Rates are a commitment to free market instead of free trade

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Roula Khalaf, publisher of the FT, selects her favorite stories in this weekly newsletter.

The writer is a FT collaborating publisher, an American Compassian chief economist and writes the American understanding bulletin

A prominent feature of the latest U.S. China trade die is the apparent commitment of the Trump administration to the 10 percent global rate as a permanent reference line. The common but peculiar objection to the president’s ongoing rates is that the burdens they put on the so -called intermediate goods are self -determination. Put a rate on steel and the domestic steel maker could benefit, but the many more manufacturers who use steel will suffer. In a wider way, inputs’ rates reduce the “competitiveness” of outings on the global market. IPhone’s rate, if necessary, but not its tiles and screws and the screen.

The mistake that this critique contains is the same as free traders have been doing for a generation: to imagine a global economy that operates as the friendly free market of the economist’s board in which competitors are affecting and capital flows to their best use. Productivity increases, prices fall, everyone blooms.

In the real world, on the contrary, the global market is dominated by national champions built in government. Capital flows to the largest subsidies and the most exploitable labor. However, productivity falls in the United States, where the typical factory requires more labor than a decade ago to produce the same production.

Free trade is nostalgic for a past age when a developing country could offer its discount work, subsidize its producers and sell the resulting production to richer clients elsewhere. This model of “exporting growth” led to an extraordinary increase in prosperity and mainly depended on cheap inputs. Imposing them would have been meaningless.

This export road is not open to the United States today. Fee steel, not to raise steel, in no case will US manufacturers be successful by selling cars made in the United States in the foreign markets. Fix chips, not target chips, in no case will the Iphones manufactured by the United States reach the Chinese shelves.

The theoretically elegant model of “comparative advantage”, by which commercial partners benefit with all the specialists in each specialty where it is relatively more productive, stopped working as soon as the FAD aimed at export. U.S. commercial balance on advanced technology products fell from a surplus of almost $ 100 million (in $ 2025) at the end of the Cold War to a $ 300 million deficit last year. Taiwan is not the leading world manufacturer because their beaches are with silicon.

Fortunately, the United States is not a small developing country. Its national consumption market is by far the largest in the world and its imports exceeds its exports in more than 1 TN of dollars a year. North -American manufacturers could have years, even decades, growth ahead of gaining share in the American market. And there, a rate does not reduce competitiveness.

A global rate rewards North -American manufacturers to their national market in a precise proportion to the degree they come from and produce at home. Foreign producers are rewarded precisely to the extent that they transfer production to the United States.

Consider the example of the Taiwan Semiconductor Manufacturers Company (TSMC), now building tip chip factories in Arizona. A 10 percent global rate makes these factories less competitive, according to critics, because some of the materials and equipment must be imported. TSMC has to pay 10 percent more for these inputs in Arizona from what he pays to Taiwan.

So what? The chips made in Arizona will not compete with Taiwan made chips in the “global market”. They will be absorbed by the demand of the United States. And thanks to the global rate, the Arizona plant will begin to look for domestic contributions.

A more valid concern would be that a North -American Market in this way will become sclerotic. Of course, closing the commercial deficit of trillion dollars would still mean trillions of dollars in annual imports, barely authentic. And the United States, when its market was much smaller and its much lower commercial volumes generated most of the main innovations of the last century. The advances have been worse in the globalized age when free trade undermined the free market.

The commitment to rates is that free market, even on a more limited domestic scale, can offer better results than a global market dominated by state -owned national champions. Perhaps free traders bet on the latter and would abandon capitalism in the American style before allowing such a blasphemy as “protection” to pass their lips. What they cannot have in the modern world, however ideal in theory, is free trade and a free market at the same time.