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Tariffs are contagious

Getty Images/Win McNamee President Donald Trump talking with steel industry leaders
White House will broaden its 2018 tariffs on steel and aluminum to include “derivative” products like nails, wire and auto panels.

By Shawn Donnan

If you want to sum up the lesson from the past week in the world of trade it’s really quite simple: Tariffs are contagious. Oh, and they don’t always work as planned. Which is kind of what economists have been saying all along.

All the tariff threats the Trump administration has lobbed at the European Union and the soon-to-be-departed U.K. in Davos and beyond have been a familiar variation on the “do as we demand or we’ll whack you” strategy that is now the American way.

But there were two other recent developments that may have been more telling about where things stand. And why it remains odd that financial markets continue to shrug off the economic risks.

The first was a report in The Times of London that Boris Johnson is preparing to adopt Trump’s own tactics in his negotiations with both Brussels and Washington. To get what he wanted with both, the prime minister would threaten to impose high tariffs if they didn’t bend to his demands, the Times reported.

Economists will tell you that one reason tariffs are rarely effective policy tools for long is that they usually prompt trading partners to do the same, thus hurting everyone involved eventually.

Johnson’s use of Trump’s approach is emblematic of that. It also means that a year in which Downing Street wants to seal trade agreements with its biggest trading partners may instead end up becoming a year of economic conflict.

It doesn’t help, of course, that both the EU and U.S. have their own interests. Or that Johnson’s government says it wants to proceed with a digital services tax that the Trump administration has already warned will bring the very same sort of tariffs on champagne and Camembert that France wriggled out of temporarily last week, raising tensions already.

In other words, it may be time to get ready for the Scotch and Stilton wars. Or the transatlantic and trans-Channel tariff wars of 2020.

The other big event was spirited out of the White House on Friday night with the administration’s announcement that it would be broadening its 2018 national-security tariffs on steel and aluminum to include “derivative” products like nails, wire and auto panels.

The stated reason: The original tariffs on upstream steel and aluminum haven’t worked as intended to stabilize domestic production above 80% of capacity — the level Trump decided was needed to protect American interests. In other words, the tariffs haven’t achieved their main policy goal.

Trump’s move was a reaction to a perfectly rational decision being made by American businesses and the market. To avoid the tariffs and the higher costs of downstream products made with costlier American steel at home, companies are importing cheaper foreign-made products.

Which is exactly what economists warned would happen when the tariffs were first put in place. Trade isn’t static. It tends to flow around barriers as businesses adapt. It’s a cliche by now, but protectionism tends to resemble a giant economic game of whack-a-mole. You can never stop whacking, even if some of that really means hitting your own economy.

Anyone who has wandered into the occasionally ugly world of Trade Twitter may now be smiling. That’s because all this brings to mind the work of one of the most ubiquitous trade tweeters there is — lawyer and Cato Insitute fellow Scott Lincicome.

For the past few years Lincicome has been touting a t-shirt with a stark slogan: “Tariffs not only impose immense economic costs but also fail to achieve their primary policy aims and foster political dysfunction along the way.”

That may not be the catchiest warning cry. But it does seem like one to bear in mind as we wrap up the first month of 2020.

Charting the Trade War

A tide of protectionism led by the U.S. threatens to force the World Trade Organization to overhaul the way it enforces the global economy’s rules of commerce or remain out of step with calls for reform. In an essay for Bloomberg Markets magazine, WTO reporter Bryce Baschuk explores a crucial decision governments have to make this year: Will they work with Washington to converge on a new set of trade rules for the 21st century, or allow the WTO to fade into the history books?

A $52 billion carrot | It took 32 months, two prime ministers, and nearly 30 votes in Parliament to extricate Britain from the EU — and the hardest part of the negotiations hasn’t even started.

The negotiator | With the clock ticking on South Korea’s withdrawal from a security pact with Japan in November, President Moon Jae-in sent a blunt-speaking aide on a secret mission to Washington.

Divorce discussions | The EU’s remaining 27 governments agreed to pursue a tough line in the post-Brexit negotiations with the U.K., seeking early concessions on fishing rights and state aid.

Against the grain | China purchased Australian, Canadian and French wheat as Beijing fills import quotas set by the WTO. Meanwhile, U.S. suppliers await their turn.

Bickering friends | Agriculture Secretary Sonny Perdue became the latest American official to face EU complaints about U.S. threats to global trade rules and punitive tariffs on EU farm goods.

Economic Analysis

Diagnosing China | Bloomberg Economics looks at China’s outlook through the lens of the latest health crisis.

Carney’s swan song | The BOE’s governor has saved the least predictable meeting of his tenure until last.

Coming Up

  • Jan. 29: U.S. advanced goods trade balance, Vietnam exports
  • Jan. 30: Hong Kong exports
  • Feb. 1: South Korea trade balance
  • Feb. 7: German trade balance
--With assistance from Mark Glassman.
To contact the author of this story:
Shawn Donnan in Washington at [email protected]
To contact the editor responsible for this story:
Brendan Murray at [email protected]
Zoe Schneeweiss
© 2020 Bloomberg L.P.
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