Commentary
Trump’s economic philosophy? Racketeering
The Gangster-in-Chief does not seem to realize that the rapid economic expansion of 1945-1975 was mainly due to the gradual reduction of protectionist measures on a global scale. Going back is very difficult and, more importantly, will not be painless.
There is a new element that may soon add to the low-intensity civil war between Republicans and Democrats in the U.S.: import tariffs. Trump is juggling tariffs as if they were lit torches that fly up into the air but should always return to his hand.
But some states will be benefited by the tariffs and others will be harmed, adding a geographical dimension to the already deep rift in the United States. This is not a difficult prediction. It has happened before in American history: the plantation South was pro-free trade and the fledgling factory North was pro-tariffs. How did things go from there?
The War of Secession (1861-1865) was a conflict for control over the expansion to the West. It was a war for supremacy in the federal government. From a certain point on, it was a war about maintaining or abolishing slavery. But along with all of this, it was also a war between mercantilism and free trade, that is, between the North, which wanted to protect its industries from foreign competition, particularly British, and the South, which instead demanded maximum freedom of trade because its cotton was being shipped straight to Britain, where it fueled the textile mills – the “dark satanic mills” as the poet William Blake called them.
The entire industrial world was effectively controlled by Southern cotton supplies. Cotton was the main article of international trade and accounted for half of all U.S. exports. It was the essential raw material for hundreds of thousands of workers in the North and in Europe. Most importantly, the South had a near monopoly in world cotton production because the plantation slave system could produce high quality fiber much more cheaply than any other existing or potential producer, as historian William Fogel noted years ago.
It was this confidence in their economy and their relationship with the British market that drove the reckless Southern ruling classes to secession, which they hoped would be protected by diplomatic recognition from Britain. That recognition would never come.
The North's victory in the Civil War was also the victory of Northern capitalists engaged in railroad construction, which required rails, which in turn required steel, which required blast furnaces, which could only cope with British and German competition under the shelter of very high protective tariffs. The highest tariffs were reached at the beginning of William McKinley's presidency (1897), when protectionist measures were also enacted on wool, sugar and luxury goods. Trump is so enamored of McKinley that one of his first acts upon taking office on January 20 was to rename the highest peak in the United States, Mount Denali in Alaska, in his honor.
Unfortunately for him, the American economy in 1897 was very different from the one in 2025. The federal budget was tiny, the military virtually nonexistent, and the main spending items were veterans' pensions and the postal service. Any comparison to nowadays is ludicrous, and Nobel Prize-winning economist Paul Krugman keeps repeating that Trump simply “doesn’t understand how tariffs work,” which are “a tax on American consumers.”
Most of all, the Gangster-in-Chief in the White House does not seem to realize that the rapid economic expansion of 1945-1975 was mainly due to the gradual reduction of protectionist measures on a global scale. And the 1975-2025 expansion, which proceeded in fits and starts, was aided by even more drastic reductions of tariffs as part of agreements made at the World Trade Organization. Going back is very difficult and, more importantly, will not be painless.
The problem Trump seems not to understand is the extremely high level of international integration for the production of anything more complex than a toothpick. Cars are made with hundreds of components from dozens of countries, and the fact that they are assembled in Detroit does not make them particularly “American,” just as iPhones designed in California all come from Foxconn factories in China and Taiwan. Tariffs on one or more components slow down production, increase uncertainty and disrupt markets.
There is, however, a form of rationality in the American president's bizarre behavior: the logic of racketeering. The show of force, threats and concessions are all part of a Mafia-style logic: “Do as I tell you or I’ll break your legs.” Invasion threats aside, the use of tariffs is a powerful weapon to convince foreign manufacturers to move to the United States, the only guarantee against future reprisals. It is no coincidence that the first company to announce a $100 billion mega-investment in Alabama is the world leader in semiconductors, Taiwan's TSMC. One should also recall that the strategy of bringing back industries that had migrated abroad, so-called re-shoring, had been pursued by both Biden and Obama, with little success.
However, a fundamental weakness of extortion schemes is the uncertainty they bring: no one knows who the boss's next target will be, or whether the bribe demanded yesterday will not be doubled tomorrow. This might have worked in the South Bronx or New Jersey in the era of the Gambino family, but it’s working less well on a planetary scale in the era of the Trump administration.
Markets hate uncertainty, and if uncertainty takes the form of tariffs that come and go, threatened in the morning, implemented in the afternoon and lifted in the evening, Wall Street will take its gains home and keep its money in its bank accounts (Warren Buffett, the octogenarian founder of the Berkshire Hathaway fund, has been repeating for months that his group is keeping their dollars in the bank). The NASDAQ index, which particularly tracks technology companies, has lost 15 percent in three weeks, and there doesn’t seem to be any stopping point in the race to the bottom. One can wonder if any of the billionaires present at Trump's swearing-in on January 20 will manage to explain this to him before it's too late.
Originally published at https://ilmanifesto.it/il-racket-come-razionalita-economica on 2025-03-13