The investment industry is, with good reason, worried about the prospect of a trade war. Some 30% of investors identified it as the top tail risk in the March edition of the Bank of America Merrill Lynch survey. 

Considering recent developments, the shift was hardly surprising. Last month, President Donald Trump announced his intention to impose tariffs of 25% on steel imports and 10% on aluminium. His statement in turn prompted threats of retaliation from America’s trading partners. 

Trump’s impetuous actions are certainly worrying – even unhinged. He has publicly stated that in some circumstances “trade wars aren’t so bad” and the US will pursue protectionism “in a very loving way”. Such an approach could easily trigger a damaging cycle of protectionist measures and reprisals although, thankfully, an all-out trade war is far from certain.

Important as these developments are, they are too often understood in a one-sided way. Typically, Trump is seen as a throwback to 1930s-style protectionism in a world that has generally embraced free trade. But this view grossly distorts the reality of recent developments.

The world is a long way from free trade in the proper sense of the term. All of the main economic players are guilty of extensive protectionism.

If there is a difference with the 1930s it is that there is less emphasis on tariffs (taxes on imports) and a greater focus on non-tariff barriers. The latter can include measures such as regulatory barriers (for example, imposing complex environmental standards to make matters difficult for regional or national competitors), selective procurement (for instance, encouraging the public sector to give preference to domestic firms) and corporate subsidies (giving domestic firms a competitive advantage). 

“The world is a long way from free trade in the proper sense of the term. All of the main economic players are guilty of extensive protectionism”

All such measures have the effect of favouring domestic firms at the expense of foreign ones. It is possible to make an intellectual case for such a mercantilist approach but it is Orwellian to describe it as free trade.

The main difference between Trump and other world leaders in this respect is that he is open about his support for protectionism. He also favours bilateral trade agreements, whereas others tend to prefer multilateral ones.

The problem is that everyone loses as a result of protectionism, whatever its form. A retreat into national economies or regional trading blocs means that global production struggles to benefit from economies of scale. For instance, if car production is organised globally it can operate much more efficiently than if it is curtailed by borders.

Emerging markets are the biggest losers. Protectionism makes it harder for them to progress on their path to economic development.

Protectionism is not a new problem that Trump has just introduced. It is already an ugly reality in the here and now.

Daniel Ben-Ami, Deputy Editor