April 21st 2018


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Articles from this issue:

COVER STORY The deeper causes of Australia's social malaise

GENDER POLITICS Queensland proposes transgender birth certificates

CANBERRA OBSERVED Malcolm at 30 (polls): the cloud on Turnbull's horizon

NATIONAL AFFAIRS Cardinal Pell firmly denies sex abuse allegations

NATIONAL AFFAIRS Sydney Archdiocese aims to eliminate slavery in supply chain

RURAL DEVELOPMENT Irrigation along Fitzroy River proposed and opposed

LIFE ISSUES Abortion Rethink Summit: the case for care

VERBATIM WA food, drink producers face shortage of carbon dioxide

HOUSING AFFORDABILITY Land costs: economist Henry George's solution

ELECTRICITY Will Turnbull lose three out of three?

ECONOMICS Trade wars: tariffs unlikely to be fired in anger

SEX AND TEENS How about support for the abstaining majority?

VISUAL ARTS Layers of meaning in Botticelli's La Primavera and The Birth of Venus

MUSIC Is it good?: Or, do we just like the sound it makes?

CINEMA The Death of Stalin: Black comedy of a dark time

BOOK REVIEW Cool head on topic that generates heat

BOOK REVIEW Life's not so bad: from the outside

POETRY

LETTERS

OPINION What a republic would really mean for Australia

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ECONOMICS
Trade wars: tariffs unlikely to be fired in anger


by Colin Teese

News Weekly, April 21, 2018

One can’t pick up a paper these days without some notable economist or think tank warning of the imminent possibility of a trade war.

Why? Because of U.S. President Donald Trump’s somewhat unorthodox efforts to impose higher tariffs (increased taxes) on sensitive U.S. imports, initially steel and aluminium.

It is no secret that the main thrust of the U.S. President’s well-publicised policy is twofold: first, to re-establish some kind of balance in trade with China; and, second, it expresses a desire to compel various partners to renegotiate the terms of what Mr Trump considers to be unsatisfactory bilateral trade agreements concluded by his predecessors.

That having been said, the question remains: are these actions by the United States really likely to trigger a global trade war?

The term “trade war”, in my view, is intended to describe a situation where the actions of one government increasing tariff rates on imports leads to a kind of chain reaction; as a result of which other countries around the world will respond in kind. Before long tariff barriers will overall lift to levels well above where they were before. The important point being that it would involve most, if not all, significant trading powers.Those who advance such a proposition should be prepared to provide evidence in support of that contention. Thus far nothing of the sort has been done. The media is awash with assertions, and free-trade proponents are self-interestedly backing them up. Beyond that, stockmarkets worldwide have been spooked, for what that may be worth.

What are, or might be the economic consequences of a full-on trade war? Actually, it’s hard to know, because, as with almost every aspect of economics, it is rarely possible to identify any single element in isolation. The most we can say is that like all other economic outcomes, whether policy induced or otherwise, some will benefit from it, others will suffer.

The Great Depression in 1929 is a case in point. Economists have advanced various suggestions about what caused the Great Depression, but none has ever suggested that it was caused by a trade war, though some present day commentators are advancing just that proposition in the context of Mr Trump’s actions on trade.

Some economists have said of the 1929 Depression (Ben Bernanke and Milton Friedman, for example) that it was caused by the U.S. Federal Reserve Bank starving heavily indebted banks of money.

More plausible (and colourful) was John Kenneth Galbraith’s suggestion, which is worth quoting in full: “Governments were either bemused, as were speculators, or they deemed it unwise to be sane at a time when sanity exposed one to ridicule … or [worse] the threat of severe political retribution.”

Preaching sanity in a mad world is probably still unwise. But whether or not our present world is mad, we are, at this time, a long way from what I would regard as a trade war.

Back in 1929 new and significant trade barriers were put in place after the Depression took hold, but these came as a reaction to a whole series of events that followed the Crash that led to the Depression. Did, however, the imposition of trade barriers hinder recovery from the Great Depression? Almost certainly not.

These days it is generally accepted that the preparation for, and the actual conduct of, World War II generated the demand for labour and investment sufficient to restore healthy levels of economic activity. The trade war disappeared in the same context.

And due to policy actions taken initially by U.S. policymakers, and thereafter copied by others, economic prosperity continued deep into the postwar period, despite the fact that many had anticipated that there would be a serious economic downturn as the war economy wound down.

The reasons this did not happen are not universally agreed, but it cannot be denied that government involvement was widely accepted as an essential element in postwar economic management. In particular, such involvement was seen as an essential safeguard against the possibility of a return to the widespread unemployment that had characterised the pre-war period. Western governments committed themselves to policies aimed at ensuring full employment.

