Some years ago, the singer and activist Bono shocked many of his supporters when he told them, “Aid is just a stopgap…Commerce [and] entrepreneurial capitalism take more people out of poverty than aid. We need Africa to become an economic powerhouse.”
Trade is a vital part of that entrepreneurial application of commerce as it connects entrepreneurs to global markets, dramatically increasing their reach and allowing for specialization and economies of scale.
The modern world is an interconnected world, and trade is one of the main connectors we have. What many do not appreciate is that trade has been a major facilitator of human development over the past fifty years or more. While most think of international development as a function of international aid shipments, it is trade that has really driven the astonishing decrease in global poverty. The United States’ role as a linchpin of this system has enhanced its position as the pre-eminent global power. Yet the new administration’s curious tariff policy threatens all of this, for no discernible benefit.
Moreover, increased competition from international rivals and access to new technology and sources of capital encourage innovation and efficiency, thereby creating wealth. Foreign direct investment helps create jobs and infrastructure, which in turn contribute to more wealth creation. We have seen this happen across the globe, most especially in southeast Asia and east Africa.
With these jobs, infrastructure, and wealth come rising living standards and poverty alleviation. Yes, many of the jobs are in what are disparagingly called sweatshops, but they provide significantly higher standards of living than the subsistence-level jobs they replaced. The increased income means that parents can now invest in their children’s education, often at low-cost private schools, rather than requiring them to work from an early age. This in turn increases the human capital in these countries.
It is sometimes said of trade that “we only export to pay for the imports,” and in the case of international development the imports are seen as a universally good thing. Specialization and gains from trade result in more affordable and better-quality goods for the inhabitants of countries lifting themselves out of poverty.
Thus do American investment, purchase of imports, and indeed exports raise the standard of living in previously desperately poor countries. As those countries become connected into the global value chain, particularly in industries like textiles and electronics, low-income countries become connected to high-growth sectors. Thus, countries like Vietnam not only engage in international trade but become signatories to trade agreements like the Comprehensive and Progressive Agreement for Trans-Pacific (CPTPP.)
In turn those agreements encourage more investment through things like investor-state dispute settlement procedures, which strengthen property rights and the rule of law in countries that might previously have had shaky institutions. This is what is meant by the “rules-based trading environment,” which is designed specifically around promises of reciprocity and lowered tariff and non-tariff barriers to trade. So these countries become valued members of the international community.
I asked Marian Tupy, co-author of the book Superabundance, to sum up the role of trade in this transformation. He told me, “From Hong Kong and Singapore to Taiwan and South Korea, trade liberalization helped transform nations from third world to first-world status within two generations. More recently, China’s and India’s partial embrace of globalization lifted hundreds of millions out of absolute poverty. Today, absolute poverty is largely confined to sub-Saharan Africa, the least globalized and most aid-dependent region in the world.”
Yet this trade hasn’t just been advantageous to the developing world; it has helped America, too. Obviously, we get the imports (which, pace the President, actually represent a consumer surplus) but we get other things too. The cash we exchange for the imports comes back to the US in the form of investment, allowing us to gain jobs and infrastructure. Some of it buys treasury bonds, which allow us to invest in our military and national security.
Yet an under-appreciated aspect of US trade policy relates not to the tangible benefits, but to the increase in what students of geopolitics call “soft power,” usually defined as international influence without coercion. America’s policy of “Trade, not aid,” allowed it to increase its international soft power without as many of the problems that come with international aid, such as funds being diverted into warlords’ pockets (warlords are terrible for business investment) or questions about waste back home.
With soft power comes many benefits. You are seen as a trusted ally, a reliable partner when things go wrong. You will have other nations vote with you in international fora. US interests are foremost in the minds of the leaders of these countries. In a multipolar world, soft power pays for itself over and over and America has been peerless in its projection of soft power.
Indeed, trade does not need a formal trade agreement to bind the parties together. While formal agreements have allowed America to export some of its values and sensibilities (for instance, progressives have been successful at writing labor and environmental standards into trade agreements), the simple existence of a mutually-beneficial trade relationship gives America leverage over its trading partners. Americans get rare minerals like diamonds, for instance, and make the diamond supplier friendlier to the US. That might allow for the siting of a strategic military base as much as a vote in the United Nations.
With the President’s “Liberation Day” tariff announcement, however, this is all now gone in an instant. Not only has the trade policy alienated our close allies and neighbors like Canada (“Blame Canada!” was an amusing joke until very recently) but developing nations in particular have felt the brunt of the policy. In fact, the methodology of the policy hurt them for the crime of being poor.
The “reciprocal tariffs” were meant to account for the other nations’ imposition of tariffs, non-tariff barriers (like food standards,) and “cheating” against the US. However, the tariff rates were not calculated by any assessment of the relative weight of these factors, but by a simple formula: its trade surplus with the US divided by its total exports, divided by two. For nations with a trade deficit with the US, like the UK, which would otherwise have had a negative tariff using this formula, a baseline of 10 percent was used.
The trouble is that many poor countries have a trade deficit with the US because they export what they can to us but cannot afford to buy our high-value products in return. They export jeans, for instance, but don’t buy Harley-Davidsons. Yet the formula really punishes countries like that. That’s why the highest reciprocal tariff rate was imposed on the tiny African nation of Lesotho.
An economic analyst from the nation told Reuters, “The 50% reciprocal tariff introduced by the US government is going to kill the textile and apparel sector in Lesotho…Then you are having retailers who are selling food. And then you have residential property owners who are renting houses for the workers. So, this means if the closure of factories were to happen, the industry is going to die and there will be multiplier effects.” He concluded, “So Lesotho will be dead, so to say.”
In many ways, this is the exact converse of the “trade not aid” philosophy. It regards exporting to the US as a cost to the US that the other nation should pay for, not as a form of mutually-beneficial cooperation with humanitarian benefits. It also kills US soft power with these nations and leaves a geopolitical vacuum into which US rivals like China will expand. High tariff rates on south east Asian countries, for example, will exacerbate the drift of those countries towards the Chinese sphere of influence that has been happening in the wake of trade uncertainty since the first Trump administration.
The administration’s trade policy sends a message to the world: America is an unreliable ally that sees you only as a source of wealth; and if you don’t have wealth, you’ll pay for it. It’s a self-contradictory and hostile message to countries that have been valued partners in trade for decades or more. As such, it also represents a repudiation of the value of soft power.
Once it is given up like this, soft power can be hard to regain. As the saying goes, a reputation is a terrible thing to waste. While the Treasury Secretary may have said, “America First does not mean America Alone,” it sure looks that way to the rest of the world.
