The beginning of an end to free trade? – Business

“A lesson for our ‘free trade’ wannabes,” commented Mujtaba Piracha, Pakistan’s former ambassador to the World Trade Organisation (WTO) in Geneva, on LinkedIn regarding the new tariffs unveiled by the United States on $18 billion in Chinese imports of electric vehicles (EVs), solar cells, battery components, legacy semiconductors and other clean energy products last month.

Piracha didn’t need to add anything further; his brief remark adequately captured the reality of free trade and the direction the new evolving international trade order is headed in as the US becomes more and more protectionist.

The use of tariffs to preserve America’s dominance in global trade is not new, but the US move to shut off Chinese imports through higher tariffs, ostensibly to protect domestic manufacturing jobs as the trade war between the two countries escalates in recent years, is tearing apart the so-called free trade regime.

While slapping new tariffs — which range from 102.50 per cent on EVs to 50pc on solar components to 25pc for all other sectors, and will take place over the next two years, starting in August — US President Joe Biden explained that he wanted “a fair competition with China and not conflict”.

“For too long, it hasn’t been fair,” he hurried to justify the protectionist move that aims to cripple Beijing’s development of critical technologies.

Most American economists and commentators have since noted that the new tariffs “typically make more political sense than economic sense” as the presidential elections approach, but imperil American ambition to enhance its new energy and auto industry competitiveness and slash carbon emissions.

A US National Bureau of Economic Research paper suggests that tariffs can pay political dividends, even if they don’t translate into ‘substantial job gains’. The paper looked at the period from 2018 to 2019, when former president Donald Trump slapped stiff tariffs on China and other countries, targeting products like aluminium, washing machines and solar panels.

It found that residents in US regions that were more exposed to import tariffs became less likely to identify as Democrats and more likely to vote Republican.

A Financial Times op-ed describes Biden’s salvo against the Chinese clean energy industry as a move designed to appeal to blue-collar voters in America’s electoral swing states, but one that will have ramifications far beyond the US, raising fears of deepening trade tensions between the world’s two economic superpowers.

The Biden administration has also enacted billions of dollars of subsidies for green and clean industries, with tax credits designed to unleash a new wave of investment in clean tech manufacturing.

CNN’s Alicia Wallace says countries have long imposed tariffs as a means of protecting and shoring up domestic industries. However, history and research have shown that the economic effects often fail to live up to the hype.

Additional tariffs are essentially a rounding error for inflation and GDP. She quotes economists, “The newly announced tariffs likely will have a minimal near-term impact on [the US] GDP, inflation and monetary policy — some equating it to a mere rounding error.”

Studies suggest the protectionist US tariff actions against Beijing — and the retaliatory actions by China — in the past have proved to be counterproductive for the American economy and consumers.

Tariffs placed by former US president George Bush on imported steel and aluminium products resulted in higher prices for American steel-consuming industries and led to a steep loss of jobs throughout the steel industry, especially among smaller firms that didn’t have the market power to influence prices.

When former US president Barack Obama increased tariffs on tyres imported from China, the initiative was credited with saving about 1,200 jobs. But it came at a $1.1bn cost to Americans in the form of higher prices, the Peterson Institute for International Economics found.

The 2018 tariffs imposed on $300bn in Chinese imports by Mr Trump led to a net loss of jobs and rising prices for consumers due to higher input costs and retaliatory tariffs, Federal Reserve economists noted in 2019.

The New York Federal Reserve Bank found that the 2018 tariffs cost US households $419 per year because of higher tax burdens and market efficiency losses. After Donald Trump unveiled his wide-ranging tariff policy, the Brookings Institute estimated that China’s retaliatory tariffs on $101.4bn in US exports affected 294,000 American export-related jobs.

Worse, some businesses appeared to take advantage of the trade war by bumping up prices even higher. Goldman Sachs found that tariffs allowed US producers and non-Chinese exporters to the US market to ‘opportunistically raise their prices as well’.

A Wall Street Journal article notes that the new tariffs aren’t economically significant. “Symbolically, they are huge. The US buys almost no electric vehicles, steel or semiconductors — all targets of the tariffs — from China. However, adding tariffs imposed by Trump signals that the decoupling of the Chinese and US economies is becoming irreversible.

“This [new] US strategy is a three-legged stool. The first consists of subsidies to build a viable technology manufacturing sector from clean energy to semiconductors. The second is tariffs on Chinese imports that threaten those efforts. The third is restrictions on access to money, technology, and know-how, which could help China compete. A fourth leg — a unified economic front with allies — remains unrealised,” it says.

It may be premature to assume that the US trade war with China will dismantle the existing global trade regime or drive full-scale de-globalisation. Nonetheless, it’s certain that the era of so-called free trade as we know it is over, with industrial policymaking a rapid comeback.

Published in Dawn, The Business and Finance Weekly, June 3rd, 2024