Trump’s tariffs

In Neoclassical economics, tariffs are viewed as distortions to a free market – leading to negative economic inefficiency or “deadweight loss”. It dictates that free trade is in the mutual interest of trading partners, allowing each economy to specialise in what they are best at – and for products to be produced more efficiently on the whole.

As far as I’m aware this narrative hasn’t changed since it was taught to me – and as much as we hate some of the negative aspects of globalism, global free trade has been beneficial towards the net economic growth of most nations on earth.

It is therefore surprising how readily the world, and the US public in particular, have accepted Donald Trump’s tariffs on US imports. Especially considering that there are likely to be negative effects on the US, particularly for US consumers, and there are unlikely to be significant benefits.

According to Soren Skou, the CEO of the world’s biggest shipping company (A.P. Moller-Maersk A/S, who transports about 20 percent of the world’s seaborn consumer goods), the negative effects of Trump’s tariffs “could easily end up being bigger in the U.S.” than the rest of the world. Mr Skou believes that the tariffs could slow global annual trade growth by 0.1 to 0.3 percent, with a slowing in the US of “perhaps 3 or 4 percent,”.

We also have a case study from 2002, when then President George W. Bush placed tariffs of 8-30% on imported steel. The tariffs were lifted by Bush on December 4, 2003 despite being scheduled to be in effect until at least 2005; largely due to the negative effects they caused.

In 2003, the U.S. International Trade Commission (ITC) examined the economic effects of the Bush steel tariffs, forming a central estimate of a deadweight loss of $US41.6 million. A separate study from 2003 that was paid for by CITAC (Consuming Industries Trade Action Coalition), a trade association of businesses that use raw materials, found that around 200,000 American jobs were lost as a result of higher steel prices during the tariff period.

Bank of America Merrill Lynch economists say that the Trump Tariffs are similar to the trade battles of the 1980s, which they say were costly and provided little benefit to the industries that were being protected. In the end, “American consumers were the biggest losers due to higher prices.”

The International Monetary Fund is also concerned about the effects of Trump’s tariffs, with IMF Director Christine Lagarde warning us “…not [to] understate the macroeconomic impact,” stating that the tariffs will have “adverse effects for both the US economy and for trading partners,”.

Given the relatively weak economic case, some have speculated that Trump may be imposing tariffs as more of a foreign policy tool rather than an economic one. Whilst this may be an effective tool against some traditional adversaries, Trump risks alienating Canadian, European, and other allies.

Regardless, despite the fact they are likely to be some of the biggest losers – the tariffs remain popular with Trump’s voter base – and they are therefore likely to persist as a result.