13 March 2018
Last week, US president Donald Trump announced tariffs on steel and aluminium, as a means to protect local American industries from foreign competition. This is in line with Trump’s general tendency towards economic protectionism, demonstrated by his support for tariffs on the Canadian manufacturer Bombardier’s C-series jets (planes which are partially produced in the UK as well), and for tariffs on imported solar panels and washing machines. In response to the announcement on steel tariffs, EU Commission president Jean-Claude Juncker claimed that the EU will react with tariffs on products like jeans, motorcycles and bourbon.
The political talking points have certainly shifted since the election of Donald Trump. Before his election, and during his first months, European politicians promised to rise above the economic mercantilism of the US President. Where Trump wanted less free trade, Europe responded with more economic cooperation. Back in July, we saw headlines like “EU, Japan seal free trade deal in signal to Trump”.“Although some are saying that the time of isolationism and disintegration is coming again, we are demonstrating that this is not the case,” European Council President Tusk said during a press conference with Japanese Prime Minister, Shinzo Abe.
Last week, however, Juncker completely overturned this recourse to economic principles and to the moral high ground.In a now legendary quote, Juncker said in a speech in Hamburg, Germany:
“So now we will also impose import tariffs. This is basically a stupid process, the fact
that we have to do this. But we have to do it. We will now impose tariffs on
motorcycles, Harley Davidson, on blue jeans, Levis, on Bourbon. We can also do
stupid. We also have to be this stupid.”
Needless to say, most of us had to double-check if this was an actual quote. And yes, the EU seems to be prepared “to be this stupid” if it does not secure the exemption it is seeking. One of the products that would suffer from these retaliatory tariffs is American bourbon, which serves as an interesting case study on this discussion.
Make no mistake, the science is in on tariffs. As much as economists disagree on interventionism, the effect of customs duties on consumer prices are well-documented, especially when we look at a range of
Tariffs are arbitrary and regressive taxes which hurt the poorest of the poor. A research paper on American tariffs exposed this as recently as January last year:
“It appears tariffs are imposed in a regressive manner – in part because expenditures on traded goods are a higher share of income and non-housing consumption among lower income households, but also due to explicit regressivity.”
In plain English, tariffs fall disproportionately on those least able to afford them. The paper concludes that the lowest income categories are burdened at 1.5 percent of disposable income, which is exponentially higher than the wealthier elements of society. For high earners, this percentage is below 0.3.
The UK consumer might brush this off as irrelevant. After all, why would a British consumer care about bourbon from overseas, when excellent whisky is being produced domestically? This is because competition through international trade isn’t only beneficial because it provides more consumer choice, but also because it increases competition in themarket. If bourbon is becoming more expensive due to tariffs, equivalent local producers lose one of their incentives to keep prices down. In fact, bourbon produced in Kentucky is keeping the prices of scotch produced in Moray in check. They may not need each other to exist, but consumers need them in orderto enjoy reasonable prices.
As the trade war between the EU and the US seems to be picking up steam, we are likely to see more products become victimsof the unreasonable demeanour of both sides. Tariffs hurt not only the opposite partner, but the consumer in the country that issues the tariffs to begin with. The appropriate response to “they are shooting themselves in the foot” can’t be: “therefore we will also shoot ourselves in the foot. Ha, let’s see how they like that!”
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Tim WorstallHow foreign competition helps domestic firms
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