Tariffs & the Free Market

Mexican President Claudia Sheinbaum supposedly responded brilliantly to Trumps tariff policy against Mexico. Fact checkers don't seem to be able to verify what is circulating on social media is true. But even if it isn't, it's a brilliant put down & she achieved a months pause in the imposition of tariffs.

A tariff is tax or duty to be paid on a particular class of import or export. The historical consensus is that tariffs raise the price of the goods in the destination country. Near unanimous consensus among economists says that tariffs are self-defeating and have a negative effect on economic growth and economic welfare, while free trade and the reduction of trade barriers has a positive effect on economic growth.  

I will probably never understand economics. But it seems self evident to me that if tariffs are imposed on a country they are going to retaliate. Then there is a self defeating spiral of increased prices. The worst case scenario is a trade war.

Sheinbaums point seems to be that Mexico has a huge population who buy things, many of which come from America. All these consumers have choices & can stop buying American goods because there are always alternatives. The same is true of any country America chooses to target with tariffs. Lets take cars for example. The most popular American cars in the UK are Chevrolet, Dodge, Jeep, & Ford. Instead of buying those we have a huge choice of non American cars. For example - Toyota, KIA, Mazda, Honda, Hyundai, Volvo, Subaru, Renault, or BMW. Many of which out perform American cars. 

Trump, Musk & their largely unqualified appointees don't seem to understand the "quid pro quo" of tariffs. Countries are already retaliating. If they coordinate their actions it will be a very powerful response. There is a groundswell of opinion against Trump policy. Ordinary people are not happy with the aggressive way American politicians are behaving & are boycotting not just American goods, but services too. The "Star Spangled Banner" has been booed. 

Personally I think that the UK is wrong to imagine that we or anyone has a "special relationship" with the Trump administration. Trump is very binary & transactional. He can't be accused of overthinking anything. He simply doesn't factor in cause & effect. So our response, which according to Starmers team is apparently to be “pragmatic” if need be, suggesting he may not retaliate immediately, in the hope of talking Trump round over time and with the aim of creating the conditions for signing a wider UK-US trade deal, doesn't seem emphatic enough to me.

The "Free Market" is an economic system in which prices are determined by unrestricted competition between privately owned businesses. Tariffs are completely counter to that. My only caveat is that there does need to be real competition. Our water industry is privately owned & is a complete mess because there is no competition at all. I have no choice but to get my water from Thames Water. There is no other supplier. So I am forced to pay for their years of mismanagement & lack of maintenance of infrastructure. Their profits have gone to huge salaries & bonuses & shareholders.

The world is paying a price for American "democracy". But I do believe that Americans will eventually realise that the price they pay for electing Trump for a second term will be higher. Goods & services will cost more & huge numbers of American jobs will go. Musks DOGE policy will make thousands unemployed.