PRESIDENT Trump just changed global economics. Don’t whine, adapt!
The world’s economists and establishment have got themselves into a complete stew about Trump’s tariff regime. Forecasts of economic meltdown and destruction abound, as do threats of trade war. Keir Starmer is talking of retaliation while seeking the credit for Britain’s low rate (actually courtesy of Brexit and therefore Nigel Farage, not his Washington day trip). With impressive logical adroitness he’s also seeking to involve the King in smarming Trump into a trade deal this summer during the President’s trip to Scotland. Are shortbread, haggis and midges so compelling?
The London Stock Market closed down some 4 to 5 per cent depending on the index. That’s a bad couple of days on the markets, not meltdown. The pound briefly rose against the dollar and fell against the euro despite the UK having a 10 per cent US tariff rate compared with the EU’s 20 per cent, which seems odd until you remember the parlous state of the UK’s public finances.
While the chatterati and the anti-Trump media (i.e. most of the mainstream) are in full cry about the leader of the world’s most powerful country and praying for his replacement, it’s time to look at the underlying facts.
Free trade is a mirage
Underpinning the whole panic is the belief that free trade is fundamental to economic growth. Free trade means goods and services free of tariffs or customs duties. This means global competition – stuff can be made or delivered wherever it is most efficient and therefore cheapest. In theory (and all economics is no more than a theory) this means that industries in the importing countries either become more efficient or die.
After the Second World War global free trade was regulated by the General Agreement on Trade and Tariffs (GATT) which 23 countries signed in 1947. Government procurement was excluded from the outset and tariffs were reduced. Further reductions were secured in subsequent ‘rounds’, as GATT’s periodic negotiations are known. As the number of GATT members increased the length of the negotiations did too. The second round in 1949 took five months and had 34 countries. The 1986 round had 123 countries and took 87 months. The last GATT round started in 2001 with 159 countries. The round’s scope included patents, environment, non-tariff measures and has not yet completed, although there was an interim ‘Bali Package’ in 2013.
GATT became the underpinnings of the World Trade Organisation (WTO), the UN body established in 1994 to regulate global trade. Pretty much all the UN are members or observers. Certainly GATT and the WTO have successes in reducing global tariffs. They have fallen from an average of 27 per cent to 5 per cent (beware that ‘average’ which masks huge variations by product and country).
It is nonsense to propose that we live in a tariff-free world. The UK charges around £5billion in duties on imports. Some food items attract duties of 15 per cent or more, (as they do in the EU). Cars from the US pay a duty of 10 per cent on their landed value (which includes shipping costs) and VAT at 20 per cent. That’s not free trade, that’s protectionism and it’s the status quo.
Many countries seek trade agreements to compensate for the WTO’s failure. These may be multi-party, such as the North American NAFTA, or bi-lateral, such as the exit agreement between UK and the EU. These come with complications beyond a reduction in tariffs. Some are necessary clarifications on quality and production methods, such as the washing of chicken in chlorine or the use of growth hormones or genetically modified organisms. Others are more political, such as the inclusion of Northern Ireland in the EU for trade purposes enshrined in the wretched Windsor Agreement.
The WTO is also concerned about what it terms ‘non-tariff barriers’ – that is the use of specifications to preclude items from imports. If the UK insisted that all cars imported into the UK were right-hand drive that would be deemed a non-financial barrier. The UK doesn’t, because it doesn’t have to. UK customers prefer right-hand drive, so that’s what they buy and that’s what manufacturers send to the UK. However there is nothing to prevent a UK customer ordering and receiving a left-hand drive vehicle, as some truck operators do.
Where the steering wheel may be is obvious to the consumer. Safety standards, operating systems, environmental compliance and production methods are not. Tracking how services are delivered is even harder. Notoriously, some of the plastic exported from the UK for recycling ends up in the sea, not as a new product. Why? Because recycling plastic is expensive so dumping saves money. If the chances of being caught are slim then a ruthless entrepreneur will cheat. His priority is to make a profit and feed his children. If western environmentalists give him money but don’t track performance, more fool them.
Therein lies the whole problem of the ‘rules-based international order’. Unless everyone plays by the rules it’s a harmful fantasy. While some self-regarding altruistic nations may harm themselves for the ‘global good’ (however you measure that) others act in their national interest. The UK’s rulers imposed Net Zero – US voters chose a president to restore America’s manufacturing.
China’s abuse of intellectual property law is notorious, as are its human rights abuses (not just the Uighurs), as is its dumping of goods on to markets at below cost price. These violations of the rules of global free trade are well-known yet nothing has been done to prevent it. For all the talk, the economic playing field is not level; the cheats have been winning.
Until now.
Part 2 tomorrow looks at Trump’s ‘bulldozer’ approach to a failing ‘global’ economy
