless, he continued to pull strings in the background (to an extent that has fully been appreciated only recently), and his advice continued to be in demand among political insiders. This period extended beyond the collapse of the “Vienna system” in the course of the Crimean War (1853–1856) and reached up to the first battles between the emerging nation-states. From 1859 onward, the Habsburg Monarchy was involuntarily drawn into these first wars between the emerging nation-states. Metternich, who died in 1859, saw his legacy, if there was a legacy, ultimately gambled away. Thus, in Metternich’s life seven decisive experiences, each of which constitutes an epoch, follow on from one another: the Enlightenment, the French Revolution, the permanent existential threat of a war, the reconstruction of Europe (“restoration”), the “spring of nations,” the revolutionary crisis within the process of modernization, and the conflicts between nations that led to the formation of nation-states. In another historical age, each of these epochs would have sufficed to fill the life of a whole generation—in our case, all seven of them were experienced by one individual. How did this shape him? Metternich, at one and the same time a descendant of a storied family of counts and an enlightened free spirit, saw old orders perish, including—almost—that of his own aristocratic house, the Metternichs. Before his eyes, new orders emerged, and he helped in building them. This forced him to live through the times of changing discourses that marked the path from the old European (“feudal”) society of estates to a market-based capitalism. He was born as a member of the nobility of the Holy Roman Empire, a nobility that depended upon the peasantry, and from this, as the owner of an ironworks with a workforce of 400, he grew into the role of a manufacturer in the early industrial era.
Quick Links
President Trump suggested America may not defend NATO allies who do not spend 2% of GDP on defence.
Sweden achieved net-negative immigration last year.
Pension funds are blocking investment in defence firms on ethical grounds.
New sentencing rules due to be introduced will treat convicted criminals differently on ethnic and religious grounds.
The gender pay gap has inverted for younger workers.
NHS trusts are to be given much greater freedoms with a reduced role for NHS England.
China’s trade surplus for the first two months of 2025 was $170 billion…
…and China still significantly under-consumes its total production.
BYD is planning to manufacture a million EVs a year outside China.
US stocks have fallen significantly under the Trump presidency.
40% of Britons have not opened a book in the last year.
Defence has risen to a top-four issue for voters.
In 1892, Britain produced 80% of the world’s commercial ships, compared to 0% now.
The UK’s global emissions share rose 1.31% in 2022 when measured by consumption rather than emission.
There are fewer babies being born per head of population of young people in urban, denser areas.