President Trump is planning to impose tariffs on the import of aluminium and steel into the US – not only has the EU threatened to respond with tariffs on US goods such as Levi jeans, Harley Davidson bikes and Bourbon whiskey, the US president has responded to the EU’s response by threatening tariffs on cars made in the EU. Could we be repeating the errors of the 1930s?
June 17th 1930: US Congress signed into law the Smoot-Hawley Tariff Act, imposing tariffs on 20,000 goods imported into the US. Looking back, economic historians say that this was one of the biggest economic errors of all time – it led to retaliatory action by other countries, led to the US Great Depression becoming much more severe than would otherwise have been the case and also helped create economic hardship throughout most of Europe. It may be going too far to say that this act led to World War 2, the Treaty of Versailles seems to be the main cause of that one – but the US tariff act certainly did not help.
Many feared that, following the 2008 crisis, we might go down the same route – well it may have taken ten years, but it now seems those fears might prove accurate.
Last week, the US President tweeted “When a country (USA) is losing many billions of dollars on trade with virtually every country it does business with, trade wars are good, and easy to win. Example, when we are down $100 billion with a certain country and they get cute, don’t trade anymore-we win big. It’s easy!”
His plan is to impose 25 per cent tariffs on steel imports and 10 per cent tariffs on the import of aluminium.
In a related move, it is thought that Mr Trump may label certain countries as currency manipulators – with resulting financial penalties on those countries probably in the form of further tariffs.
Canada is the biggest exporter of steel to the US followed by the EU – with Germany and the Netherlands the EU’s two biggest steel producers. Countries that are vulnerable to charges of currency manipulation include Thailand, South Korea and China.
There are 320,000 jobs in the EU steel industry, so it is an important industry, but worldwide steel only accounts for two per cent of international trade – so tariff free trade in steel is important but maybe not critical to the smooth running of the global economy.
Is Mr Trump right?
To many countries, especially emerging markets, in talks with the US it has often felt as if the cards are stacked against them, so the claim that such countries are effectively getting the better of the US, as its President claims, is not one that has much credibility within the countries he accuses.
Indeed, protectionism measures, both in the US and the EU, imposed on domestic agricultural businesses, is a major bone of contention among many emerging markets in trade talks.
European Commission president Jean-Claude Juncker said: “We strongly regret this step, which appears to represent a blatant intervention to protect US domestic industry and not to be based on any national security justification.”
He continued: “The EU has been a close security ally of the US for decades. We will not sit idly while our industry is hit with unfair measures that put thousands of European jobs at risk.”
Canadian Foreign Minister, Chrystia Freeland said: “We will always stand up for Canadian workers and Canadian businesses. Should restrictions be imposed on Canadian steel and aluminium products, Canada will take responsive measures to defend its trade interests and workers.”
And Jean Simard, chief executive officer of the Aluminium Association of Canada said: “The President has just initiated an all-out trade war.”
Response to response
President Trump tweeted in response: “If the EU wants to further increase their already massive tariffs and barriers on US companies doing business there, we will simply apply a tax on their cars which freely pour into the US.”
For her part, Theresa May chose a more traditional way of expressing her thoughts, she rang the US President. A spokesperson said: “The prime minister raised our deep concern at the president’s forthcoming announcement on steel and aluminium tariffs, noting that multilateral action was the only way to resolve the problem of global overcapacity in all parties’ interests.”
Casting blame in the wrong direction
Globalisation has been held up as the cause of the global economy’s ills, creating rises in inequality. Yet, absolute poverty has fallen by a billion since 1981 and the number of non-poor people has risen by four billion.
Trade creates wealth, of that there is no doubt – but within countries, there can be winners and losers, the real problem is that countries have not come up with a means to ensure the extra wealth generated by trade can partially be used to compensate disenfranchised workers. Instead of trying to fix the problem, it seems Jonny foreigner gets the blame.
The biggest threat to the US from a trade war may relate to its reliance on overseas investors. Around 27 per cent of the $14 trillion of US government debt is held by foreign countries – but the President’s planned tax cuts will require around $1.5 trillion of extra funding.
One end result of a trade war might be a fall in global output potential, closing the gap between global demand and supply, wiping out what has been called the global savings glut, leading to much higher interest rates.