25th August 2026
There was a time when free trade was regarded as one of the great economic ideas of the modern world.
The argument was relatively straightforward - if countries concentrated on producing the goods and services they were particularly good at producing, and then traded freely with one another, everybody could benefit. Consumers would have more choice and, because businesses were competing internationally, prices would tend to be lower. Companies would gain access to much larger markets, investment would flow across borders and countries would become increasingly prosperous through their economic relationships with one another.
It was never quite as simple as that, of course. Free trade created winners and losers, and some of the losers were very visible. A consumer might enjoy cheaper clothing, electronics or household goods, while a factory in their own town was closing because it could no longer compete with cheaper imports. Economists could quite reasonably argue that the economy as a whole was better off, but that was of little comfort to the people whose jobs had disappeared or to communities that gradually lost the industries around which they had been built.
That distinction between the overall economy and individual communities is probably one of the reasons the political enthusiasm for globalisation eventually began to weaken. A country can become richer overall while particular towns and regions become poorer. The benefits of cheaper goods are spread across millions of consumers, while the consequences of an industrial closure can be concentrated in one community. The people affected by that closure remember it for decades, and eventually politicians begin to hear their concerns.
That helps explain where we are today. The United States is imposing tariffs on trading partners including Canada and Europe, countries are retaliating or threatening to retaliate, and China remains at the centre of a much wider dispute about trade, manufacturing and economic power. The World Trade Organization has reported an extraordinary increase in trade-policy intervention, reflecting how rapidly the international trading environment has changed.
The remarkable thing is that many of the countries now raising barriers to trade spent decades encouraging exactly the opposite. Globalisation encouraged companies to build international supply chains in which different parts of a product could be manufactured wherever they could be produced most efficiently. A car might contain components from several countries before it reaches the showroom. A computer could involve design, software, chips and assembly taking place in completely different parts of the world. The system worked because companies could rely on goods moving across borders with relatively few obstacles.
That efficiency helped bring prices down, but it also created dependencies. The pandemic demonstrated what could happen when international supply chains suddenly stopped functioning properly. Russia's invasion of Ukraine exposed the vulnerability of European energy supplies. The increasingly confrontational relationship between America and China has raised questions about semiconductors, critical minerals, technology and other strategically important products. Governments have consequently started asking a different question from the one businesses asked during the great expansion of globalisation.
The old question was essentially, "Where can we produce this most cheaply?" The new question is increasingly, "Where can we produce this safely and reliably, even if it costs more?"
That is a very significant change.
There are perfectly good reasons for governments to want domestic capacity in certain industries. Nobody wants to discover during an international crisis that their country cannot obtain essential medicines, defence equipment, energy technology or critical components. There is therefore a legitimate argument for resilience, and sometimes that resilience will cost more than relying on the cheapest possible international supplier.
The difficulty begins when protection of strategically important industries turns into a general belief that tariffs are a good way of making an economy prosperous.
A tariff can sound wonderfully simple when presented politically. The foreign producer is supposedly being made to pay for access to the American market, while domestic manufacturers are protected from overseas competition. But the economics are rather different. If an American importer buys something from Canada and a tariff is imposed on it, the importer initially has to pay the tariff to the US government. The Canadian exporter might subsequently reduce its price to remain competitive, the American importer might accept a lower profit margin, or the American customer might pay more. In reality, the cost can be distributed between all of them.
The problem becomes even greater when the imported product is not something that is sold directly to the consumer but is a component used to manufacture something else. The tariff then becomes another cost embedded in the production process. If that happens repeatedly through a supply chain, the eventual product can become considerably more expensive.
This is why the current dispute between America and Canada is so significant. These are not two economies that operate independently of each other. Their manufacturing systems have become deeply integrated over many decades, with components and finished products crossing the border as part of complex supply chains. A tariff intended to protect an American industry can therefore end up increasing the costs faced by American manufacturers as well.
There is a certain irony here. The international supply chains that governments are now trying to unwind were largely created because they made manufacturing more efficient. Companies did not deliberately make their products dependent upon half a dozen countries because they wanted to create a geopolitical vulnerability. They did it because it reduced costs, improved efficiency and allowed them to specialise.
We are now asking businesses to reverse some of that process.
Instead of "just in time", they are increasingly thinking about "just in case". Instead of having one supplier because it is the cheapest, they may decide they need two suppliers in different countries. Instead of manufacturing everything in the most efficient location, they may bring some production closer to home. Instead of holding minimal stocks, they may maintain larger inventories in case another disruption occurs.
That may make the economy more resilient, but resilience is not free. Maintaining duplicate suppliers costs money. Holding additional stock costs money. Producing something domestically when it could be made more cheaply abroad costs money. Building new factories costs money. Ultimately those costs have to be absorbed somewhere, and a considerable part of them will eventually find their way into the prices paid by consumers.
This is where the old debate about free trade becomes much more complicated.
Free trade was never supposed to mean that every worker, every company and every community benefited from every individual trade agreement. It was an argument that the overall gains from allowing countries to specialise and trade would outweigh the losses, provided governments dealt properly with the people and communities adversely affected.
Perhaps that second part was neglected.
The answer to a factory closure was too often assumed to be that workers would simply find something else to do. The fact that an entire community might lose an industrial base was sometimes treated as an unfortunate but necessary consequence of economic efficiency. The gains were celebrated in national statistics, while the losses were experienced locally.
