Tariffs harm the imposer as much as those upon whom they are imposed. American consumers will see higher prices and limited choice because of Trump's imposts. Badly run and inefficient American companies will benefit from extra profits.
All the logic of free trade remains, which is why it is right for the United Kingdom not to retaliate. This is not least because Trump has a point. There are many unnecessary tariffs that the UK applies to US goods.
The United Kingdom likes to think of itself as an open market. The prosperity we achieved in the 19th century was built on trade, and Sir Robert Peel's repeal of the Corn Laws is remembered as a great boon to the living standards of the poorest, as they were able to buy cheap bread. Unfortunately, in 1973 we joined the protectionist EU, and have not fully returned to our free trading ways.
This particularly applies to food, for instance beef imported from the US, outside the tariff rate quota, would be taxed at 65%. In addition, we replicate safety checks on US beef that have already been done, in a way we do not on beef from Ireland or other EU members.
Hence, there is not only a hefty ad valorem charge, but also costs for each shipment and these will be in the thousands of pounds. This effectively doubles the cost of a pound of beef imported to the UK from the US.
No wonder Trump is cross, but we ought to be as well. These tariffs were originally applied by the EU to protect European farmers, and are especially beneficial to the Irish beef industry, which is not the concern of the UK consumer, and who has to pay much higher prices as a consequence.
The situation for cars is not quite so bad, but is still a major distortion of trade. Accepting that there will, for all markets, be some necessary adaptations (for example, we drive on the left, as do India and Japan) that each side has to make, we nonetheless add extra burdens that hit the US. The main one is a tariff barrier of 10% plus 2% VAT, so a total of 12%. Although some of the American criticism of VAT is misplaced, because it is not distortive when it is applied to all goods regardless of their origin, VAT is protectionist when added to a tariff. It then has the effect of increasing the tariff duty by 20%, as domestic production is not taxed in this way.
On top of this, there are non-tariff barriers that harm US carmakers, because they tend to make bigger cars with larger engines, so are hit by emissions regulations. These rules could easily be changed, as we are no longer members of the EU.
Similarly, the 25% tariff on US wine and spirits could just be abolished, and perhaps the Scotch Whisky Association would then benefit by a non-imposition of US tariffs. Regulations that ban genetically modified crops could also be abolished as they are merely a result of EU hysteria and anti-import regulations.
It is not only direct obstacles, but indirect ones that matter. In the case of financial services, both sides are equally culpable. As I used to run an investment management business, I know how complex each country's rules can be.
As both countries have safeguards for investors, it is an easier area, not so much to deregulate, but to have mutual recognition of each other's regulations, which provide a safe environment for investors. This would cut costs and reduce friction, and so help both nations' consumers and capital markets.
Medicines and medical devices are a good example of what can be done. The last government accepted that the drugs approved in the US, Japan, Australia, Canada, the EU, Switzerland and Singapore did not need to go through separate UK clinical trials, as we simply recognise the country of origin's approvals.
This does not risk patient safety in the UK, because all these regulators are equally rigorous. Because the NHS is a monopsony, the market may have different characteristics to the US, but that is a separate matter.
This principle of mutual recognition could be applied to almost all US products. It is a safe and highly litigious country, whose safeguards are regularly enforced through the courts by both public regulation, and legal action brought by private individuals who feel wronged. This principle could also be applied beyond the US to all our trusted partners.
This was what I was trying to do when I was Brexit Opportunities Minister. Removing non-tariff barriers in this way would be the biggest expansion of free trade since Peel worked his magic in 1846.
Whisper it quietly, but possibly, just possibly, Trump could be about to give the biggest fillip in history to global trade. He does have a case that the US has been treated badly. It has run huge trade deficits as its consumers have sucked in products from around the world, from countries that do not reciprocate.
There is a chance that his aggressive approach may force other countries and trading blocs to remove their barriers, which would allow the world economy to flourish.
Unfortunately, there is the other possibility, that other countries respond by imposing additional tariffs of their own, leading to a global trade war, which would be a disaster.
It seems certain that the EU will respond in this way, which is foolish and masochistic. It will harm consumers, increase prices, and lower economic growth. Reciprocity, in this instance, is just as damaging as the initial imposition of tariffs.
It is an absolute godsend that the UK is no longer a member of the EU and, therefore, will not have to go down this route. The government is to be praised for avoiding it so far. It is an expense of political capital by the Labour Party, as the easy and, in the short term, popular response would be to retaliate.
The other possibility is that Trump actually genuinely likes tariffs as a revenue raising measure. This would be a mistake, as the economic damage is disproportionate to the revenue that would be raised.
If countries cannot avoid the charges by opening their own markets, then global trade will shrink, making everyone less well-off and lowering the quality of goods and services, as competition erodes.
Meanwhile, the UK is in an excellent position to maximise the potential benefit, it is the supreme Brexit opportunity. Free trade has at all times helped economies, it is a way of encouraging growth as it helps all but the inefficient, whose poorly used capital can be reallocated.
As we are out of the EU, we have already shown a more sensible attitude towards Trump. It is essential that we hold the line on not retaliating. Instead, we ought to lift every barrier we can think of, not just on trade with America, but with the rest of the world too.
While I was briefly Business Secretary, I was asked what restrictions and red lines I wanted to attach to the International Trade Secretary's free trade negotiation with a major partner.
I said, to the surprise, if not horror, of my officials, that I had none. I trusted my counterpart to negotiate sensibly, recognising that free trade is good in itself and protectionism harmful.
Sadly, nothing happened, as the government fell and we all moved on, but it was, nonetheless, the right policy approach. Sir Keir Starmer may find he follows it by force majeure, rather than of his own free will.
Hence, there is a ray of sunshine, because although it may be that Trump is mad and that a slump of the 1930s kind is about to hit us, it is not necessarily so.
He does, after all, have a point, and if he is using American power to force open global markets, in ten years' time we will be much better off, all because of Brexit.
This has been shown by the fact that we have only suffered a 10% tariff, against a 20% hit upon the EU. If we continue with our approach, and the EU continues with its stubborn, recalcitrant and antediluvian one, then we will be the great beneficiaries over the years to come.
Postscript: My friend Liam Halligan has joined Substack and is both authoritative and a pleasure to read. I would highly recommend him.
You can now earn rewards by referring friends. For instance, if you can encourage three friends to subscribe, you will receive a month’s paid subscription. For more details please see the Leaderboard page.
Your comments would be most welcome. Please click the button to join the conversation. Thank you.
Share this post