Terrible Tariffs

What links Harley Davidson motorbikes, the Boston Tea Party, soybeans, the Great Depression, Hōne Heke, solar panels, Levis jeans, China and Donald Trump? 

Tariffs.

More precisely, all the above-mentioned products, events and people are linked by conflict (real wars or trade wars) brought on, at least in part, by tariffs.

With Donald Trump and his trade wars, tariffs - those seemingly boring taxes on goods - are suddenly once again centre-stage and threatening.

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On October 31 2017, almost exactly two years ago, an arguably dull report about solar panels came out from an arguably even duller American federal agency, the US International Trade Commission.

The report found that imports of solar panels had caused injury to American solar panel producers. It recommended US President Donald Trump put restrictions on solar panel imports.

A month later, the same body produced a similar report about washing machines. And two months after that, Trump imposed tariffs on $8.5 billion of imports of solar panels and washing machines.

It was a declaration of war, and China, a major exporter of both these products, didn’t take long to respond. Just days after Trump’s washing machine and solar panel tariffs it started taxing American sorghum, a very unsexy grain that mostly goes into cattle feed and ethanol production.

It was a cunning plan: at that time, three-quarters of US sorghum was going to China. 

Solar panels versus sorghum sounds an obscure trade tit-for-tat, but it was just the preliminary volley in a two-year-long war that has so far involved six totally different Trump-initiated tariff battles, hundreds of billions of dollars of imports, and thousands of products from bourbon to peanut butter, Harley Davidson motorbikes to Levi’s jeans, French cheese to cranberries, aircraft to powerboats. 

(For a blow-by-blow account in a highly digestible form check out the excellent “Trump trade war timeline” put together by Chad Bown and Melina Kolb at the Peterson Institute for International Economics.

National security imperative

Trump has used a number of rationales for the various tariffs, including “national security”. His argument with the steel and aluminium imports, for example, was that tariffs would make the US domestic metals industry stronger. And stronger steel and aluminium producers are able to churn out lots more fighter jets and armoured combat vehicles.

The trouble is that other countries, including some of the US’s long-standing allies like Canada and the European Union, don’t see it Trump’s way. 

“Let me be clear,” said Canadian Prime Minister Justin Trudeau. “These tariffs are totally unacceptable.”

And from EU Trade Commissioner Cecilia Malmström, announcing the retaliatory tariffs on iconic American products like Levis, peanut butter and Harley Davidsons: “Clearly the EU has to defend its interests and this is why the EU will today... impose additional duties on a number of imports from the US.”

A separate battle with China, intended to force China to do something about its sometimes questionable use of overseas intellectual property, has escalated to cover practically every product traded between the two countries - hundreds of billions of dollars-worth.

A spiral of doom

Auckland-based international trade policy consultant Stephanie Honey says the tariff war has created a lot of nervousness in trade, economic and business circles.

“The tariffs are definitely harmful; they have an impact on the affected producers and on consumers. But one of the biggest things that has come out of this tariff action is a huge increase in levels of economic uncertainty - and uncertainty is the killer in this global market.

“It means businesses are very cautious about what they want to do, investors are very cautious about investment and overall that has an impact on the way trade happens and the way cross-border investment happens.

“It’s a downward spiral.”

Meanwhile, the world’s most powerful economists are starting to issue grim warnings. At a presentation last week, the International Monetary Fund’s new boss Kristalina Georgieva said global GDP could fall by $US700 billion by 2020 as a result of the trade conflicts.

“Everyone loses in a trade war,” she said. “And even if growth picks up in 2020, the current rifts could lead to changes that last for a generation."

We live in extraordinary times. 

History suggests it won’t go well

But extraordinary times and the imposition of tariffs have often gone hand in hand in the past. Tariffs, those boring old taxes on goods moving around the world, have played a major part in some really big historical events. Often pretty traumatic events.

Like the Boston tea party, which started out as much a protest against preferential British tariffs on imported tea, as a fight for independence. Though the war followed fairly swiftly after.

Or Ngāpuhi chief Hōne Heke cutting down the flagpole at Russell, which was in part a reaction against the then Governor Robert FitzRoy abolishing all tariffs in New Zealand and disbanding the Customs service. FitzRoy was a fan of free trade; Hōne Heke not so much. 

As David McGill says in his history of the NZ Customs Service, 'The Guardians at the Gate': “Hōne Heke had rather different notions of free trade from Governor FitzRoy. Their differences resulted in the Governor abolishing Customs, partly to please the Māori, and in Heke cutting down FitzRoy’s symbol of authority because he had interfered with Heke’s lucrative trading with the Pākehā.”

But perhaps the most tragic manifestation of ill-advised tariffs - and the one which causes economists the largest forebodings in terms of Trump’s present taxes - came with the Smoot Hawley affair in America in the late 1920s - the so-called Roaring Twenties*.

