Flat White

Tariffs and trade: not that simple

13 March 2018

5:47 PM

13 March 2018

5:47 PM

The attention attracted by US import duties is important on many dimensions.

Alan Kohler, in the process of suggesting that Trump might be deliberately trying to start a trade war, pointed out that the policy communication came at a press conference, following talks with steel executives.  Right at the end of the press conference, the President unexpectedly announced, “Twenty-five per cent for steel. It will be 10 per cent for aluminium. And it will be for a long period of time.”

The action was not taken on anti-dumping grounds but under national security provisions, which are anchored on ‘domestic production needed for projected national defense requirement’ determined by a review by the Secretary of Commerce in conjunction with the Secretary of Defense.  Previous US actions under this provision have numbered only 14 and have focussed on parts of industries with clear defence implications, like Integrated Circuit Ceramic Packaging (1992) and Antifriction Bearings (1988).  The provision does not require that exporters have been cheating.

Although, ostensibly these were neither anti-dumping measures nor an attempt to save specific jobs, these considerations have been prominent in the consequent rhetoric from the President.

Twelve US anti-dumping measures are already in effect, one on China with a 500 per cent tariff.  Other countries also have such measures.  In 2002, President George W. Bush imposed steel tariffs of up to 30 percent. But facing an adverse ruling by the World Trade Organization and retaliation by trading partners, he lifted them 15 months before the end of the planned three-year duration.

Anti-dumping as a policy makes no sense.  It assumes a firm (or nation) is deliberately pricing below costs to drive the domestic firms out of business after which prices can be raised to recoup the lost costs.  Successful examples have never been identified because they are impossible – they would entail a cartel of assailants and, once successful, no new participants capable of exploiting the profits from the subsequent high prices.

Clearly, there are many reasons why firms might sell below full cost – and indeed, many goods and services are given away free in an attempt to win future business.  But rather than dumping, with its monopolistic core, this is just part of the competitive process.

Hardly any educated person, Trump included, disagrees with free trade, domestically or internationally. It is axiomatically a means to getting better value.  But, the national security dimension aside, three rationales for the measures have been put forward: to offset unfair “currency manipulation”; to prevent “unfair” trade for other reasons; and to prevent the trade involving some illegal features.

Currency manipulation is a long-standing accusation against successful exporters – it was used against Germany and Japan long before the rise of industrial China.  It involves the central bank “sterilising” the revenues from exports by hoarding foreign currencies, buying gold or buying foreign assets.  At $US 3 trillion China has considerable reserves but these have been falling over the past four years.  Most of the reserves are in US Treasury securities and in that respect they are helping to finance the US budget deficit and, in effect, supplementing US consumption.  If China is setting its exchange rate too low, it will tend to require capital outflows to offset this – thus supplementing other countries’ spending and acquiring assets in return.

“Unfair trade” is a familiar catchcry.  At its most populist, it argues that we cannot compete with other countries because our wages are too high, an argument that defies the logic of rich countries” (UK, US, Germany, Japan) for long periods running current account balance of payments surpluses.  More sophisticated versions of this are that countries are competing unfairly because they are abusing their own and the global environment; the latter is at the heart of the now ineffective Obama/EU policy in trying to force other countries to tax greenhouse gas emissions.

More convincing is the case for discriminatory action stemming from illegal acts.  Such action is, of course, also common in domestic trade – governments try to prevent sales of goods and services that have evaded taxes or may involve stolen goods.  The issue in international trade is allegations of theft through the patent and trade mark system.

With regard to the Trump measures, already carve-outs have been made.  Australia gets away because of its trade deficit with the US – an ominous rationale which applied in reverse would lead to the international trade system collapsing.  Australia and others are also playing the ally game.  Mario Draghi, the president of the European Central Bank, said that a plan to impose broad tariffs that hit allies was “dangerous” and could undermine national security, “If you put tariffs against your allies, one wonders who the enemies are.”

The World Trade Organisation allows exceptions to new tariffs when national security is at stake.  But other countries need to accept the merits of the action.  According to the New York Times, if the World Trade Organization rules against the United States, the Trump administration will have to decide whether to reverse its decision or go up against the organization. If the United States ignores or withdraws from the group, it could precipitate a breakdown in global trading rules and a new era of global protectionism.  Perhaps so but such ominous statements have made in response to earlier ill-judged measures that have turned back freedom of commerce but done so only temporarily.

Finally, although free trade brings advantages to all and to the country that dismantles its tariffs, there is only one country, Hong Kong, that has actually achieved high living standards by relentlessly pursuing the policy.  In the nineteenth century, US tariffs were the immediate cause of the Civil War, while Germany and Japan prospered with them even before China, India and other countries adopted protective walls behind which their domestic industries grew.  Of course, the Soviets and countless centrally planned economies foundered on high tariffs accompanied by other measures and none of these success stories could have been possible without low levels of regulation.  But the issue is complicated.

Alan Moran is with Regulation Economics and is the author of Climate Change: Treaties and Policies in the Trump Era.

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