Tariff Brinkmanship

THE HUMBLE TARIFF has made an extraordinary return to the centre of global economic policy. A tax on imports, the tariff has, for long, had a negative connotation usually described as “protectionist”. A sign of weakness, not of strength. It is surprising then that the strongman president of the world’s richest economy has chosen tariffs as his favourite instrument of economic policy. Or is it merely an instrument of negotiation?

Once upon a time, the US was an active proponent of tariffs. Under George Washington, the country’s first president, Alexander Hamilton, the first treasury secretary, implemented tariffs on imports from Europe (the UK, in particular) in an effort to promote American manufacturing.

The logic used then was what came to be known as the “infant industry” argument. American manufacturers needed a shield against already established and cost-competitive manufacturers from Europe. It would take some time for the US to catch up in terms of cost-competitiveness. Hence “protection” was required.

The same argument was subsequently used to frame policy by many other late industrialisers, whether Japan, China or South Korea. All of them used protection against imports—and tariffs are the most efficient method—ostensibly to allow time for domestic industry to become competitive. However, there were several late industrialisers like India, which used tariffs extensively but failed to develop competitive industries.

The difference between success and failure lay in the need to grasp the “infant” part of the argument. There is an underlying assumption

that tariff protection must be withdrawn once industries “grow up”. Japan, Korea and China made their industry compete against the world’s best in global markets. They became adults. India’s did not. Under indefinite protection, they remain stunted.

The other legitimate exception to free trade came from strategic trade theory, which said that in the case of oligopolistic international markets (say, commercial airplane manufacturing), it may require some form of protection of domestic firms for them to make a successful entry.

Of course, there are strong arguments against both “infant industry” protection and strategic trade theory in terms of workability, especially in the scenario where every country starts deploying protectionism, effectively nullifying any advantage for producers but raising costs for consumers.

Trump’s tariffs defy all economic logic. The US is not an industrialising country with infant industries. It is a country that has exited certain types of manufacturing as it has become more prosperous and focused on high technology and high value-added industries or services. This is a natural progression. Trump may want some industries to return to the US (say, steel) but these will not be infant industries. In a high-wage economy, some industries will never be competitive to imports from low-wage economies. The only way they can come back and survive in the US is with permanent protection. And that is a sure path to economic inefficiency.

The US cannot even claim the support of strategic trade theory. There is no oligopolistic industry where the US is not a key player. In fact, the US tech industry is so dominant that it is difficult for others to gain entry.

A tariff-happy US president will only reduce prosperity for his own country and the world. Unless he is using it as a tool of negotiation, the outcome could be different. If his idea of reciprocal tariffs, abominable as it is for those who believe in multilateral free trade, force high-tariff countries like India or high-tariff sectors like agriculture across many countries to reduce their tariffs, then it could actually lead to better outcomes for all. In India, for example, there is little rationale for such extraordinarily high tariffs in automobiles for such a long period of time. It costs the Indian consumer. Similarly, Canada shouldn’t have such high tariffs on dairy. It costs Canadians.

Trump and the world are engaged in a game of tariff brinksmanship. In the end, it could either kill the global economy or give it new life.

Donald Trumpeconomic inefficiencygeopoliticshigh-wage economytrade and tariff