To news & knowledge overview

Correction

 Salomons Judgement

Financial markets again have economic concerns, as President Trump said he will impose tariffs on steel and aluminium imports. Rhetoric on globalisation is simple, but it is not easy to change course on an ongoing process.

I was planning to write this column about innovation when president Trump said he would impose tariffs on steel (25%) and aluminium (10%) last week. During the elections, he claimed that other countries benefit from free trade at the expense of the United States. While this is not the case, it resonated with his supporters, especially in the Rust Belt. Whoever thought that cooler heads would prevail, was wrong. Apparently, Trump’s advisors haven’t been able to stop him and we risk a trade war now. And so, I must write about destruction instead of innovation.

Trade issues are complex and cannot be considered as a game with winners or losers. In general, everybody benefits from free trade, but it does involve redistribution issues. If policymakers are to be  worried, they should be concerned about the losers in this redistribution process. But their problem will not be solved by trade barriers, they will boomerang back threefold:

  1. A tariff on the import of steel helps the steel worker, but it is bad for workers in the car industry. ‘America first’, but which America would that be? In the United States, the companies using steel outnumber the ones producing it.
  2. The largest trading partners of the United States – Europe and China – will likely feel the need to respond. On behalf of Europe, Jean-Claude Juncker already thought aloud about a tariff of 25% on American import products as whiskey (with an ‘e’, as without is reserved for Scotch), jeans and motors. China wisely keeps quiet for now but will certainly respond.
  3. Because the steel worker in Pennsylvania must be protected, chances are that everybody will have to pay more. Think about it: can the Fed ignore the inflationary initial effects of the import tariffs, arguing that future effects will slow down economic growth? I don’t think so. When prices go up, central banks will increase their interest rates. That is some bad news for people who will just have obtained a mortgage.

 

The United States have shown several self-centred periods in economic history. In 2002, President Bush imposed a tariff on the import of steel (which was eventually revoked under pressure of the World Trade Organization) something. President Nixon also instituted an import tariff of 10% in 1971 and went further by denying the convertibility of gold. The Smooth-Hawley rates that started in 1930 were even more worrying. According to economic historians, they have deepened and prolonged the Great Depression in the 1930s. 

Rhetoric on globalisation is easy enough, but turning the tide is not so simple. It will only bring back the redistribution issue; in this case the steel worker first, and then the car manufacturer. Paul Krugman has described this ‘reversing’ as a car driver who runs over a pedestrian and – to solve the problem – puts the car into reverse to repeat his action.

For now, only one conclusion remains: the uncertainty in the world economy has increased. The chosen direction cannot be considered as the right one. 

 

The author

Roelof Salomons

Subscribe to our letter

Leave your email address and be the first to receive the latest editions