The American economy was booming, particularly in manufacturing, but some farmers were feeling the pinch. 

So in 1928, the new president, Herbert Hoover, and members of his Republican Party came up with a Brave New Idea - tariffs. 

The obvious place to start was wool and sugar, the two agricultural products facing the most foreign competition at that time. 

But as the bill was debated, every legislator wanted to add protections for their own state’s industries, so they started a process of vote trading, saying they would vote for tariffs on wool and sugar only if the government also imposed tariffs on, say, corn or eggs.

In the end, the Smoot-Hawley Tariff Act, named after Reed Smoot and Willis Hawley, who were the politicians in charge of tariffs at the time, was passed in 1930 and increased tariffs on up to 20,000 products. 

Complete disaster

The Smoot Hawley tariffs were, as predicted by a group of more than 1000 economists who wrote a petition to President Hoover in 1930 begging him to veto the bill, a total disaster. 

The higher tariffs made imported products more expensive, meaning ordinary people - many of whom had been affected by the 1929 stock market crash - could no longer afford to buy imported products like toys, wine, food, or clothing.

But the tariffs also made US manufacturers such as car makers less competitive, because suddenly any imported parts they needed were more expensive. 

And - surprise, surprise - other countries quickly retaliated by raising tariffs on American goods coming over. So American exports plummeted too, including farm exports, which by 1933 had fallen to a third of their 1929 level.

In the end, tariffs ended up hurting the very people they were meant to be helping. As well as sending the world economy into a tailspin.

Honey says tariffs didn’t cause the Great Depression and World War II, but they reinforced the general decline and set countries against each other. 

“The Smoot Hawley tariffs kicked off a process of tit-for-tat with countries forming economic blocks where they would reduce tariffs between themselves, but increase tariffs on others. And that really exacerbated the decline into the Great Depression, which had a lot of very painful economic consequences, but also led into World War II

A lesson forgotten

Simon Tucker, director of global stakeholder affairs at Fonterra, agrees the lessons of Smoot Hawley are very worrying in the present climate.

“Most people would see the Smoot Hawley tariffs as one of the things that deepened and prolonged what was at the time a recession and turned into the Great Depression and I think in some ways the lessons of that period are what has driven the trend towards liberalisation.

“I think it’s quite concerning that countries seem to be forgetting that lesson.”

Honey says one of the positive things to come out of Smoot Hawley, the Depression, and the war was the development of the General Agreement on Tariffs and Trade [GATT] in 1947. This document was signed by 23 countries, including the US and New Zealand, and started the process of freeing up trade and bringing tariffs down.

“Back in the immediate period after WWII, the world was in a mess, and a group of wealthy nations got together and realised the benefit in opening up trade flows and opening up markets. There was also a recognition that if there are deeper economic ties, that contributes to peace and stability.”

Why tariffs don’t work

Simon Tucker says although New Zealand farmers fought against the liberalising of our tariff and import regimes in the 1980s and 1990s, and there were undoubtedly tough times for many businesses, both producers and consumers were better off in the end.

“The dairy industry has benefitted from the New Zealand economy being open and efficient. Remember dairy farmers, like all New Zealanders, import a lot of things from overseas, be it machinery, technology, or the things they consume as a family. 

“And the New Zealand economy has benefitted from having well-priced inputs into our various industries.

“Tariffs are bad for the economy, they are bad for consumers because they make goods more expensive, and they are bad for global markets because they deny the opportunity for competitive advantage,” said Tucker. 

But free trade remains contentious, highly political, and nationalistic, as we have seen over the last couple of years with Donald Trump’s tariffs. 

Consumers will suffer

Stephanie Honey says some of the biggest losers will be consumers.

“Some of the analysis that has been done has suggested by the end of  this year when President Trump has imposed his full suite of tariffs on products, particularly coming in from China, each American household will probably be paying around $US1000 more for the goods they buy and consume.”

And New Zealand is far from immune from a global trade war.

“There’s a dreadful metaphor that says when elephants fight they trample the grass,” said Tucker. “China is our largest export market, the US is our third largest. Anything that hampers economic progress in those two countries is going to be bad for our opportunities to sell products.

“Then there’s the disruption. For example, China puts retaliatory tariffs on US dairy exports into China. In the short term it might mean there’s an opportunity for New Zealand in China, but those US exports no longer going to China are going to turn up in other places.

“What you see is disruption and uncertainty in global markets and that’s not good for a business like ours.”

Tucker said despite the history showing we’ve been here before, these feel like almost unprecedented times. 

“There’s more instability in the world trading system than there has been for 40-50 years and it’s a challenge for New Zealand exporters. I’d back our exporters to get through it but it’s certainly a very difficult and unusual period for us.”

*For a very entertaining rundown of the Smoot Hawley affair, check out the Planet Money episode.