The international trade system of free trade with the efficient flow of capital, people, and goods wasn't created to improve its efficiency. Countries didn't wake up one morning and decide to implement free trade principles expecting economic benefits. If anything, the default in every country is imposing trade restrictions. The reason is simple – free trade benefits consumers but harms producers. And producers not only vote in elections but also pay lobbyists. They have a clear interest in restricting free trade.
So how did we still arrive at a world where free trade led to deep integration between countries and sectors, where your smartphone is produced in about half a dozen countries, and the coffee you drink in the morning comes from West Africa or Brazil? The answer is simple – it was a strategic decision by the US.
At the end of World War II, Americans faced two problems: a strong rival in the Soviet Union and countries too weak to limit its influence (West Germany, France, Britain, and Japan). To try to contain the Soviets at a bearable cost to the US, Washington decided to consolidate Western European countries and Japan into a new economic and security bloc that could, over time, contain and perhaps even defeat the Soviets.
One foundation of this bloc was an extensive defense alliance system connecting the US to Western Europe and East Asia. The North Atlantic Treaty Organization (NATO) was established in 1949. Japan and the US signed a defense alliance in 1951. This was the first time in history that the US entered into a defense alliance not during wartime, and with numerous countries. We can also add the defense alliances signed with Central and South America and with Southeast Asian countries.
Another foundation of the American bloc was a free trade system. Americans correctly identified that severe tariffs had harmed trade in the period between the world wars. To ensure the prosperity of the "free world," mutual tariff reduction and encouragement of free trade that would benefit all bloc members were necessary.
But there was one problem with the plan. The US and its allies were in very different economic positions. Western European countries and Japan were at the beginning of a long recovery from World War II. Most Japanese cities were destroyed. London was scarred by Hitler. France was under occupation for four years. In contrast, the US was in excellent condition – its cities knew no occupation, and its industry grew during the war. Free trade between such a prosperous country and such devastated countries would only bring further economic damage to these countries. How was a Japanese manufacturer supposed to compete with an American one when he had no access to raw materials, and high inflation eroded his income?
So, the vision of free trade was modified. Instead of demanding reciprocity, the US opened its huge consumer market while accepting high tariffs and restrictions on American exports from its trading partners. Over time, the situation improved, and Western European countries and Japan grew, but the leading logic remained the same – prioritizing national security and the fight against communism over economic considerations. That is, if an economic issue threatened to harm security or diplomatic cooperation, it was pushed aside, sometimes to the protest of American manufacturers and workers.
This was the case with Japan. In the 1970s, Japanese chip manufacturers flooded the US and took over a growing share of the domestic market. American manufacturers put enormous pressure on Congress and the White House to address the Japanese threat. The Defense Department and State Department opposed it because they believed the strategic consideration should lead – Japan was too important a military base in East Asia, and a trade dispute in the chip sector would damage relations. Fortunately for chip manufacturers, and unfortunately for Japan, tensions between the US and Soviet Union decreased in the 1980s. The pressure that built up in Congress influenced the White House, and Japan was forced to open its market and limit exports to the US.
Trump's moves stem from a different vision for the international trade system. At the top of the priority list is the economic interest of the American worker, and partner countries are required to treat American exporters fairly, even at the cost of reducing cheap imports into the US. Fairness and economic welfare are the name of the game, not appeasing allies and free trade for the sake of free trade.
This means that even allies will be required to treat American exporters fairly, or they'll face tariffs. Trump sees tariffs as a simple and effective tool for changing US trade relations and compensating for any unfair practice against American manufacturers. And how does Trump know there's an unfair practice? Simple – he checks if the US has a trade deficit with the partner country.
For Israel, the immediate implication is that it needs to examine which tariffs and other regulations are applied to imports to the US and contribute to our trade surplus with the Americans. Goodwill gestures, especially in the field of vehicle imports and agricultural produce, can put Israel on the right side of the American trade war.
