With the decision of Donald Trump to impose tariffs on steel and aluminium entering the US market, the world seems to be on the brink of a trade war. The EU and Canada have been quick to hit back, with threats to impose tariffs of their own and to mount a legal challenge against the US at the World Trade Organisation.
Although Trump’s actions were wrong, the threats from other world leaders to impose retaliatory tariffs are equally wrong.
If you were to place a hundred economists in a room then they are likely to disagree with one another on just about everything. However, what pretty much every single one of them would agree on is the fact that barriers to trade, such as tariffs, are a bad thing.
Tariffs are economically harmful and detrimental to trade. The frustrating ting is the logical step taken by world leaders. It goes something like this: “Tariffs are bad, and so it is not good that Trump has imposed them. Therefore, let’s impose tariffs”.
Dodgy reasoning aside, it would be a mistake to get dragged into a trade war for a number of reasons.
Tariffs are, essentially, just another tax. And, like every other tax, they have negative and often unforeseen consequences.
Trump’s reasoning for imposing tariffs on steel and aluminium entering the US market is to protect American jobs in those industries. Now, it is perfectly possible that some jobs might be created in these industries as a result of the tariffs. But they will be offset by the massive job losses which will result in other sectors of the economy.
A recent report found that there will be a net loss of 146,000 jobs as a result of the tariffs. This does not include the impact of retaliatory tariffs by US trading partners. There is a strong precedence for this in recent history. In 2002, for example, the US lost 200,000 jobs in one year in steel-using industries due to tariffs of up to 30 per cent on steel. Then there was Obama’s tyre tariff in 2009. The move saved 1,2000 US tyre jobs and saw an increase in tyre production in the US. However, a major study found that it led to 3,731 jobs lost in retail.
If Trump’s tariffs are based on an economically illiterate argument, are the EU and Canada’s decisions to retaliate any different? After a painful period of very high unemployment, the Eurozone is starting to recover, with the unemployment rate at its lowest point since February 2009. Responding to the economically harmful actions of Trump by implementing equally damaging tariffs would jeopardise that recovery.
The Trump administration has also cited the need to ensure that the US produces enough steel for reasons of national security. This claim is just as bogus as the economic case for tariffs.
There is no good reason why the United States, or any country, should need to produce its own steel for reasons of national security. For example, the recent construction of two Royal Navy aircraft carriers required only 82,00 tonnes of steel, several thousands of which were imported into the UK. Furthermore, steel is no longer strategically important for national defence. It is not 1898, there is not a naval arms race requiring huge quantities of steel to build more and more dreadnoughts.
Then there is the impact that tariffs will have on consumers. In the US, Trump has raised the price of steel and aluminium entering the US market. This increases the costs for businesses who then pass the cost on to consumers. The estimated cost of Obama’s tyre war with China, was $926,000 thousand for every job saved.
A response from the EU and Canada which would involve placing tariffs on American goods would be passed on to consumers in those countries.
What, then, should be done about Trump’s tariffs?
There is, of course, the World Trade Organisation route. There are numerous articles which provide for dispute resolution between WTO members. As such, the EU and Canada have this option available to them.
However, there is a far more effective and economically beneficial solution. Instead of imposing tariffs on the US, the EU and Canada should abolish their tariffs. All of them.
This would likely result in Trump scrapping his proposed tariffs. South Korea, for example, has already secured an exemption from the steel tariffs by agreeing to open up its economy to the American automobile industry. This is what Trump wants, after all. He has certainly gone about it in a harmful and heavy handed manner, but it would appear that if he is acting in a way which maximises American exports. If we open up our economy to America, there is a chance he will open up US markets to us. Even if Trump doesn’t respond in that way, scrapping tariffs would still be economically beneficial.
We should therefore see Trump’s actions as an opportunity. As mentioned above, imposing tariffs on goods from the US will increase costs for companies and consumers in the EU. There are already numerous tariffs imposed on imports to the EU which do just that. These should therefore be scrapped in order to ease the burden on businesses and households. Moreover, the EU and Canada should work together to ensure that other countries around the world abolish their tariffs, to the benefit of all parties.
Abolishing all tariffs would not only cut costs for businesses and consumers, it would also dramatically increase productivity as a result of an increase in imports. Growth in productivity has been sluggish around the world in the years since the Great Recession, and this has been particularly true in the UK. The benefits to productivity as a result of an increase in imports can be seen in China. The Chinese share of US and EU imports increased from 2 per cent in 1991 to 11 per cent by 2007. This led to increases in research and development, patenting, IT and productivity within firms.
Pretty much everyone who knows anything about economics knows that tariffs are harmful. That makes it disappointing to see the world lurching towards a trade war. The answer for policymakers is simple: no matter what other countries are doing, the case for scrapping whatever tariffs you impose on imports is unanswerable.