Global economics in The Monday Briefing

The meaning of Mr Trump’s import tariffs

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Donald Trump’s scepticism about free trade is longstanding and was a prominent feature of his 2016 presidential campaign. Such was the appeal of Mr Trump’s protectionist stance that his opponent and former free trade advocate Hillary Clinton found herself renouncing the Trans-Pacific Partnership she had once promoted.

The recent imposition of tariffs on imports of metals is Mr Trump’s latest attempt to deliver on campaign promises to shrink America’s trade deficit and ‘bring home’ manufacturing jobs. The US will impose import taxes of 25% on steel and 10% on aluminium. Mexico and Canada are exempt, a move which seems designed to strengthen America’s hand in the current negotiations over the future of the North America Free Trade Agreement (NAFTA).

The tariffs are ostensibly aimed at China, which the US administration believes is dumping excess steel and breaking World Trade Organisation (WTO) rules. But the US has invoked a different rationale for the imposition of tariffs, the little-used Article XXI of the WTO treaty, which allows tariffs to be imposed to protect national security. This rationale is questionable given that the tariffs will principally affect imports from allies including the EU and Japan, who are major exporters of steel to the US.

All this falls short of an all-out trade war. In macroeconomic terms the tariffs are relatively trivial, accounting for 2% of last year’s US imports, or 0.2% of US GDP. Recent US history demonstrates that the imposition of tariffs does not lead inevitably to a trade war. Every US president since Jimmy Carter has imposed some form of trade barrier to try to protect jobs. In the 1980s President Reagan negotiated so-called voluntary export restraints with Japan to limit imports of steel and cars. George W. Bush implemented a 30% tariff on steel imports in 2002. These measures did not cause a spiral of retaliation or much disrupt the world trade order.

Three factors suggest that the risks are greater this time.

First, Article XXI of the WTO Treaty allows a nation to override the normal rules of the WTO by invoking national security, even when there is no evidence that exports are subsiding, sold below cost, or are surging. As The Economist has observed, “By appealing to national security, rather than making a case of the sort the court normally rules on, Mr Trump is blocking the mechanism that sanctions limited retaliation and thus stops trade wars blowing up”.

Second, previous administrations have applied tariffs, but they were initiated by presidents who were committed to free trade and the rules-based system that underpins it. Mr Trump’s position is quite different. In rhetoric at least he would count as the most protectionist US president since the 1930s. The risk is that US tariffs cause a tit-for-tat spiral of protectionism. The EU has said it will impose tariffs on a number of US products, including Bourbon, blue jeans and Harley Davidson, if the tariffs are not revoked.

Third, US grievances towards China are not without substance. The EU also believes that China is dumping excess steel on world markets and last August imposed provisional anti-dumping duties on Chinese steel. Nor is this just about steel. Given the scale and competitiveness of America’s tech sector, and its success in other major markets, it is perhaps surprising that the US scarcely runs a trade surplus in intellectual property (IP) with China. It is not only members of the Trump administration who believe that Chinese trade barriers have been a factor here. A report from the National Bureau of Asian Research put the annual cost of intellectual property theft to the US economy at $225-600 billion with China labelled “the world’s principal IP infringer”. The fact that the Chinese government has set targets for the share of its market that must be served by Chinese companies in rising industries, including supercomputers, autonomous vehicles and advanced medical devices, sits uneasily with a commitment to free trade. This week The Economist’s cover story entitled, ‘The Battle for Digital Supremacy’, provides a gripping account of the contest between the US and China.

Yet if China is the target, Mr Trump’s steel and aluminium tariffs are not the solution. China accounts for just 1% of US steel imports. As for US manufacturing, the supposed beneficiary of higher tariffs, it may well end up losing jobs. A Wall Street Journal survey of economists last week showed that most expected job gains in the steel and aluminium industries are to be more than offset by job losses in sectors that will have to pay more for imported steel and aluminium. This would be consistent with the effects of steel tariffs imposed by President George W. Bush in the early 2000s. The Trade Partnership, a US consulting firm, estimated that those tariffs led to almost 200,000 job losses in industries that rely on steel as prices rose. This is more than the entire workforce of 187,500 people employed in the steel sector at the time.

