IT is important for an intellectual position not only to be right but to be right for the right reasons; and the near-universal condemnation of Donald Trump’s aggressive imposition of tariffs, though right, is right for the wrong reasons. A pervasive presumption underlying such condemnation has been that unrestricted trade is a good thing for all concerned; and that Trump, in deviating from this maxim, is being both nasty and stupid. Much of the critique of Trump’s strategy in short is based on an acceptance of the free trade argument that has been handed down from the days of David Ricardo. This argument however is totally wrong.

It is based on an acceptance of Say’s Law that states that a capitalist economy can never have a demand constraint, which is palpably absurd. Once we move away from this Law attributed to the “trite M. Say”, as Marx had described him, then it follows that trade policy, that is, whether free trade is pursued or tariffs are imposed, is devised for obtaining a larger market for the producers of one country at the expense of others. Free trade in other words does not necessarily benefit all; and faulting Trump for moving away from free trade amounts to faulting him for the wrong reasons.

In progressive circles of course an altogether different argument is advanced against Trump’s policy, namely that the imposition of tariffs in US, the leading metropolitan economy, even as the global south is subjected to free trade, is an act of imperialism, for it shuts out imports from the global south and hence leads to an export of unemployment from the leading metropolitan economy to the global south. This argument, even though apposite in the immediate present context, is not a defining feature of imperialism in general. In the later part of the colonial period, for instance, the imposition of free trade on the global south had been accompanied also by free trade in the leading metropolitan economy, Britain. The imposition of free trade had opened up economies like India and China to the cheaper manufactured goods exported from Britain after the Industrial Revolution, and had caused deindustrialisation in these economies by displacing pre-capitalist producers.

This situation of imposition of free trade on the global south had continued until the inter-war period when a political wave had swept across Latin America in the context of the Great Depression, and a whole set of new regimes had emerged that introduced protection and ushered in industrialisation behind tariff walls; in India too the colonial administration had to introduce, albeit grudgingly, “discriminating protection” in the inter-war period (on the “infant industry” argument) for a small range of industries, allowing some room for the domestic bourgeoisie to develop. Imperialism in short is not always associated with protectionism in the leading metropolitan country, and the imposition of free trade on the global south. Imperialist trade policy depends on the concrete situation.

In the recent period, when metropolitan capital has been more willing to locate plants in the global south to take advantage of its low wages to produce for the world market, this has entailed an export not of unemployment but of employment to the global south, especially from the US, in conditions of unrestricted trade. In fact neoliberal policies were sold to countries like India precisely on the promise that employment in their economies would increase through the relocation of activities from the global north if all barriers to the movement of capital were removed. Now, Trump wants to put an end to this.

Trump’s protectionism however is not motivated solely by the desire to snatch employment from the global south, especially from China. A very strong additional reason is the continuing US current account deficit on the balance of payments which has made the US into the world’s largest debtor country; protectionism he hopes would rectify this situation.

There is however a contradiction here that is usually missed. It is a hallmark of the leader of the capitalist world to run a current account deficit vis-à-vis its rivals, in order to accommodate their ambitions and preserve its leadership role. Britain, in the period before the First World War when it had been the leader of the capitalist world, had run a persistent current account deficit vis-à-vis continental Europe and the United States, newly emerging powers of that time, in order to accommodate their ambitions and prevent them from rebelling against British leadership.

But Britain had not become an indebted nation; on the contrary it had emerged as a major creditor nation making large capital exports, and that too precisely to the regions with which it had current account deficits. It could do so because it could appropriate gratis all the net export earnings of its tropical and subtropical colonies (the “drain” of surplus), and also make “deindustrialising” exports to them since they were, in effect, “markets on tap” (in the words of economic historian SB Saul). The fundamental difference between the position of Britain then and of the US today is that such “drain” of net export earnings from the global south and the possibilities for imposing “deindustrialisation” upon it are not available to the latter.

This is both because we have today imperialism without colonies, and also because there is a limit to the extent that a system can be sustained by colonies, even if such colonies had still existed: the scope for further “deindustrialisation” dwindles as more and more pre-capitalist producers are supplanted, and also the scope for a further increase in “drain” dwindles as larger surpluses are squeezed out of stagnant colonial economies. Rosa Luxemburg had drawn attention to the first of these limits; and though her argument about the causes of imperialism had its limitations, it had the merit of recognising that capitalism in the metropolis ran into increasing difficulties as it developed.

Trump’s unleashing of a tariff war is usually attributed to his “madness” or his “contempt” for the rest of the world, and such like reasons; but in fact it arises from deeper contradictions rooted in the development of capitalism as it attains maturity. Attributing it to Trump’s “madness” alone would be an utterly superficial explanation. Ironically, Trump’s imposition of tariffs could work for the US, both by way of increasing employment and also by way of reducing its current account deficit, if other countries did not retaliate by raising their own tariffs vis-à-vis the US; but US imposition of tariffs would not only not work for the US itself if other countries did retaliate, but would even make matters worse for the entire capitalist world in the event of such retaliation.

This is because higher tariffs everywhere would raise prices relative to money wages and hence entail a shift from wages to profits; such a shift, since a larger proportion of wages is consumed than of profits, would further reduce the level of consumption out of any given output and hence lower aggregate demand, leading to a lowering of output and employment in the world economy. This to be sure could be prevented if State expenditure, financed by either taxes on the rich or a larger fiscal deficit, increased adequately to counter it. But both these ways of financing larger State expenditure are anathema for globalised finance; a wave of tariff increases across the world therefore would only worsen the state of world capitalism. But even if such a development occurs, it would have been a manifestation of basic contradictions in world capitalism rather than an outcome of the “madness” of a Donald Trump.

The question before us is: how to react to Trump’s tariff hike? What the Trump offensive signifies is an end to the era of diffusion of activities from the US to the global south and hence a formal end to any rationale for the pursuit of a neoliberal policy. The time for a change of trajectory has arrived for countries like India. This change must begin by protecting the economy and expanding the home market. Protection alone is not enough; it must be accompanied by an increase in State expenditure financed by wealth taxation, to increase people’s welfare and to stimulate agricultural and small industries growth, so that the size of the home market increases simultaneously.

Any such activism on the part of the State, however, is likely to cause an outflow of finance; and, to stem such an outflow, capital controls have to be put in place. In short, Trump’s tariffs should open people’s eyes to the fact that there is no alternative to an egalitarian, welfare-oriented, home-market-based, and State-sustained, strategy of development for countries like India in the present conjuncture.