Econ_June_09

12 Leaders

The Economist

June 9th 2018

F ALL President Donald

Trump’s assaults on multi-

lateralism, his trade policy is the

most relentless. On June 1st his

administration expanded tariffs

of 25% on steel and 10% on alu-

minium to include imports from

allies: the EuropeanUnion, Can-

ada andMexico. The tariffs are justified by “national security”,

a ruse to render them legal at the World Trade Organisation

(

WTO

). TheWhite Housemay not stop there. It is investigating

whether imports of cars and car parts also pose a “threat”.

America’s allies are brandishing their own lists of levies on

American imports, as is China. Should they strike back?

The arguments against retaliationare clear. Atit-for-tat trade

warwill unleash destructivemercantilism, which lurks every-

where, not just in theWhite House. Even in good times, politi-

cians usually forget that the main benefits of trade are higher

productivity and cheap imports. Instead, they keep tariffs low

chiefly to open foreignmarkets for their hard-lobbying export-

ers. The more barriers they encounter abroad, the less value

theywill see in supporting the global trading system. Decades

of progress towards freer trade could unravel.

But doing nothing entails costs, too. Mr Trump’s goals go far

beyond tariffs on a fewmetals. He seeks trade terms that will

force supply chains to move to America, damn the economic

consequences. For example, the administration wants the

North American Free-Trade Agreement (

NAFTA

) to expire

automatically after five years, robbing firms of the certainty

they need to invest in Mexico. To roll over on tariffs today

would invite further, more damaging assaults tomorrow.

There are no good options. But on balance, it is better to try

to deter Mr Trump now, while the scale of the dispute is small.

Countries should organise their response so that it has maxi-

mumeffect at minimumcost.

They should act in unison andwithin the spirit of the rules-

based system. Condemnation of America’s actions by the rest

ofthe

7 on June 2ndwas a first step. Countries are also right to

complain about the tariffs to the

WTO

. The rules may yet per-

mit retaliation; the idea that Mr Trump’s tariffs have anything

to do with national security is laughable; and it would smack

of double standards for retaliators to defend the multilateral

systemwhile circumventing it.

Any retaliation should be carefully calibrated. It is sensible

to target symbolically important goods. Mexico has imposed

tariffs on bourbon and pork, which are produced in states that

are home to Republican leaders. Canada plans to tax imports

from swing states, such as chocolate from Pennsylvania and

orange juice from Florida. Mr Trump’s trade policy is already

unpopular among Republicans in Congress, some of whom

are trying to curtail the president’s power to act unilaterally on

trade. America’s allies should aim to weaken the remaining

support for protectionism.

Retaliatory tariffs should be structured so as to do as little

economic damage as possible at home. That means omitting

goods for which there are few available substitutes, as well as

parts and components. Otherwise, supply chains will be put

at risk and governments will probably be drawn into the busi-

ness of picking winners. To see how easily that happens, wit-

ness the thousands of requests by American importers for ex-

emptions fromMr Trump’s steel and aluminium tariffs.

Bullypulpit

The Economist

was founded in opposition to tariffs and mer-

cantilism. Barriers to trade distort economies and harm con-

sumers, especially poor ones. Yet, in the long run, a measured

show of strength in the face of Mr Trump’s aggression offers

the best hope for keepingmarkets open.

Trade retaliation

Rules of war

Value of US imports

$bn, 2017

Steel

Aluminium

Tariffs imposed, %

America’s allies should stand up to its reckless trade policy

HOUGH only a few days

old, June has been cruel to

the European Union. In Italy, on

June1st, the first all-populist gov-

ernment was formed since the

second world war. It brings to-

gether inbizarre conjunction the

maverick left-wing Five Star

Movement, a party founded nine years ago by a television co-

median, and the hard-right nativists of the Northern League.

Also on June 1st Mariano Rajoy, Spain’s prime minister, was

dispatched in a confidence vote that has brought to power an

even narrower minority government under Pedro Sánchez

(pictured). His Socialists control only 24% of the lower house.

Not for the first time, Spain and Italyappear to shadoweach

other through economic and political tumult. Either or both

governments may be short-lived. And nervous markets have

pushed up the bond yields of both. But there the similarities

end. Spain these days counts as a bright spot, unlike Italy,

which hasmuch to learn from its Iberian cousin.

Of the two southern European states, Spain had by far the

worse financial crisis of 2008. Its property bubble burst, crip-

pling the banks and causingmass unemployment that peaked

at 26%. In 2012 Spain was bailed out by its European partners,

in contrast to Italy which managed to hold on. Despite these

problems or, more likely, because of them, Spain has had the

A new Spanish government

The gain in Spain

Populists of left and right are on the rise in Europe. Despite its political turbulence, Spain is different