The Trump Administration's new tariff policy has been in discussion for some time now. Starting from his campaign season, he has been harshly talking about imposing reciprocal tariffs with the US's major trading partners. Well, everything that Trump has been talking about tariffs only since last year, right? Not so. Trump made tariffs a central policy even in his 2016 election campaign, and the US entered a trade war with China, which lasted even during the Biden Administration. To our shock, Biden didn't remove most of the tariffs that were imposed by the Trump administration. In addition, Biden continued to keep them as well as continue to impose tariffs on aluminium, steel and 200% on Chinese EVs. Now, you can see there is a small affinity for tariffs not only in the US but around the world.
Let us not deny the fact that we are all beneficiaries of free trade. We are taught pure economics in school but not international political economy. Hence, our understanding of economics becomes more bleak and narrow. Hence, this article is aimed at helping you understand key questions that are beyond economics- Why do people have a fantasy for it? Why do people hate free trade even though they get benefits from it? Is free trade only about economics or much more?
LINK To Newscapsule of March 2025
What is trade?
An exchange of goods or services between any two or more parties. The parties can be people, companies, entities, organisations, countries or even a group of countries.
What is free trade?
A form of trade where there are minimal or no trade barriers such as import or export duty, licenses, quotas and much more.
Tariffs and other barriers
There are two types of trade barriers- tariff barriers and non-tariff barriers. Tariff barriers focus on imposing import and export duties on countries. A free trade agreement is a legal pact between countries that reduces barriers to encourage trade between them.
Why do tariffs exist, and why have they been used?
Tariffs are a form of tax that the government can use to raise revenue. Tariffs once imposed on a foreign good will make it expensive. So once these goods reach the market, the domestically produced goods will be cheaper and appealing to the local population. Thus, they are used to protect the domestic industry by reducing foreign competition. Lastly, tariffs can be used as a diplomatic negotiating tool for geopolitical and geo-economic gains. The last point indicates a large scope for whatever is relevant for us in the upcoming discussion.
Benefits of Free Trade
Human civilisation since its inception has always thrived through trade. Today, its an agreed fact that economists, experts, international organisations and many others believe that free trade is beneficial. Free trade brings together people, communities, countries, and the entire world. It allows you the consumers to get the best-in-class products from around the world at a cheap price. It will give you the option of varied choice which is significant for any consumer. At a macro level free-trade propels economic growth and prosperity. All of them lead to a better quality of life for us. Today, poverty and economic suffering around the world is at its lowest.
International Trade and Internationalism
Adam Smith's Absolute Advantage Theory and David Ricardo's Comparative Advantage Theory have successfully argued the need for international trade and why countries prefer to engage in an exchange of goods and services. Starting from the silk route to the present agreements, human beings have preferred to stay connected and engage in an exchange of goods and services. At that period in time, there was free movement of goods and people across the world. This continued till the emergence of the nation-state system where the instruments of state became strong and they started putting barriers on trade to show their economic strength. Mercantilism is an ideology focused on high tariffs as a deterrent against imports. Even though China's Han dynasty is claimed to have the first tariff as part of the Silk Route although it was the US in the 18th century that first adopted an official tariff policy.
Adam Smith and other liberals of the time opposed mercantilism and supported free trade where the involvement of the involvement of the state was minimal. This meant opening for free trade means, which was to be a political decision or a choice the state or the government had to make. The biggest one is removing trade barriers notably tariff barriers. Ever since 1945, with the emergence of the new world order, the idea of free trade expanded globally. This was due to the political choices countries took due to their economic compulsions. The idea of internationalism was significant in driving countries towards that.
Internationalism talks about political, economic, and cultural collaboration beyond the borders. Those who support internationalism are called internationalists. They believe it is free trade and the economic benefits of trade, which will drive countries and populations towards internationalism. More trade requires transportation corridors, infrastructure, more stores, and facilities which act as a multiplier effect for the economy.
The major challenge of internationalism remains to be legal, which means you need laws and its implementors to enforce them. Post World War II, we had the new world order which tried to propel the world based on free-trade economics to empower our lives. General Agreement on Tariffs and Trade (GATT) in
1947 and its successor World Trade Organisation (WTO) in 1995 focused on the proliferation of free trade and the reduction of tariffs thus building an international free-trade regime.
Additionally, we have several free-trade regimes today such as NAFTA, SAFTA, EU-FTA, EFTA, ASEAN FTA, CPTPP, RCEP and much more. Additionally, there are several bilateral free trade agreements between various countries.
Internationalism to Globalism
In the 1970s and 1980s, there were radical changes in the policies where countries looked into neo-liberalism. With this, it was fully converted into an era of globalisation where the world was more connected economically than ever before. Along with the traditional instruments of globalisation, brought financial integration, international migration, cultural globalisation etc. Neoliberalism focused on expansionist capitalism. Moreover, the world was connected through culture, technology, entertainment and commerce. It was not only the companies but the governments pushing were for the reforms as well.
Benjamin Barber in his work Jihad vs McWorld published in 1995 interprets globalisation as globally expansionist capitalism where
countries are tied together by communications, information, entertainment, and
commerce.