International agencies reflected the same commitment. The General Agreement on Tariffs and Trade (GATT) preamble reflected this sentiment: “Trade and economic endeavour should be conducted with a view to raising standards of living, ensuring full employment and a large and steadily growing of real income and effective demand.”

Note: not a word about “free trade”.

Following the end of the Cold War, Western economies moved away from this economic philosophy towards the idea that markets freed of government interference would deliver better outcomes.

In specifying the means by which he wants to make America great again, Donald Trump may not realise it, but his actions are calling into question at least some of the assumptions lying behind the idea that markets deliver the best outcomes.

Rightly or wrongly Mr Trump believes that previous Presidents have allowed the United States to be taken advantage of. Corrections are needed and international trade arrangements are one of a number of foci. Much prevailing opinion is convinced that he wants to dismantle the trade arrangements that have been in place more or less since the end of World War II.

More accurately it might be said that he wants to recast some of the arrangements that were put in place after the end of the Cold War and that culminated in the establishment of the World Trade Organisation (WTO) to replace the GATT.

Assuming Mr Trump goes ahead with his confrontation with China, what might be the consequences of his actions on trade? Most likely less than is usually feared. After all, he is proposing only selective increases in tariff rates, impacting on what he considers to be key (strategic) industries for the U.S.

He presumably accepts that this could result in increased domestic costs for imports of those goods. Further, he regards this is a price worth paying if it leads to the creation of new, higher-paid job opportunities in stronger U.S. industries.

It is impossible to judge in advance what the overall effect will be for the U.S., except to say that, as always, there will be winners and losers. Again, as always, that will be the political problem for him as President. How it plays out with his core support base will be the key to that.

Apart from uninformed comment from the media, committed free-trade believers have been out in force. One large international accounting firm has, I understand, modelled the consequences of an overall tariff increase of 5 per cent. It has judged that such an outcome would be worse for the world economy than the outcome of the 2008 financial crisis. A truly stunning conclusion, given that the global financial crisis came close to destroying the world economy.

To this writer, it does seem improbable, if only because of its underlying assumption. Nobody, to my knowledge, is predicting across-the-board 5 per cent increases in tariffs. For the moment the discussion is confined to trade between the United States and China and within that trade the focus is on a narrow range of products.

Certainly there is no evidence that a trade war involving most of the world’s trading nations could escalate to the point where overall tariffs could rise by 5 per cent. That is not now, nor has it ever been, how international trade works.

Historically, most trading nations have not maintained tariffs on all imports regardless of protective needs. For perfectly sensible reasons countries may decide to protect certain sensitive industries from import competition. Beyond that, imports will enter duty free, except in cases where countries might want to apply a tax on imports to supplement overall revenue collections.

Australia is a case I know about. When we operated a system of openly protective tariffs, 75 per cent of all goods entering Australia were not subject to import duties. Obviously, those were the imports we decided we had no need to protect.

That, I am sure, was equally true of our trading partners.

Having said all of this, there should be no doubt that the merits or otherwise of “neo-liberal free trade” are being re-evaluated.

The actions of Mr Trump may not have singlehandedly triggered this re-examination, but they have given it legs: it has been an influence. The fact is that the arguments in favour of the idea of unbridled free trade as a universal good are now under the microscope.

No doubt this comes as a surprise to the many advocates of free trade who believed that the issue had been settled decades ago. The establishment of the WTO in 1996 as successor to the GATT was meant to have buried protectionism.

The WTO was supposed to extend the reach of GATT and, as well, to tighten up the trade rules. But in the process it has become more complicated and bureaucratic. It has also introduced practices that are contrary to trade liberalisation in some cases.

Worse still, right from the start, countries began producing bilateral free trade agreements. Over time, these too, became more restrictive. The WTO, whether on its own initiative, or under pressure from the big players – the U.S., the EU and Japan – chose to ignore these developments, even though they were against the spirit and, in some cases, the rules of the WTO.

As a result, the reputation of the WTO as a guardian of trade rules has been tarnished.

At the same time that this was happening in the developed world, it was becoming harder and harder to convince ordinary people that they were benefitting from free trade. There are sound reasons for this concern.

Perhaps even more importantly, the developing world, especially Africa, has taken a different path on free trade. In an agreement covering all of developing Africa, except the two largest states, an all-encompassing agreement has emerged, fundamentally different in nature. Deliberately, its intent is not to cover all of the trade involved; it leaves untouched those areas that the parties want to continue to protect.

It is a substantial agreement but more in line with what is likely to endure. Significantly, it lines up with the way international trade was managed under the GATT. Countries committed themselves to a realistic and manageable set of flexible rules on trade liberalisation within which they had sufficient room to move when the national interest demanded it.

It would be no bad thing if Mr Trump’s actions were to encourage us all to follow the African lead and head back in that direction.




























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