Whatever happens to the sector, the overall economic effects of the current trade measures will be small. Steel manufacturing today accounts for 85,000 jobs in a labour market of 192 million people. In the last 12 months the US economy has, on average, taken just 14 days to create 85,000 jobs.

Reflecting on the likely impact of tariffs on US jobs and their failure to address supposed Chinese trade infractions, it is hard not to conclude that Mr Trump’s low approval ratings and the looming mid-term elections in November may have played a role in their adoption.

On trade the real economic question is what happens next. The two events to watch for are the negotiations between the US, Canada and Mexico on NAFTA and the conclusions of a US investigation into China’s policies on intellectual property (IP).

Forthcoming US and Mexican elections mean that the negotiators have an incentive to reach an agreement in principle in the next couple of months. NAFTA seems likely to survive in an amended form, though this is by no means certain.

Things are moving on the US investigation into China’s approach to IP. Last week the Politico news site reported that Mr Trump wants, “to hit China soon with steep tariffs and investment restrictions in response to allegations of intellectual property theft”. These sorts of measures are likely to be on a greater scale than the tariffs on steel and aluminium, and more consequential.

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Posted on 19/03/2018

Money for Nothing

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In the aftermath of the financial crisis poverty, inequality and social inclusion have become high profile issues. To its adherents, and there are many, the solution is for the state to provide adults with a Universal Basic Income (UBI) to cover their basic needs, allowing them to earn whatever they wanted in addition. Implementing a UBI would represent a profound change in the role of the government and its effect on peoples’ lives.

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Posted on 12/03/2018

UK consumer: good and bad news

In a sign of the tough trading conditions on British high streets two well-known retail names, Toys R Us and Maplin, fell into administration last week.

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Posted on 05/03/2018

Assessing America’s tax reforms

1 cent
Last December the US Congress passed a bill overhauling the tax code, the first major tax reform since 1986. The federal corporate tax rate was permanently slashed from 35%, the highest rate of any large, developed country, to 21%. The tax cut is partly financed by a one-off levy on profits retained overseas by US corporations, at 15.5% on cash and 8% on other investments.

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Posted on 19/02/2018

Crash, panic, bounce, slide

Last week’s equity market gyrations felt pretty dramatic. The US market dropped 5%, the worst week in two years. Europe took its cue from the US, with the FTSE100 and German DAX also down almost 5%. The VIX Index, a measure of equity market volatility, also known as the ‘fear gauge’, shot up from what, until recently, have been very low levels.

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Posted on 12/02/2018

UK looking for a boost from the global recovery

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UK growth has softened since the EU referendum, and at a time when the rest of the global economy is picking up. The pace of UK activity has not closely followed the news flow on Brexit, illustrating how politics is one of many factors influencing growth.

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Posted on 06/02/2018

How distance survived the communication revolution

A planet of cities
Errors in predicting the future of technology tend to be extreme. At one end are the naysayers, like the Hollywood mogul Darryly Zanuck, who in 1946 predicted that TV would flop, “People will soon get tired of staring at a plywood box every night."

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Posted on 29/01/2018

Who made money in 2017?


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Last year was a good one for equity investors, with global equity markets rising by 21%. For a reasonably diversified investor it was hard not to make money.

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Posted on 22/01/2018

2018 global economic outlook

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The global economy enters 2018 with good momentum. Expectations for growth this year are rising in many countries, equities are hitting new highs and business confidence is buoyant.

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Posted on 15/01/2018

CFOs want cost control and growth

Planting seeds for growth
The latest Deloitte survey of UK Chief Financial Officers, released this morning, shows the CFOs enter 2018 more focussed on controlling costs than at any time in the last eight years. CFOs seem to be reacting to slower UK growth and Brexit uncertainties with a renewed focus on costs.

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Posted on 08/01/2018