PRESIDENT TRUMP’S NEW TARIFFS

In a recent article in the Daily Mail, Lord Hannan, president of the Institute for Free Trade, following an earlier article on this topic (see https://michaelwilliampg.com/daniel-hannan/), wrote:

‘The chief victims of Donald Trump’s new tariffs will be Americans. The President’s 25 per cent levy on all imported cars, to sit alongside those on steel and aluminium, will inevitably result in price rises. Most obviously, imported cars will become more expensive. But so will American vehicles as their manufacturers will no longer need to worry about competition … To make matters worse, as prices rise in showrooms, American consumers will have less to spend on other things, harming the whole economy.’

Lord Hannan continued to argue that it would be the ‘worst possible response … to replicate’ President Trump’s tariffs, and:

‘If someone chops off his finger, you don’t retaliate by lopping off one of your own.

Unfortunately, politics and economics are two different beasts. Although free trade is one of the few ideas which every mainstream economist supports, rational arguments count for little when a country feels disrespected … So [Canada] will end up imposing a harmful policy – tit-for-tat tariffs on American cars – rather than reason with voters whose blood is up. Something similar, I suspect, will happen in the EU, which retaliated against Trump’s decision to impose steel and aluminium tariffs in February by introducing its own, to the detriment of its construction workers, car manufacturers, electrical appliance-makers and railways. So far, to his credit, Keir Starmer has avoided that mistake … he exercised caution.’

Instead of imposing tariffs on the US goods, Lord Hannan argued that the UK should agree that ‘all tariffs’ should be suspended while ‘trade talks get under way’, and ‘In exchange, Britain should offer, while talks proceed, to suspend the idiotic 10 per cent tariff on US cars that we inherited from the EU – or, at the very least, to cut it to the US rate of 2.5 per cent.’ Lord Hannan pointed out: ‘By the end of Trump’s first term, nearly two thirds of the US-UK trade chapters were at or close to completion. We should get on and conclude the deal … If Starmer can get a deal over the line, he will see both the British economy and his personal ratings soar. And you know what? He will deserve it.’

Lord Hannan does not simply advocate free trade – but a particular, UK, interpretation of it: unilateral free trade. It is globalisation at its most fundamental. For those who hold this view, it does not matter whether or not the UK has tariff-fee access to other markets, or if other countries dump subsidised goods onto the UK market at even below the cost of production with a view to bankrupting UK competitors; all that matters is that imports into the UK are tariff-free.

For Lord Hannan, any tariff on imports is harmful in all circumstances. The idea that the correct response is to reach a free trade agreement with the USA might sound attractive. But it takes two to make an agreement, and the USA is not minded to countenance holding off on implementing a new tariff regime while talks are resurrected. This is with good reason, as the USA has both a trade deficit and a massive, $2 trillion, government spending deficit. That cannot continue or else the USA faces bankruptcy.

How the UK reacts to this is a pragmatic issue. It may be better to take it on the chin, or else retaliate, or else rely upon some other solution. The USA has taken measures to redress a trade deficit before many times. The world did not come to an end.

It is untrue that tariffs will ‘inevitably result in price rises’. Domestic competition will still remain and domestic producers will aim to expand production to gain market share from the higher price of imports. Increased domestic production will lead to more jobs, more salaries and profits, and hence more tax revenues. Any increase in the prices of domestic goods will lead to increased profitability, higher salaries and hence more tax revenues.

It may well be that Starmer has ‘exercised caution’ (to use Lord Hannan’s term) regarding steel and aluminium tariffs. But the British steel furnaces are now due for closure. Unemployment will increase and tax revenues will fall. The UK is about to see its virgin steel production wiped out. This means the UK is will need to import all the high quality steel needed for defence and major construction projects. This is especially alarming given the geo-political situation in Europe and elsewhere.

Lord Hannan makes no mention of the USA’s need to deal with its trade deficit, nor of the consequences of the UK allowing its own trade deficit to worsen. The idea that a country has to pay its way is ignored.

Lord Hannan is wrong to oppose the use of tariffs in principle, wrong to claim that tariffs are always damaging while unilateral free trade is always beneficial.