The imposition of tariffs on imports of steel and aluminium by the Trump administration in March has sparked a cycle of retaliatory tariffs. This is a serious outbreak of protectionism, one that is already acting as a drag on growth. Yet the global trading system is in rather better shape than it looks. This week’s Briefing explains why.
First, the bad news.
Escalating trade tensions are taking a toll just as economic theory and history suggest they would. Last month the chairman of the US Federal Reserve, Jerome Powell, said that concerns about trade have hit US business confidence and led to firms postponing “investment, hiring and making decisions”. Trade tensions have fuelled capital outflows from emerging market economies and weakened economic prospects. Political risk, higher oil prices and rising US interest rates are also at work, but the spectre of protectionism has added to the sell-off in emerging market currency and equity markets this year.
The IMF recently estimated that trade tariffs and other measures announced so far could reduce global GDP by as much as 0.5% by 2020. This is a material effect. But it looks less alarming in the context of a global economy that is expected to grow by more than 10% over this period. The message is that, so far at least, protectionism is likely to dent, but not derail growth.
Of course, things could get worse. Current US trade policy and public scepticism about globalisation are clear risks.
Yet free trade also has powerful supporters. Politicians and policymakers are, with some conspicuous exceptions, supportive of free trade and alive to the dangers of protectionism. The transformation of emerging market economies in the last 30 years, and the resulting reduction in poverty have been built on globalisation. That process has helped cut prices and raised living standards in the West (Here’s a quirky angle on this: the media report that UK households are suffering from an epidemic of clothes moths which has been blamed on warmer weather. But the fact that the price of clothing has almost halved in the last 20 years, largely as a result of low cost imports, and that we have lots more clothes, also provides moths with an even more target-rich environment.)
It’s hard to think of any major government which shares the Mr Trump’s views on trade.
It was almost buried by the news about US tariffs, but last month the EU and Japan signed the world’s largest bilateral free trade deal, lifting tariffs on nearly all goods traded between the two countries. Donald Tusk, the president of the European Council, hailed the deal as “an act of enormous strategic importance for the rules-based international order, at a time when some are questioning this order”.
Despite America’s withdrawal from the Trans-Pacific Partnership trade pact, the remaining 11 signatories recently ratified the agreement.
And while Brexit is sometimes interpreted as a backlash against globalisation, there is little if any support for Trump-style trade protectionism in the UK. On the contrary, to its supporters Brexit is an opportunity to create a “global Britain” by signing its own free trade deals.
On trade the Trump administration is an outlier. This doesn’t feel like 1929, the year in which protectionism last spun out of control. In a bid to protect domestic farmers the US administration increased tariffs on more than 20,000 imported agricultural and industrial goods. Retaliatory tariffs followed and by 1930 volumes of US imports and exports had fallen over 60% - a staggeringly sharp decline. The Tariff Act of 1930, widely known as the Smoot-Hawley Tariff, is widely seen as having exacerbated the Great Depression.
These are testing times for free trade. And yet barriers to trade are still close to record lows. The average global – or ‘most favoured nation’ - tariff is 5.4%, according to the latest data from the World Trade Organisation. In the 1990s and much of the 2000s it was above 8%. In the 1970s and 1980s tariffs were higher still.
Protectionism is likely to weigh on growth, but probably marginally. Much of the world – and, crucially, many of its leaders – still believe that free trade helps drive growth and opportunity. It’s too early to call an end to the era of globalisation.