Trump’s trade war is getting worse not better. It demands a clever – not rash – response

The trade war, far from moving towards a truce, seems to be opening up on new fronts.

Donald Trump has just imposed steel tariffs on Brazil and Argentina, and has proposed tariffs of up to 100 per cent on a variety of French goods including cheese, champagne and handbags in retaliation for a tax on technology companies. The tax is a 3 per cent levy on revenues earned by all companies that provide digital services in France, but in practice it catches mainly US firms, because they dominate the market.

Shares in French businesses producing luxury products duly fell at the news, but while some $2.4bn (£1.85bn) of French exports might be affected, the scale of the potential hit is small when set against the proposed levies on Chinese goods, which take effect on 15 December unless there is some agreement by then. The US president has threatened to impose a 15 per cent tariff on $160bn of Chinese goods.

The consensus on the financial markets is that eventually some sort of trade deal will be agreed with China, probably early next year, but meanwhile the 15 December deadline is troubling them. Shares fell sharply on the suggestion that the tariffs might indeed kick in then, rather than being postponed while talks continued.

There are several ways to look at this. One is to see this as an ill-disciplined president lashing out randomly without caring about the effect. The French minister for finance and the economy Bruno Le Maire said: “This is not the sort of behaviour one expects from the United States with respect to one of its main allies, France, and to Europe in general.”

Well, actually it is exactly the sort of behaviour that France should expect, for this is how Donald Trump works. The question is what do you do about it. That leads to the second way of looking at the Trump initiative. How should trading partners, in this case France, respond? Though the action is specifically against France, its instinct is to look to the rest of Europe to support it. “We were in contact yesterday with the European Union to ensure that if there are new American tariffs, there will be a European response, a strong response,” Le Maire said on Tuesday.

That is understandable, but escalation is dangerous and potentially divisive for Europe. All major European countries have significant exports to the US, but the German car industry would be the most damaged if, as he has threatened, Trump were to impose a 25 per cent tariff on European cars. France does not export many cars to the US; Germany does. Some response is needed, but Europe should tread carefully.

Perhaps the most sensible way to see what is happening as part of a more general transition from a world where trade in goods and to some extent services, gets ever freer, to one in which trade will be politically managed and in which domestic produce will be favoured over imports more generally. Is this so bad?

In principle it is terrible. One of the great drivers of this burst of global prosperity the world has experienced over the past 75 years has been ever-freer trade. It is common sense that if one country, or region, can make better goods more cheaply than another, then everyone benefits. It is the law of comparative advantage, first developed by David Ricardo in 1817. To reverse the progress of three-quarters of a century would be madness. In practice, however, some political management of free trade might not be so damaging, and might – sensibly applied – even support this movement to greater freedom of trade. How so?

For several reasons. One, there are clear abuses of the present free trade regime. China has kept out US social media, while expecting other counties, including the US, to buy Huawei equipment. Try and buy US (or indeed any non-French) wine in a French supermarket and you won’t find much on offer. Go to a UK or American supermarket and there are lots of wines from all around the world.

Two, the world has established complex supply chains, shipping (or flying) stuff around the world. There are clear environmental reasons why such chains should be simplified.

Three, political support for ever-freer trade has weakened. It may be sad to acknowledge that, but Donald Trump hits a nerve with his trade aggression. He would not do it if he did not have general support among much of the US electorate. To maintain support, politicians have to acknowledge that there is sometimes some point in the criticism, not ignore it.

Four, in any case trade may shift from making things to trade in ideas of how to make things. In other words, you do the actual fabrication wherever convenient but make the money from the ideas behind the products. Think of the iPhone – the money is in the brand, not in the manufacture.

Finally, trade in goods seems to have reached a natural high point around 2015, before “The Donald” came into office. It kept on rising in absolute terms but not as a percentage of global GDP. We are too close to know quite why, but there must be a natural limit to the extent to which we want to buy foreign goods and services, and in any case the cost advantage of what were once low-cost producers has decreased as they become richer.

None of this is a support for the US lashing out. But the world needs to respond cleverly, not lash out in return.