Trade Tariffs

Trade Tariffs

In the current market it seems like there is not a day goes by without the discussion on tariffs being mentioned in the news.

Please see the article below from our in-house economist Peter Bickley on the possible effect it will have on the stock markets.

Across the developed world we live in an era of low tariffs. The lessons of the 1930’s were well learnt and the strong post-war consensus that brought us what we now know as the EU and NAFTA, amongst many other multi and bi-lateral arrangements, has brought immense benefits. World Trade Organisation statisticians calculate that taken as a broad average US tariffs stood (in 2015) at 2.4%, Canada’s at 3.1% and the EU at 3.0% (source: The Economist). But with statistics you can prove anything; in each case the greater part of overall trade is tariff free, but what does get caught can be taxed very highly.

Even within the EU, where goods (unlike services) do indeed flow freely across borders, we shelter behind an exterior wall of tariffs, some of which seem a tad eccentric. An importer of umbrellas (with telescopic handles, of course) faces a tariff of 4.7%; diversifying into swords, cutlasses and bayonets would cut the impost to 1.7% but further diversification into, say, unicycles would encounter a 15% charge. Tariffs like these are hard to understand though protection for a nascent unicycle manufacturing sector must seem important to somebody. Others are easier to comprehend: the duty on oranges imported into the EU rose from 3.2% to 16% in response to lobbying from Spanish orange growers. More comprehensible but no more justifiable; as is ever the case, a targeted protectionist tariff benefits one small group at the expense of everyone else.

Silly interventions of this variety are a natural temptation for politicians, so much so that mindful of the damage they can cause, there are rules intended to head them off. WTO regulations govern what is and is not a ‘fair’ or ‘legal’ tariff and the circumstances in which one may or may not be introduced. Unsurprisingly there are constant squabbles about all this and the occasional rattle is ejected from a pram; generally, though, the system has worked passably well.

From the headlines one could be forgiven for thinking that all of this has broken down, that the world is rapidly dividing into a series of fortress economies, each waging economic war on the others. That is not yet the case, but the outlook is not encouraging.

Tariffs, as in the oranges example, are often deployed to protect specific interest groups. Sometimes, though, they are applied more broadly in a (futile) attempt to curb a more general imbalance of trade. This is the simplistic muddled thinking behind Mr Trump’s approach to the topic. The US runs a trade deficit because it spends more than it earns, the accounting counterbalance being a surplus on the capital account (i.e. ‘exports’ of dollars). The trade deficit will not reduce unless or until America saves more or spends less. No amount of huffing and puffing from the White House can alter this basic fact of macroeconomics; sadly Mr Trump’s comprehension of basic macroeconomic facts appears indistinguishable from zero. This is why we all have reasons to worry.

The now notorious tariffs on (some) imported steel and aluminium are, in the grand scheme of things, hardly material. The manner of their introduction, though, certainly matters. The rules-based system is under attack, evidenced by the fatuous assertion that European steel exports represent a threat to US national security. As, apparently does the appearance of Mercedes Benz motors cruising down Wall Street, some kind of opulent fifth column perhaps. Rules-based systems work when everyone broadly accepts their constraints; if the largest participant blatantly doesn’t then the risk of a reversion to the mistakes of the 1930’s becomes very real.

Those same metals tariffs nicely illustrate the self-defeating impact of protectionism. If the idea is to protect a local, domestic industry, they have worked. Wholesale steel and aluminium prices in the US have responded quickly and are now significantly higher than the internationally traded equivalents. Which is bad news for anyone else who actually needs to use the stuff; already businesses have started shutting down. The quest to improve the job security of 20,000 or so steel workers in the US is likely to result in the loss of some 500,000 jobs (in the US) overall. To anyone with at least half a brain that looks a rotten deal.