So are trade tariffs good for the US, bad or is it going to get ugly?
The economic argument goes something like this. When a tariff is put in place to protect a domestic industry from cheap imports, this keeps prices in that domestic market artificially high and protects the businesses from external competition which may put them out of business. The most common area where this occurs is agriculture. Most countries want to keep their farmers in business as they have no alternative employment but more importantly, most countries want to feed themselves because it would be unacceptable to be overly reliant on a third country for basic nutritional needs. The risk to sovereignty and security is too much for most governments to accept despite the fact that the population will pay higher prices in the process. Most populations would also have a problem with it if they stopped to think, especially those that can remember Hitler’s strategy to literally starve the UK into submission by sinking supply vessels with his U-boats.
The problem with imposing a tariff where previously it did not apply, is that businesses adjust over time to whatever pricing environment is in place. Global competition will have introduced all kinds of other margin pressures such that the imposition of even a 10% import tariff could put many firms out of business. For example, we will all be familiar with the £5 tee-shirt from the likes of Primark. It will be made in China or some other low labour cost developing country in the world. If Theresa May had the economic brainwave of imposing tariffs on clothing imports from China, the result would be that other economies would take up the mantle and supply for a similar cost. In fact, we have seen this in the performance of surrounding areas to China, such as Vietnam, which is now more competitive and has outperformed China as a stockmarket partly on the back of this. Trump has thought about this one with his steel and aluminium imports by applying them to all US imports but has had to provide concessions to the EU because the impact was too severe and many businesses would have been in crisis overnight, unable to source steel and aluminium.
So, in reality, the best (or worst) he can do, in our global economy is discriminate against a single country or forge a unilateral trade deal with that country to level the playing the field. Economic globalisation has been good for profits throughout the world where all in the west have benefited from low Chinese labour costs which has driven down prices and inflation and provided a boost to consumers.
False economy to restrict immigration
This in turn has been hugely beneficial to the Chinese economy so everyone is a winner. The downside is that developed nations have stopped manufacturing low-ticket items and outsourced the least desirable jobs such as coal mining to other countries. In addition, low-wage jobs have gone to immigrants who are willing to do them for residency as has been the case in the UK. It is a false economy to blindly restrict immigration if it means you can no longer get staff to do the basic jobs of nursing care or fruit picking. This is as important for Trump, who has deliberately imposed protectionist tariffs, as it is for the UK, where we may end up with tariffs by default if we embark on a no-deal Brexit scenario. Artificially imposed tariffs are only viable for the protection of existing industries not the reinvigoration of those that have already gone. Globalisation, once in motion, is irreversible without significant inflationary consequences or profit collapse for the domestic industry subjected to the protectionist tariff.
Interestingly, there has been historical precedent of steel tariffs being imposed on imported steel. This happened under the Presidency of George W Bush in 2002. They were imposed in March of that year and were ultimately removed in December of 2003 with subsequent research showing that they adversely affected US GDP and employment. The motivation for this at the time was to give US steel makers protection from a detrimental surge in steel imports which had caused a significant number of steel makers to declare bankruptcy in marginal electoral states. The main reason for their removal was retaliation from the EU which threatened to impose tariffs on products ranging from US cars to Florida oranges in those same marginal states. Trump’s tariffs are far broader and focused on China where there is a problem with intellectual property theft via joint ventures with western firms. Corporate freedom for US financial services is also severely constrained whilst there is also potentially a military angle where China is seen as a threat. The recent lunar landing on the far side of the moon would have caused much hand-wringing following Trump’s recent announcement of his plans for a Space Force and US space domination.
Period of Political Posturing
Donald Trump’s approach does rather feel like a step back into the Kennedy era of space and arms races but with a different superpower, China rather than Russia. If Trump agrees a deal soon, then tariffs will be neither good, bad or ugly but more a period of political posturing based around his electoral strategy for a second term which has caused stockmarket volatility in the process. If the 90 day suspension with China yields nothing then it could well become bad at the very least and possibly ugly if a global recession follows.