When Trade was King
Inevitably I find myself behind on my summer reader list. But I can recommend Palermo, City of Kings, by renowned Mediterranean scholar Jeremy Dummett.
Why Palermo? What more is there to know about Sicily’s capital city beyond what Francis Ford Coppola taught us in his Godfather trilogy? Plenty as it turns out. With trade-related cauldrons percolating worldwide, it is worthwhile to consider what trade meant to an ancient people whose net worth was measured by the quality of goods they could buy and sell.
Centuries before its grim association with organized crime, Palermo was a city of light, a celestial point in the late-Middle Age commercial revolution. First under Arab administration in the tenth century AD and later under the Normans and Germans, the city was the seat of power of an island coveted for its fertile soil and abundant fresh water harnessed by canals and aqueducts. Farmers developed such new crops as cotton, rice, silk, sugar cane and alfalfa. The island enjoyed a near-monopoly over the global tuna trade after enterprising fishermen pioneered the concept of interlocking nets. Palermitani tailors boasted European and Scandinavian royalty as clients for their luxury silk garments.
As the economy thrived, so too did academia and the arts. As Dummett puts it, “Here prosperity grew on the back of successful trading with other cities around the Mediterranean. Arts and sciences flourished and [Sicilian] learning impressed the world.”
Reading Dummett’s book, it struck me that the history of human industry is best told in two parts. There is the global economy that prevailed for most of recorded time as clusters of city-states whose economies rose or fell on the strength of their terms of trade. Consider the Nabataean trajectory for example. In the 2nd century BC in what is now Jordan, they controlled the main toll road connecting Europe and Central Asia and the trade concession that went with it. Made redundant by the Roman conquest, the Nabataeans packed up their grip, headed south and achieved their second act as olive-oil barons.
This was the libertarian, “eat what you kill” way of antiquity and the borderless trade routes that sustained it. It was replaced by the nation-state world we live in today which, as a trade order peaked in the 1990s with the success of the Uruguay Round – the seminal round of multilateral talks held under the framework of the General Agreement on Tariffs and Trade – hit the wall with the collapse of the Doha Round and is now more-or-less rudderless. Though trade today accounts for a not-insignificant 30% of global GDP, it is undercut by subsidizes on all sides and a proliferation of trade deals that often conflict with the protocols of the World Trade Organization – the so-called “spaghetti bowls.” The WTO, meanwhile, is a Leviathan in search of itself. No longer content with tariff reduction, it now mediates non-core but still important issues like labor conditions and environmental standards.
Whether or not you approve of this state of affairs, reciprocity of interests between public agencies and Fortune 200 companies – in this case make-work for sweetheart deals – usually results in long and happy equilibriums. That is one of the conclusions of a recent study on trade by JPMorgan. Among other things it argues that vested powers will, by weight of their authority, save our global trading system from meaningful change, let alone the kind of wholesale reform demanded by the current Trump administration.
The study notes the high rate of “inertia,” or the weak impact tariffs have had on the global economy since the mid-1990s, which it attributes to such irreversible factors as extensive trade integration, longer supply-chains, regional trade blocs and the fear of tit-for-tat tariff escalation. If tariffs are prone to inertia, so too does the infrastructure of trade enshrine the status quo.
Until now, JPMorgan implies, the threat of a trade war was preempted by negotiation or, failing that, threats of tariff reciprocity among interested parties – think agro-giants, Big Pharma, banks and airlines. “One of the results of greater trade integration over time,” the paper argues, “is the concentration of trading activity in larger firms [which] implies a trend toward larger players in international transactions and more heft behind threats of retaliation in response to tariffs.” In this way, recent punitive tariffs such as US countervailing duties on Canadian lumber or anti-dumping duties on Chinese steel have remained isolated events. “The protectionist direction,” according to JPMorgan, “is unlikely to go all the way to its limits.”
Anfield shares this prognosis and has for some time. At the same time, we support a critical evaluation of US trade policy.
Keep in mind that “Tariff” is jargon for “Tax” and that taxes are famously inefficient when it comes to modifying consumer behavior. (Generations of so-called “sin” taxes have done little to curb smoking and alcohol consumption, for example). Similarly, tariffs are more useful as menacing cudgels than as practical elements of trade policy for the reason cited by JPMorgan—in this globalized world, they are too easily neutralized by threats of retaliation, means of substitution and the weight of the world’s trade infrastructure.
So go in peace and don’t fear the Tariffs!
 Mandel & Anderson, What is a trade war, and are we in one?, JPMorgan Asset Management, July 2018