Economania

“A week is a long time in politics” – Harold Wilson.

A lot has happened since the last edition of Economania in late 2022. Conservative prime ministers came and went in rapid succession finally to be replaced by Sir Keir Starmer and the first Labour government since 2010. Globally much else has also changed. So there is much to talk about. Where to begin?

The biggest upheaval on the world political stage is the second presidency of one Donald J Trump and his economic programme. Of particular interest is Trump’s proposed programme of tariffs. I say ‘proposed’ because their implementation has, at time of writing, been suspended for 90 days for all countries except China. When Trump first announced his tariffs the US stock market slumped and the dollar moved sharply down on foreign exchange markets. Then the bond market went into meltdown. This last was a Liz Truss moment. Trump was forced to announce a delay in the implementation of his tariffs.

Trump has presented tariffs to his constituency – his ‘base’ – as a penalty imposed on foreign governments. They have cheered him to the echo. His MAGA supporters do not seem to have grasped that they will be paying the tariffs in the form of higher prices.

Trump has offered tariffs as the panacea to all of America’s economic ills. He has asserted that these tariffs will force American companies to repatriate the manufacturing they had previously off-shored to low-wage countries. If fully implemented, will the tariffs have the desired effect?

There is an argument in favour of tariffs but it is a special case. The general, long-term application of tariffs is usually met with retaliatory tariffs and thus they eventually become part of the economic furniture, losing any beneficial effects.

Tariffs can be used simply to reduce the overall level of imports by making them more expensive, thus favouring home-produced substitutes. Tariffs may be imposed on imports to counter the practice of dumping, where goods are made artificially cheap by subsidies given to producers by foreign governments.

In addition, tariffs may be imposed to counter restrictions imposed by foreign countries in the form of bureaucratic procedures design to impede importation.

Additionally, and most commonly, tariffs are used to protect fledgling industries until such time as those industries are able to compete in an open market.

Finally, tariffs may be used to protect strategically important industries such as energy, agriculture and defence-related industries.

The US likes to present itself as the champion of free markets but in reality it has been historically inclined to protectionism and happily subsidises its farmers. In 2002 Senator John D Rockefeller IV argued for higher tariffs on imported steel. Indeed, we can go right back to Alexander Hamilton, the first US Secretary of the Treasury, who was a vigorous advocate for tariffs.

Republican Senator William McKinley, Trumps’ claimed chief influence in the matter of tariffs, was also a vigorous advocate. Indeed, he considered himself an expert on the subject of tariffs. In 1890 he convinced Congress to enact and implement a tariff, known as the McKinley Tariff, raising the rate on some goods to almost 50%.

The tariff was not well-received by the American public as the prices they paid on goods rose sharply. In the mid-term election later that year the Republicans lost almost half their seats in the House of Representatives. In the presidential election of 1892 the Democratic presidential candidate Grover Cleveland took the White House and the Democrats took the House and the Senate.

It has been argued, mostly by advocates of free-markets, that tariffs cause recessions and depressions but the evidence for that is inconclusive at best. The Smoot-Hawley tariffs were cited by neo-liberals as the cause of the Great Depression of the 1930s, but that depression had already begun. The US had average tariffs of 44.6% before Smoot-Hawley and 53,2 percent afterwards – hardly a massive increase. The Great Depression was caused by Federal Reserve monetary policy errors. (Rickards, 2016)

Tariff increases in 1861, 1864, 1890 and 1922 did not produce recessions. Recessions occurred in 1873 and 1893 without the imposition of tariff increases. (Fletcher, 2011)

If Trump’s programme of tariffs is fully implemented as advertised, will American companies really repatriate their manufacturing operations? Indeed, would they be able to? American industrial decline began in the 1970s resulting in what is known as the Rust Belt, that is the now-defunct steel mills and other factories that used to provide the majority of blue-collar jobs, primarily in the mid-western states, i.e. Illinois, Indiana, Michigan, Missouri, New York, Ohio, Pennsylvania, West Virginia, and Wisconsin.

The generation of people who worked in the steel mills and other heavy industries are now retired and it would require a major programme of recruitment and retraining to revive the workforce. The same applies to all the other industries that supplied the steel mills. Detroit, once the world capital of motor manufacture, is now a shadow of its former self, having lost over half of its population between 1970 and 2010.

The Taiwan Semiconductor Manufacturing Company (TSMC), the world’s largest producer of the most advanced semiconductor chips, has built a $40 billion dollar plant in the US and intends to expand its production there. In March of this year a further investment by TSMC of $100 billion was announced. This move is not to avoid tariffs, but is intended to secure advanced chip production for the world in light of China’s threat of future invasion of Taiwan.

The IMF have said that Trump’s tariffs, if implemented in full, will knock about 0.5% off global GDP in the next 12 months. While not a disaster, it is a move in the wrong direction given the current global economic background. Here in Britain it will be a further blow to the chancellor’s plans to restore growth to the UK economy.

Trump won the presidential election for a second term with a restatement of his claim that he was ‘going to make America great again’. One recalls that in the 1930s an Austrian corporal achieved the highest political office with a claim that he was ‘going to make Germany great again’. That particular project was – how shall we say? - less than successful.

Sources.
Rickards, James – ‘The Road to Ruin’, publ. Portfolio Penguin, 2016.
Fletcher, Ian – ‘Free Trade Doesn’t Work’, publ. U.S. Business & Industry Council, 2010.
Bannock, Baxter and Davis – The Penguin Dictionary of Economics, publ. Penguin, 1987.
Reuters
The Washington Post, 2002

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