If you thought the five years since we officially left the EU have been bad, just wait for the next four. Donald Trump is back in the White House and he is throwing his toys out of the pram, threatening enemies, competitors, friends and neighbours alike with tariffs and even invasion.
The UK, with a government he despises and one that remains semi-detached from its former EU partners, is going to have to dodge the flying dummies and rattles. It is worried about trade wars, and rightly so – because no one ever wins them.
Part of the problem is Trump’s unpredictability. He’s already carrying out his cruel and stupid domestic programme, but on the wider world is he just grandstanding? Is it just Chinese goods that he will hit with 60% tariffs – and maybe punish some specific imports from Canada, Mexico and Panama – or is he going to slap 20% tariffs on friend and foe alike?
Has he been emboldened by last weekend’s stand-off with Colombia, which refused to accept two deportee flights, was briefly threatened with 25% tariffs and then proposed its own retailiatory taxes on coffee exported to the US before agreement was reached?
Before that flashpoint there was a weird, rambling speech beamed to the World Economic Forum at Davos, in which Trump said “he would rather not put tariffs” on China. But then he said the whole world had to “make your products in America or pay tariffs”. He told Canada: “You can always become a state, and if you’re a state, we won’t have a deficit. We won’t have to tariff you.”
In short, he is deliberately muddying the waters to keep the world on edge. He thinks this is clever, but only because he is a dumb bully and an economic illiterate who seems to truly believe that tariffs are taxes paid by foreigners. In fact, price hikes are passed on to American consumers, who feel the pinch as a result.
Trump also thinks US industry will thrive as competing imports become more expensive. The economic evidence shows he is wrong – when he put tariffs on steel and aluminium imports during his last term, the consequences in terms of lost jobs were worse for America than for others.
As Michael Gasiorek, professor of economics at the University of Sussex and director of its Centre for Inclusive Trade Policy (CITP), puts it: “The logic behind his position is fundamentally flawed, it won’t have the consequences that he hopes it will have.”
The CITP’s calculations are that if Trump imposed a 20% tariff on all countries and 60% on China, total US imports would fall by 37%, and US GDP by as much as $680bn, or more than $2,000 per person (£1,562). UK exports to America would fall by 18%.
In 2018, after Trump slapped those tariffs on steel and aluminium, I travelled to Wisconsin for the BBC to report on how they were affecting American companies. I met a man who ran a company processing and selling potatoes. His factory was full of machines that cleaned, sorted and bagged tons of spuds; all this equipment was made of steel and aluminium. The price of those machines was soaring; why?
Because if you put a 25% tariff on foreign steel, local steelmakers don’t act patriotically and reasonably and keep their prices the same – they put them up by 24%, so that their product is still cheaper than imports but they can screw their customers for 24% more money. Capitalist greed, made possible by government intervention.
Since steel and aluminium are essential materials for everything – from missiles and planes to cars, trucks, tractors, machinery, buildings and domestic appliances – every manufacturer in America saw their costs soar. And since workers in all those industries outnumber workers in the steel industry by 80:1, it is not hard to see that the damage caused to the American economy far outweighs any gains, including making American exports more expensive and uncompetitive too.
But that is just what happens when you put tariffs on one essential raw material. Trump may be about to start a world trade war with huge tariffs on everybody and everything. You have to go back a bit further than 2018 to see what that would mean, and the warning from history is dire.
You have to be a bit of an economics nerd to know who senators Smoot and Hawley were, and what damage they did to the world. In 1930, having decided the answer to increasing economic gloom was to protect US manufacturers and farmers from nasty foreigners, they sponsored an act that slapped tariffs on imports. The result was to deepen the Great Depression and almost destroy the world economy.
The rest of the world retaliated with its own tariffs on American exports. American trade fell by 67%, and world trade also took a similar hit, falling by 66% between 1929 and 1934. Unemployment rose across the developed world – in the USA from 8% to 25%.
In the UK the jobless figure reached 20%, but in heavy industry areas up to 70% of the workforce found themselves out of a job.
Which is why Prof Gasiorek told me the best reaction to Trump’s tariffs might be for all countries just to ignore them and do nothing in retaliation. In the UK, we only do about 14% of our trade with the USA (compared with over 40% with the EU and even more for the rest of Europe) and relatively few of our firms are dependent on sales there.
US tariffs might cost the UK £22bn in lost trade but that is only 2.5% of our exports. Rather than a spiral of mutually assured destruction, it might be better to take that hit and focus on trade alliances elsewhere. Not least because, compared with the EU, Prof Gasiorek says: “The UK has less power or possibility of changing US policy through retaliatory measures.” We are no longer in the big league.
After Smoot and Hawley, it took a world war to get the world’s economy working again. After Hitler’s defeat, we created an international order based on cooperation and reducing tariffs wherever possible. It is this system and its structures that Trump is now attempting to destroy in a costly trade war that will damage everyone.
What a time to be out in the cold. We have been out of the EU for five years now, but when we decided to leave, we thought it was into a world still run by the post-second world war international order.
We are about to spend four years finding out that the planet now dances to the tune of a narcissistic fool with no knowledge of economics or history.
