Donald Trump has been a strong promoter of protectionism. Photo: Gage Skidmore

Trade war risks collateral damage

Wednesday, 19 September, 2018 - 15:18
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Market fears for the outcome of the escalating tariff war between the world’s two biggest economies have heightened during the past week, with history showing what could be a significant impact on consumers, and employment.

US President Donald Trump this week announced a new round of tariffs on about $US200 billion of Chinese imports, with a 10 per cent tariff to come into effect on September 24.

It's the latest attack in a battle that has been escalating since early 2018.

China has so far matched moves by the US, as the two countries continue to negotiate, most recently with tariffs of 5 to 10 per cent on $US60 billion of goods.

Both are waiting for the other to blink.

The impacts could be more significant than the initial numbers might indicate, however.

For example, UBS’s chief investment office noted earlier in September that the US’s monthly trade deficit with China hit a record $US31.1 billion in August.

The data suggests that the impact of import barriers on the trade deficit has been minimal.

“While this may reflect front-end loading of imports ahead of tariffs, as happened following the imposition of tariffs on washing machines earlier this year, a widening deficit also carries the risk of strengthening Trump’s resolve to increase tariffs,” the investor note said.

The impacts beyond the trade deficit will be higher prices for consumers and companies using imports as inputs, such as steel in construction.

UBS said Apple would be one example of a business hit across its supply chain.

“Lower-value assembly work could feasibly be moved to the US, at a high cost ... migrating component supply chains would be a far more challenging and expensive exercise,” UBS said.

History has numerous examples to sketch out what might happen next.

The most infamous case is the 1929 Smoot-Hawley tariffs in the US.

They reportedly reduced imports by 66 per cent, and as trading partners retaliated, cut exports by 61 per cent, contributing to The Great Depression.

Ironically, that happened at a time when the country already had a trade surplus.

Work by the US National Bureau of Economic Research in 2012 found the 1929 tariff protection reduced productivity in that country by 1.6 per cent.

Earlier work by the New York Federal Reserve suggested that the Smoot-Hawley tariffs were responsible for 10 per cent of the decline in output during the depression.

More recent trade fights tell similar tales, including former president Barack Obama’s tariffs on tyres in 2009.

Gary Clyde Hufbauer and Sean Lowry, writing for the Peterson Institute for International Economics in April 2012, found that policy cost consumers about $1.1 billion annually, while calculating ‘generously’ that about 1,200 jobs were saved.

The industry employed a total of 52,000 workers, according to the report.

“Our analysis also shows that American buyers of car and light truck tyres paid a hefty price for this exercise of trade protection,” the authors wrote.

“According to our calculations, the total cost to American consumers from higher prices was around $US1.1 billion in 2011.”

“The cost per job saved was at least $US900,000 in that year.

“Only a very small fraction of this bloated figure reached the pockets of tyre workers.”

A further issue was that higher tyre prices meant lower sales for other retailers.

“On balance, it seems likely that tyre protectionism cost the US economy around 2,531 jobs, when losses in the retail sector are offset against gains in tyre manufacturing,” the authors wrote.

“Adding further to the loss column, China retaliated by imposing antidumping duties on US exports of chicken parts, (costing around $US1 billion).”