Internationalism now was globalism where countries wanted to be integrated with the rest of the world and populations too. Nation-states became enablers for that. International Relations thinkers described this state of the world as complex interdependence and functionalism. It is important that countries can now focus on improving formal and information with other countries through dialogue and diplomacy which will help countries avoid conflicts. The functional areas are not restricted to trade, science and tech, cultural exchanges and much more. Economic and financial integration further leads to social and political integration.
Trade as a tool of crisis management
Now, whenever there are crises, or political issues between countries, trade can take a toll but at the same time, Trade can also play the role of bridge where countries can rally together for economic benefits over fighting wars. Functionalism and complex interdependence argue that countries that trade a lot with each other will not fight wars. This theory is in another way called McDonald's theory. Important thinker Immanuel Kant also stated the same when he gave the idea of perpetual peace.
Case Studies
The benefits of trade, globalisation and globalism can be seen through the following examples.
European Union
Europe was ravaged by two world wars. This is despite the massive industrialisation and development that was there in the region. But what was absent? Two big powers France and Germany were always at war. After the WW2 settlement, several European countries notably France and Germany decided to work together by setting up the European Coal and Steel Community. Later it was upgraded to the European Economic Community and further to the European Community. This was not only a free trade area but also a common market with the free movement of people and goods. The abolition of tariffs between small countries made goods and services move across the continent freely and additionally bring down the cost of transportation. In 1992, the European Community ceased to exist and what we know today as the European Union came to existence. The European Union has three pillars- Economic, Social and Cultural. Today, the EU is a striking example of how countries (27 of them) can come together and work together collaborating with each other. Additionally, it is one of the places where everyone aspires to live.
Asian Tigers
South Korea, Taiwan, Singapore, and Hong Kong are known as the four Asian tigers. With change in economic policies of these countries in the 1980s and 90s paved the way for their excellent growth and today they are seen as the gems of Asia. Japan led the growth for these countries, while today these four countries are leaders in export and have become a role model for China. China entered the WTO only in 2001 but gained excellent growth ever since then.
Age of Backlash
As Fareed Zakaria claims today, we live in an era of backlash. We are trying to fight back against openness, free trade, democracy, cosmopolitanism and acceptance. The rise of populists and far-right shows that there is significant opposition to free trade, internationalism, globalism, globalisation, cooperation, multilateralism, etc. Even democracies are backtracking and backsliding. They want to bring back tariffs, and protectionism, and promote traditionalism, family values, and religion, among many others. Trump wants to fantasise 1800s and 1900s.
Problemetising Trump's and tariffs
Ever since his victory he was targeting Canada, Mexico, and China with tariffs. India was targeted by Aluminum and Steel tariffs. He believes that tariffs are the most beautiful word in the dictionary. Tariffs now are no longer an obsession but an addiction for the new Administration.
Trump claims that America has been historically ripped off and taken advantage of by other countries. This statement is absolutely not true. The USA is the world's largest economy driven by free trade and globalisation. The American consumers were able to take advantage of low prices, high quality and variety of goods and services. This gave them savings and increased their quality of life. Additionally, the loss of manufacturing jobs was definitely a side effect but bringing back manufacturing jobs to a country with high wages and consumers worrying about their expenses will backfire. West today is benefiting from capital generated where US companies will outsource jobs elsewhere and benefiting local consumers. This is consumer behaviour and not countries ripping off each other.
Donald Trump imposed "Reciprocal Tariffs" on all countries around the world, including overseas territories and some uninhabited islands on the "Liberation Day". The most affected include Southeast Asian countries, Europe, China, India and Taiwan. A minimum 10% has been imposed on all countries. The earlier Trump administration had imposed tariffs and went on a trade war with China in 2019. But let's also not forget that the Biden Administration didn't remove a single tariff imposed by Trump. Additionally, they imposed Aluminium and Steel tariffs; the biggest one - 200% on Chinese EVs. One imp. reason for inflation during Biden's period was the tariffs on Chinese imports so, the same which led to the downfall of his administration. Bad economics punished Trump in 2020, lack of communication on economics by Biden and Harris in 2024. Currently, Trump's approval rating on the state of the economy is at a record low. Historically, Democrats have been more protectionist and Republicans have been pro Free Trade.
Conclusion
Free trade is not just good economics but also good politics. The population benefits from more choices, low prices and high-quality products. The nature of jobs will change and people need to adapt to that. The days of thousands of people working in factories are no more with industrialisation, automation and AI. No more can Trump or any populist protectionist leader claim that he will take back the country to the 1800s when tariffs funded the country and manufacturing led the economy. Just see the reaction of the stock market and the voice of farmers in the mid-west. Tariffs don't benefit anyone.
Free trade doesn't solve all the problems neither it is an anti-tode. Everything might start with free trade, to be followed up by multilateralism, cooperation, and complex interdependence. It is up to the governments, countries and population to make the best use of it and avoid its misuse. That is where good politics matter more than good economics.
When America sneezes, the world will catch a cold.
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