Of the many reasons for a rational person to look upon the Trump presidency with anxiety, ‘protectionism’ frequently appears at the top of the list in the mainstream media. The Independent quoted an executive of a large mining consortium warning us of “global trauma” should the new president fulfil his promise to introduce tariffs.  Some progressive commentators seem to share the protectionist anxiety. In response to Trump’s declaration that “protection will lead to great prosperity and strength,” the Guardian’s Jonathan Freedland told his readers that this assertion is “in defiance of the historical experience that says protection leads, in fact, to crisis and world war.”

Given the seriousness of these warnings, their validity bears investigation. The analytical basis for the ‘protectionism leads to disaster among nations’ argument comes from a book by Norman Angell published in 1910, The Great Illusion. He argued that warfare gained nothing (“the great illusion”), because wealth comes from trade among countries, not conquest of territory.

Angell’s book and his hypothesis suffered from unfortunate timing. Just four years after his extolling the peaceful virtues of international commerce, the most destructive war in history broke out among the trade-integrated nations of Europe. Despite this apparently definitive empirical rejection, the trade-prevents-war argument continues to find support, along with the obverse argument made by Freedland, that disrupting trade provokes conflict.

The “historical experience” Freedland has in mind is almost certainly the Great Depression of the 1930s, the trump card (no pun intended) of free traders. The argument is quite simple: the US Congress in 1930 provoked a global tariff war. This caused the Great Depression, which in turn set off a second world war.

This anti-protectionist hypothesis repeated with such assurance by Freedland and others encounters a chronological problem. Almost everyone dates the Depression from late 1929 (Black Thursday), while the Tariff Law came into effect in mid-1930 (the so-called Smoot-Hawley Tariff Act). Defenders of the protectionist hypothesis argue that chronology is on their side, because in 1928 Herbert Hoover had campaigned for the presidency on a protectionist platform. Therefore, the tariffs were widely anticipated well before they were formally enacted.

But arguments over when, whether and who anticipated the increase in tariffs should be dismissed as irrelevant, because the Great Depression was not caused by a tariff war. A careful survey of both writings at the time and subsequent academic and policy work turns up no important source making the tariff argument. Quite to the contrary, one finds explicit rejection of the tariff war argument.

The Great Depression was largely an American phenomenon, caused by the same dysfunctional behaviour that brought on the Global Crash of 2008: inadequately regulated financial speculation, as John Kenneth Galbraith argued so eloquently in his 1955 book, The Great Crash of 1929. A speculative bubble expanded through the 1920s, and when it burst it generated a wave of bank failures (over 5000 during 1929-32).

As would be repeated eighty years later, the spreading financial failure provoked a collapse of private investment that generated a downward spiral of contracting demand and rising unemployment. Paul Krugman, a vociferous advocate of freer trade, rejects the tariff war explanation of the Great Depression:

“One thing you hear all the time is that protectionism caused the Great Depression. I’ve always seen this as an attempt at a Noble Lie; there’s no good reason to believe that it’s true, but it has been used to scare governments into maintaining relatively free trade.”

Krugman also rejects the soft version of the tariff argument, that protectionism made the Great Depression worse, citing work by Eichengreen and Irwin who demonstrate the reverse causality, that the Great Depression fostered protection. On the website of the Washington International Trade Association – an advocacy group for trade liberalisation – an article places the allegedly disastrous Smoot-Hawley tariffs in historical context: “Some note that the US had also enormously raised tariffs in 1922 and that this did not cause a depression”.

The tariff-war explanation of depression and war represents the twenty-first century insistence of right-wing arguments that economic instability results from policy mistakes by governments, not flaws inherent in capitalism. As a counter to the systemic explanations of the Great Depression made by Galbraith and others, in 1963 Friedman and Schwartz published their misleadingly titled Monetary History of the United States (more an interpretation than a “history”).

They re-branded the Depression as the “Great Contraction”, arguing that the economic disaster resulted from policy mistakes by the US central bank (Federal Reserve System), a re-branding subsequently endorsed by Ben Bernanke in a eulogistic speech at a conference marking Friedman’s ninetieth birthday (appropriately enough).

The Friedman-Schwartz-Benanke “Great Contraction” applied to the 1930s has much in common with assertions that excessive or inappropriate financial regulation brought on the financial crash of 2008 and banks themselves bear no blame. The general message of the ‘contraction’ hypothesis is clear: instability of capitalist economies results from errors of governments, not flaws of markets. The allegation that protectionism leads to disaster and war is a near cousin.

Attacking Trump as a “protectionist” comes from the same ideological perspective that refers to him and to Bernie Sanders as “populists”, one of the right and the other of the left.  Had the Democratic Party nominated the Vermont Senator for president and had he won (which I think he would have), the accusation of protectionist disaster would be directed at Sanders with equal fervour.  

Even more than progressives, the neoliberal right recognizes that Donald Trump in the White House signals a paradigm change.  By “neoliberal” I mean the ideology of market deregulation whose major outcome has been the hegemonic rise of financial capital, or “financialization”.  Marxists warned of the dangers the finance sector crowding out other economic activities (as did Marx himself), and these warnings are now found even in the non-financial pro-business media.

So-called globalization appears to the eponymous person in the street as a phenomenon of trade, but the domination of finance over production is its driving force. Fully liberalized trade in commodities (“goods”) requires fully convertible currencies (no “exchange controls”), which allows for unrestricted capital movement.  Very quickly the value of capital inflow and outflow far exceeds trade flows so that the so-called capital account (financial flows) comes to determine exchange rates and via exchange rates have a major impact on the stability of the domestic economy.  Advocating “free trade” means in practice endorsing the dominance of finance over production.

What appears as “free trade” policy is in practice the liberation of finance to dominate society. It should come as no surprise that among the vociferous opponents of “protectionism”, we find the big international money dealers such as Goldman Sachs.  Equally unsurprising, when the media tell us that economists are unanimous in opposition to the perversion of protection, employees of financial corporations are always prominent among the cited economic gurus.

The long term decline of US economic and political power is the motivation for the new, far-right president to drop the superficially benign rhetoric of free trade in favour of the aggressive polemics of economic nationalism. Trumpian attacks on both the Chinese and German governments for their trade policies suggest that the polemics are harbingers of action. At the moment it is not clear whether and how much real tension exists between the global dominance of finance and Trump’s “America First”.

I have no doubt that Donald Trump’s vision of a new American hegemony is a threat to world peace.  It is not because he opposes trade liberalization.  We can leave that criticism to the agents of global finance, whose masters have their own plan for hegemony: financialisation.