Advertisement
Features

Trump launches a trade war

The US Tariff Act of 1930 shows unequivocally that nobody wins a trade war. It exacerbated the Great Depression and led to a tit-for-tat series of trade barriers that took the global economic system decades to unravel.

886_MW_P04_Markets
Trump claims tariffs are a matter of national security

"Until last week, Donald Trump's bark on trade protectionism had proved a good deal worse than his bite," says Jeremy Warner in The Sunday Telegraph. It seems "we relaxed too soon". The US president has announced levies on aluminium and steel imports, which will now incur tariffs of 10% and 25% respectively.

Advertisement - Article continues below

The market reaction to the news tells you pretty much everything you need to know about this policy's likely impact, says Nathaniel Taplin in The Wall Street Journal. The overall market was rattled, with the Dow and the S&P 500 falling by almost 2% each. Steel futures and shares in big steelmakers such as US Steel bounced. The listed arm of China's top steelmaker declined, but not as much as its Canadian and South Korean rivals.

More losers than winners

This new policy won't punish China, which is always accused of producing too much metal and dumping it on world markets at unfairly subsidised prices. The US used to take a lot of Chinese steel, but now Canada, Brazil and South Korea are the main exporters of the metal to the US. So "American allies" will pay the bill, says Taplin. The slide in the overall market, meanwhile, highlights the basic problem with protectionist measures: they produce more losers than winners.

Advertisement - Article continues below
Advertisement
Advertisement - Article continues below

The steel-using sector "dwarfs" the steel-producing sector, as Lawrence Summers notes in the Financial Times. Payrolls of steel and aluminium producers total around 203,000. Industries such as car making and construction, which use steel, employ around 6.5 million people. By making steel more expensive, the US government is raising local steel users' costs and reducing their international competitiveness. It is also increasing overall prices at a time when the economy is already motoring, with a robust labour market threatening to stoke significant wage inflation. Higher prices trim disposable incomes. So the overall impact is likely to be slightly lower growth as well as inflation.

This could get nasty

The big danger here, however, is "an escalation into a full-blown trade war", says Ben Inker in a note by asset managers GMO especially when you consider the "increasing numbers of populist leaders with a shaky grasp of economics around the world". The EU has already threatened to retaliate.

Advertisement - Article continues below

If this escalates, we could see tariffs in more and more sectors on both sides of the Atlantic, slowly throttling global trade and growth. It hardly helps that the Trump government has claimed the tariffs are a matter of national security instead of providing an economic justification for them, however specious. Countries have hitherto resisted resorting to this excuse, which is supposed to be used only in national emergencies. Having broken a taboo, Trump may be tempting others to follow. The world could be about to relearn a very expensive lesson (see below).

A race to the bottom

886_markets_P04

"It's easy to win a trade war," insisted Donald Trump last week. He appears not to have heard of the US Tariff Act of 1930, often known as the Smoot-Hawley Act after the two senators who sponsored the bill. It shows unequivocally that nobody wins a trade war. The Act exacerbated the Great Depression and led to a tit-for-tat series of trade barriers that took the global economic system decades to unravel.

Advertisement - Article continues below

Congress, claiming it was protecting American jobs, launched a plan to bolster agriculture, which had slumped in the 1920s. But given the stark general economic backdrop, and politicians being politicians, legislators kept insisting on tariffs on all sorts of goods in exchange for their support, notes Chris Cillizza on CNN. It wasn't long before the bill began to mushroom. The final version increased almost 900 US import duties. Canada and Europe soon retaliated, and a rapid and alarming squeeze on world trade began as exporting became ever harder (see chart). US imports declined by 40% in the two years after Smoot-Hawley. US exports of eggs to Canada slipped from 919,000 in 1929 to 7,900 in 1932, says Cillizza.

Perhaps the most disconcerting thing about the outbreak of protectionism was that, even though virtually all economists realised it was likely to backfire spectacularly, and advised frantically against it, it still happened.Thomas Lamont, a partner at JP Morgan, said he "almost went down on [his] knees to beg Herbert Hoover to veto the asinine [bill]". Bad ideas can develop unstoppable momentum. "The fact that politicians know something to be madness," says The Economist, "does not stop them doing it."

Advertisement
Advertisement

Recommended

How long can the good times roll?
Economy

How long can the good times roll?

Despite all the doom and gloom that has dominated our headlines for most of 2019, Britain and most of the rest of the developing world is currently en…
19 Dec 2019
Why Wall Street has got the US economy wrong again
Economy

Why Wall Street has got the US economy wrong again

The hiring slowdown does not signal recession for the US economy. Growth is just moving down a gear, says Brian Pellegrini.
25 Oct 2019
What will the US central bank do next?
US Economy

What will the US central bank do next?

As the US continues to grapple with the Covid pandemic, the Federal Reserve will meet to decide what to do next on jobs, inflation and the recovery in…
28 Jul 2020
Is it time to buy Europe and sell the US?
European stockmarkets

Is it time to buy Europe and sell the US?

Europe is looking ever more attractive to investors, while the US is starting to look like the riskier bet, says John Stepek.
24 Jul 2020

Most Popular

Eagle Lightweight GT: the reincarnation of the E-type Jag
Toys and gadgets

Eagle Lightweight GT: the reincarnation of the E-type Jag

Jaguar’s classic E-type sports car has been reinvented for the modern age. The result – the Eagle Lightweight GT – is a thing of beauty.
7 Aug 2020
Platinum: the precious metal that looks set to play catch-up with silver and gold
Silver and other precious metals

Platinum: the precious metal that looks set to play catch-up with silver and gold

Gold and silver continue to soar, but there's still time to get in. And there's another precious metal that looks set to go on a bull run too, says Jo…
7 Aug 2020
Don’t despair on dividends – these companies could be set to bring them back
Income investing

Don’t despair on dividends – these companies could be set to bring them back

The value of dividends paid out by UK stocks has plummeted this year as companies “rebase” their payment policies. But things could soon start to look…
6 Aug 2020