Tariffs and their discontents

As I wrote in my column today, we won’t know for sure what will happen on April 2 until Donald Trump’s so-called “liberation day” is here. But since my respondent today is London-based Tej Parikh, the FT’s economics leader writer, I thought I’d plunge into the topic of tariffs, and the transatlantic divide in how people tend to view them.

In the US, public opinion around tariffs really depends on how you ask the question, as this New York Times’ graphic points out. If you ask whether Americans support tariffs “even if prices increase”, only about a third are in favour. But if you start calling out specific countries, like China, and pointing out specific unfair trade practices or differences in the rates charged by the US versus other countries, then suddenly the number who are in favour can rise above half the population.

This is an important point to understand, not only because is it at the heart of the Trump administration’s economic thinking, but also because it resonates with average Americans. If it’s about “fairness,” rather than “inflation,” views shift.

As Stephen Miran, head of the President’s Council of Economic Advisers, wrote in his much talked about report, “A Users Guide to Restructuring the Global Trading System,” the current administration believes that is it unfairly locked into a system of tariff rates that are “designed for a different economic age.” As he points out, the US’ share of global GDP halved from 40 per cent in the 1960s to 21 per cent in 2012, and has recovered slightly to 26 per cent today — but the tariff and trade system is stuck in a postwar paradigm.

According to Miran’s report, the US effective tariff on imports is the lowest of any nation in the world, at about 3 per cent. The EU’s effective rate is about 5 per cent and China’s is 10 per cent. Bilateral discrepancies can be larger. As Miran writes: “The US imposes only 2.5 per cent tariffs on auto imports from the EU, while Europe imposes a 10 per cent duty on American auto imports.”

OK, so how to explain Trump’s 25 per cent across the board auto tariffs? How do they address the US-Europe discrepancy in particular?

If you add in the fact that European companies — like carmakers — don’t pay VAT on goods for export, then you end up with a situation in which “a potential US tariff of 25 per cent on goods from Europe is not arbitrary, punitive, or merely a negotiating tactic,” as Jason Cummins, the chief US economist at Brevan Howard wrote in the FT last week, but rather “logically addresses inherent differences between tariff and VAT systems”. Cummins argues that 25 per cent is what it would take to level the playing field with Europe.

Now, of course, none of this reflects all the challenges and potential inflation through complex supply chains that might result from tariffs (witness how all the carmakers, including the US ones, are complaining about that). But large industrial supply chains used to be vertically integrated (remember Henry Ford’s River Rouge plan, which had steel going in one side and cars coming out the other?).

My bet is that they will be more so again in the future, for reasons that have little to do with geopolitics (additive manufacturing that allows complex products to be made locally is coming to scale, and a global price on carbon will argue for more regionalised hubs of production and consumption, since logistics is the second largest polluter after China).

Meanwhile, if you put up on a white board the effective tariff rates of the US (3 per cent), EU (5 per cent) and China (10 per cent), and ask Americans if they think that’s fair, I’d wager they’d say no. I haven’t seen polling on this, but it follows the general trend that opinions on tariffs are reliant on how questions are posed. So, my question to you, Tej, as a European is, what would you say to that? Is there anything in this position that you can sympathise with? What would an average Briton say to such an argument? And if you were going to make the case about tariffs from the point of view of an average Briton to an American, how would you frame it?

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Tej Parikh responds

The use, and effects, of protectionism are so wide-ranging that it makes sense that support for it varies depending on which element is being emphasised — whether in America or Europe.

In this case, it is difficult for individuals to assess the direct cost of import duties on themselves with the value they place on fairness. They don’t want to face higher prices. But they also think trade should be a level playing field.

The questions will also have salience with different households. For instance, workers with experience of the economic disruption caused by globalisation — such as job losses and factory closures, triggered by competition from abroad — might find the fairness argument for raising tariffs more compelling. (Even perhaps to the extent that they’re willing to experience some short-term economic pain if it brings retribution.)

This is what makes tariffs such a useful political tool. Their rationale can be targeted. And, politicians can get away with it, if the costs are manageable and not immediate. That’s where I think Trump’s April 2 bonanza will trip him up. High and wide tariffs will hit Americans’ pockets quickly.

In Britain, controlling immigration rather than protecting certain jobs and industries with tariffs has been the more salient aspect of globalisation. But I imagine one could still garner support for import duties in parts of the country that have faced rapid deindustrialisation. (The same may be true in parts of Europe too, although the idea of open trade is more central to the European project).

In coastal, rural and northern parts of England, the argument that tariffs would help block cheap competition from abroad, protect jobs and nurture industries, would land to some extent. But, in London, which has boomed, partly because of globalisation, it probably wouldn’t.

The broader point here is that free trade is being made a scapegoat for deeper issues governments have failed to address, such as reskilling and investment support. But some of these “left behind” regions feel that promises to regenerate local areas always fall flat, and so if tariffs help at least some “old economy” jobs stay put, then some may think it is worth the punt.