“Trade wars are good and easy to win,”, so says U.S. President Donald Trump, who last weekend railed against the EU for being as “bad as China” when it comes to trade practices that he perceives as being disadvantageous to U.S. jobs and business.
Over the past few weeks the rhetoric over global trade has been ramped up quite markedly as investor concerns rise about the prospect of a global trade war. The decision by the U.S. to raise tariffs on imports of steel and aluminium may well protect U.S. jobs in this particular area, but it will also raise costs in the areas of the U.S. economy that use these metals, like auto, construction and manufacturing.
This will likely mean higher prices and higher inflation that, in turn, will hit the U.S. consumer, which at the moment, despite a tight labour market, is only seeing modest wage growth. This would suggest that in seeking to protect U.S. industry from cheap imports domestic prices could well rise causing U.S. businesses to shed staff to cope with higher costs. In 2002, the Bush administration adopted similar measures on steel. However, they were abandoned after 18 months as a raft of U.S. companies in related industries went bust as costs increased.
While the U.S. does have a point about Chinese steel dumping, the scattergun effect of his trade sanctions will also serve to penalize the U.S.’s historical partners and allies, with Canada being hit the hardest.
On the flip side, we have the more plausible argument that trade wars are bad, and usually hurt the very people they are designed to protect. While the response by the EU, Canada and China, is justifiable in the short term, it also risks a significant escalation.
The EU has already retaliated with a modest range of tariffs on U.S. imports, to the tune of €2.8 billion, on goods like motorcycles, whiskey and orange juice. Canada has also followed suit, and China will weigh in later this week, with the risk that the U.S. will respond further as it targets the European Union’s huge automotive sector – the U.S. being its second biggest export market.
This raises the prospect of making a bad situation worse with consumers likely to bear the brunt, and while one can sympathize with the fact that the U.S. is behaving irrationally, surely the best way to deal with the U.S. is to play the game a different way.
Tit-for-tat responses rarely end well, with the reactions to Smoot Hawley in the 1930s being used as a historical precedent, as rising costs impacted on domestic consumers. Furthermore, there are significant anomalies on how the EU levies tariffs on U.S. imports, which suggests that Trump has a point about some of the EU’s trade policy.
Rather than dealing with the U.S. by way of counter-punch, the EU would best serve its consumers by way of engaging with the Trump administration in a more constructive fashion, holding back from knee-jerk retaliation and displaying a willingness to negotiate in the expectation that we could see a ratcheting down of some of the recent trade tension that is currently spooking investors.
This approach worked in 2002 when the Bush administration was forced to abandon its steel tariffs after 18 months under pressure from U.S. businesses that were adversely affected by the increases in costs.
EU politicians should put their egos to one side and think about the people they represent who will feel the effects of any retaliatory measures, more than they will.
To quote Oscar Wilde: "To do nothing at all is the most difficult thing in the world, the most difficult and most intellectual."
If, as economists claim, tariffs hurt the implementer more than the intended victim, then surely the best policy is to refuse to engage in a race to the bottom.