Washington Insider Long-Term Trade Impacts

The New York Times published a retrospective by Justin Wolfers, a professor of economics and public policy at the University of Michigan. Wolfers first points out that the president's protectionist trade policies so far have barely changed a fundamental reality: That the United States is still less protectionist than it has been throughout most of its history or than most nations are today. Still, the article is a warning -- that even if the tariffs currently in place inflict only limited damage on the economy, the consequences will be much more severe if Mr. Trump follows through on his threats for much more aggressive action. The average tariff rate in the United States was about 1.4 percent, according to the latest data compiled by the United States International Trade Commission. That was nearly as low as it has ever been. However, that figure only includes tariffs imposed in the administration's first year. In March 2018, the White House added a 25 percent tariff to about $31 billion worth of imported steel, and a 10 percent tariff to $17 billion of imported aluminum, excluding imports from Argentina, Australia and Brazil. Then, in July and August, Mr. Trump imposed an extra 25 percent tariff on $50 billion worth of imports from China, who retaliated, so Mr. Trump punched back, imposing an additional 10 percent tariff on $200 billion in Chinese goods. The Times says that Chad Bown, a trade policy expert at the Peterson Institute for International Economics, a Washington think tank, weighed in on the question of how consequential these changes would be. He calculated that the recent Trump actions would increase America's annual tariff revenue by about $42 billion. That sounds like a big number and it has garnered major headlines. But if you consider the scale of international trade, the figure starts to seem more modest: Last year, Americans spent roughly $2.3 trillion on imports. These numbers suggest the average tariff rate in 2018 will rise by about 1.8 percentage points, to about 3.2 percent, roughly their level at the beginning of President Bill Clinton's administration. Even so, average tariffs remain lower — by quite a large margin — than they have been through most of United States history. Even after these recent tariff increases, Wolfers says, the United States will charge lower tariffs than most countries, although it has become notably more protectionist than major trading partners like Canada and the European Union. Compared with the Smoot-Hawley tariffs of the 1930s, which averaged about 20 percent, the current rates are lower. Even those were below rates of the early 1900s, when it was about 30 percent. Still, most economists, Wolfers says, generally favor freer trade and the current tariffs are moving sharply in the wrong direction. Imposing tariffs on China, only to see China retaliate with tariffs on the United States, is in the interest of neither country. It has caused disruption in both nations, and made neither better off, he said. Furthermore, fighting a trade war when tariffs around the world are already pretty low is difficult. That's because if you "win," you can force your trading partners to knock their tariff rate down from a few percentage points above zero to something a bit closer to zero. That's not a big deal. The major weapon used in such fights is the threat of substantially higher tariffs and if negotiations become deadlocked, these can persist. The prize for winning a trade war is small, but the costs are potentially very large because of a troubling asymmetry that comes into play. Wolfers says that economic theory provides a rule of thumb that the cost of tariff-induced distortions rises with the square of the tariff rate. Put simply, small tariffs do relatively little harm--a tariff rate of 1 percent, for instance, probably won't prevent you from buying something you really want. If, however, the tariff rate jumps to 10 percent, the cost of tariff-induced distortions won't just be 10 times as great, but could be more like 100 times the damage. Thus, large tariff increases don't just lead to fewer imports. They also persuade people to cut back purchases of items they really value. Under this logic, even if relatively small tariff increases haven't imposed much pain, further escalation could have far more severe consequences. The administration has already announced plans to increase the second round of tariffs on China and could raise the average rate to 4.5 percent. Trump is threatening to broaden his tariff offensive, imposing a 25 percent tariff on all of the roughly $500 billion of goods and services imported from China. That would cause the average tariff rate to rise to about 7.2 percent. If that happens, the average tariff rate for the entire economy could rise into double digits. Even worse, the administration says it is considering withdrawing the United States from the WTO which would mean that it would no longer be bound by past multilateral trade agreements that together determine nearly all American tariff rates. If the U.S. withdrew from the trade organization, then an executive order could lead tariffs to revert to the much higher rates when they were last set by Congress as part of the Smoot-Hawley act. So, we will see. There are a lot of moving pieces involved, including current talks with China and others and reviews by Congress that could affect the outcome of the current posturing. Still, trade policy is a critical debate for producers and everyone on agriculture, and should be watched closely as it proceeds, Washington Insider believes.