That created fertile ground for the protectionist politics we see today.
The argument that "foreign competition is taking our jobs" is powerful because people can see the factory that has closed. It is much harder to see the economic benefit created by millions of consumers paying slightly less for thousands of products. Economically, the benefits may be real, but politically they are much less visible.
This is why I think the current tariff war should not simply be dismissed as irrational.
There are genuine problems that created the backlash. Some countries have used subsidies to support domestic industries. Some have restricted access to their own markets while benefiting from access to American or European consumers. Intellectual property disputes and concerns about industrial espionage have added to the tensions. China in particular has become an enormous manufacturing power, and the United States has legitimate concerns about strategic dependence on a geopolitical competitor.
But recognising those problems does not mean that an endless tariff war is the answer.
There is a huge difference between protecting a strategically important industry and imposing barriers on a vast range of ordinary trade. The former can sometimes be justified on national-security grounds. The latter risks becoming a cycle in which every country protects its own industries from the protectionism of everyone else.
Once that happens, the economic logic becomes rather absurd. America imposes tariffs to protect American producers. Canada retaliates to protect Canadian producers. Europe responds to protect European producers. Other countries then respond to protect themselves from the consequences of all three.
Every government can claim that it is defending its own workers.
Yet collectively they may be making everyone poorer.
This is the danger of a trade war. It becomes very difficult for any individual country to back down because doing so can be portrayed politically as surrender. The tariff that was introduced as a temporary negotiating weapon can become permanent. Businesses adapt to it, governments collect revenue from it and protected industries lobby to keep it. What began as a bargaining tool becomes part of the economic system.
Britain has a particular reason to be concerned about this development. We are a trading nation, and our prosperity depends heavily upon access to international markets. We export financial services, pharmaceuticals, whisky, machinery, technology and countless other products, while importing an enormous range of goods and components. If international trade becomes more expensive and fragmented, British companies can face both higher costs and smaller markets.
There could, of course, be opportunities. If Canadian businesses decide that they need to reduce their dependence upon the American market, British companies might gain new customers. If European businesses look for alternative suppliers, British exporters could benefit. Trade rarely moves in only one direction.
But those opportunities are unlikely to compensate for a general deterioration in the international trading environment.
The most damaging consequence of the tariff war may therefore not be the tariffs themselves. It may be uncertainty.
Imagine being the owner of a manufacturing company considering a £20 million investment. You need to know where you will obtain your raw materials, where you will sell your finished products and what the tariff regime will look like over the next five or ten years. If governments can suddenly change the cost of importing or exporting a major component, that investment becomes much harder to justify.
Companies can cope with high taxes. They can cope with regulation. They can even cope with tariffs if they know what the rules are.
What businesses find much harder to cope with is not knowing what the rules will be next year.
That uncertainty can lead to delayed investment, which eventually affects productivity and economic growth. It is one of the reasons that the consequences of a trade war can be much greater than the value of the tariffs themselves.
There is also a wider philosophical question here. The world spent several decades becoming economically interconnected on the assumption that countries with strong trading relationships would have more to lose from conflict with one another. Economic interdependence was not just about making products cheaper; it was also regarded as a way of creating relationships between countries.
We are now moving in the opposite direction.
Countries are increasingly concerned about becoming dependent upon one another. Governments are talking about economic security, strategic autonomy and reshoring. Businesses are reconsidering supply chains that took decades to construct.
Some of that is sensible.
But if taken too far, it could result in a world in which everything costs more because every country is attempting to manufacture everything itself.
That would be an extraordinary reversal of the economic thinking that dominated much of the post-war period.
So whatever happened to free trade?
Perhaps it did not fail because the basic economic idea was wrong. Perhaps it failed politically because governments did not do enough to ensure that the people who lost from globalisation were properly supported.
There is a lesson here that goes beyond the current argument between Donald Trump, Canada, Europe and China. An economic policy cannot remain politically sustainable if its benefits are widely distributed but its costs are concentrated in particular communities and people.
The answer, however, does not necessarily have to be the complete abandonment of free trade.
There is a middle ground in which countries can challenge unfair subsidies, prevent genuine dumping, protect strategically important industries and insist upon reciprocal market access while still maintaining a broadly open international trading system.
That would be a much more difficult policy to sell politically than a simple promise to "put tariffs on them".
But it might also be a much more economically sustainable one.
The great irony is that we may eventually discover that free trade was never really about making everyone a winner. It was about creating a system in which the overall gains from trading with one another were greater than the losses created by competition.
The challenge was always to make sure that those gains were shared sufficiently widely.
Instead, we now seem to be swinging towards the opposite extreme, where every country is attempting to protect itself from every other country.
That may make for good political headlines.
But it does not necessarily make for a richer world.
And the final irony is perhaps the simplest of all. The consumer who once benefited from the great expansion of global trade may now be asked to pay for the process of dismantling it.
The tariff might appear on the government's spreadsheet as a charge against a foreign company.
But eventually, someone somewhere pays for it.
And increasingly, that someone could be the person standing at the supermarket checkout, filling the car with fuel or wondering why the price of an ordinary product has suddenly gone up.
Perhaps we should therefore be asking a slightly different question.
Not "Who won the latest tariff dispute?"
But "How much are we all paying to prove that we can live without free trade?"