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The Trump tariff hikes that shook the world

By Tim Harcourt  March 06, 2018

So now, in terms of trade, it gets serious. This is not merely trade policy by Twitter. US President Donald Trump has announced some steep tariff hikes with a 25% import tariff on steel and 10% on aluminium. 

Financial markets have become jittery (after positive reaction late last year to the Trump corporate tax cuts) and world leaders fear a trade war, right when there were good signs of better days ahead in the global economy.

Politically, it is aimed at the blue-collar industrial swing states that eschewed Hillary Clinton in the presidential race and went to Trump to give him the crucial electoral college votes to get to the White House. 

Clinton offered them lectures on misogyny and racism, (the famous “basket of deplorables” speech) while Trump offered them tariff protection. 

Neither is going to help voters in the long run, but it may help Trump in 2020. And undoubtedly his next Democrat opponent will not make Clinton’s mistake of failing to campaign in the swing states after her party’s convention.

Economically, it may not help them or Trump. It is said that putting up tariffs is like putting rocks in your own harbour and ultimately it will hurt your own country’s consumers, producers and workers. 

That was the rationale behind the Hawke-Keating tariff reforms of 1983-96, that took Australia from a protected economy with high inflation and high unemployment to an economy that has experienced more than 25 years of continued economic growth and a much lower unemployment rate than the Hawke-Keating government inherited and bequeathed.

The indirect effects could bring about unintended consequences. If the US is isolated, it could actually be good for Australia

So, what is likely to happen? The decision is likely to play well in steel towns (all politics is local, as legendary House speaker Tip O’Neill used to say) and in the industrial mid-west, but congressional representatives from agricultural, export-orientated states will probably fear retaliation – as will those from IT areas such as Seattle and Silicon Valley which rely on international markets for their success. 

And this matters, because trade policy is determined in Congress as much as in the White House, as the President can only make trade policy if granted trade negotiating authority by Congress.

Of course, even if the Trump tariff hikes get through Congress, they could get struck down by the World Trade Organisation (WTO). The Geneva-based body has seemed ‘as dead as a Doha’ in recent year’s – failing to get the Doha round of multilateral negotiations completed – but parties do take what they perceive as unfair trade practices to the WTO whenever possible.

Have we seen this movie before? President George W. Bush imposed steel product tariffs in 2002, but withdrew them later, with little impact. But Bush was bringing in tariffs during a US slump before engaging in free trade agreements elsewhere – including Australia – while Trump has no such agenda.

Will the US’s trading partners retaliate or not? This is the big worry. The European Union (EU) has already threatened a tax on the US icons of “bikes, blue jeans and bourbon” that are Harley Davidson, Levi’s and Jack Daniels, and even Canada, in the midst of a fray over NAFTA, has threatened action. Canada, along with Brazil and South Korea, is a major steel supplier.

China, while it may keep its powder dry, has mentioned possible action over US agriculture (for example, soya beans), though China may take advantage of the retreat from global leadership by Trump to fill the vacuum. 

Japan will let China do the running. Having experienced the impact of Japan bashing by past US administrations, it would rather China be the fall guy for US trade aggression this time around.

How will the tariff hikes impact on Australia? There will be direct and indirect effects. Trade Minister Steve Ciobo has warned about the adverse effect on Australia’s steel-makers and aluminium exporters but is also hoping Prime Minister Malcolm Turnbull’s visit last month to the White House means there’s some sort of deal or exemption for Australia that hasn’t been revealed yet. 

Australian steel makers largely avoided major damage during the Bush steel product tariffs of 2002.

However, the indirect effects could bring about unintended consequences. If the US is isolated, it could actually be good for Australia. 

For if Trump makes the US an erratic and chaotic trade partner, Australia will be seen by China, South Korea, India and ASEAN nations as safe, reliable and on side in the Asia Pacific, particularly given the withdrawal of the US by the Trump administration from the Trans Pacific Partnership (TPP). 

And given that the US is mainly a source of foreign investment, it is trade that matters for us in North East Asia and that’s where Australia must maintain its solid reputation as a reliable supplier and customer.

In the end, the tariff hikes may help Trump win the battle for Ohio, Michigan, Pennsylvania or Wisconsin, but it may also make the US lose the war in terms of trade. 

And ultimately, we are all losers in a global trade war and that will only hurt the most vulnerable in all societies.

Tim Harcourt is the J.W. Nevile Fellow in Economics at UNSW Business School  and host of The Airport Economist on Sky News Business Channel and Qantas inflight programming.

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