We are yet to realise how dangerous this is. Donald Trump‘s tariff hikes risk plunging the world into a recession – at precisely the moment when wars and unrest are on the rise.
During his election campaign, the Republican candidate proposed a universal tariff on goods imported by America of between 10 and 20 per cent, rising to 60 per cent for China.
Now the US President-elect says he will start with 25 per cent tariffs on Canada and Mexico, plus an extra 10 per cent on top of any existing tariffs on China, which vary according to the type of product.
His rationale for this is not to do with trade and economics – but with drugs and immigration: ‘I have had many talks with China about the massive amounts of drugs, in particular fentanyl [a deadly, synthetic opioid 50 times more potent than heroin], being sent into the United States. But to no avail,’ he declared on his social media site Truth Social.
‘Until such time as they stop, we will be charging China an additional 10 per cent tariff, above any additional tariffs, on all of their many products coming into the United States of America.’
So far, so Trump. The man who wrote the 1987 bestseller Trump: The Art Of The Deal is in his element, talking tough with countries that he believes are showing America insufficient respect.
The problem is that tariffs do most damage to the nation applying them. Yes, they may incidentally harm Chinese (or Mexican or Canadian) exporters. But they will do vastly more damage to the American economy.
The way Trump frames his proposal – ‘we will be charging China an additional 10 per cent’ – is misleading. It is not Chinese companies that will be charged, but American consumers. As prices rise, Americans have less money to spend on everything else, which means that their economy contracts. Almost all of them will be worse off.
Donald Trump with China’s President Xi Jinping in 2019. Even if British imports end up being exempted from Trump’s tariffs, we will still suffer dire consequences as the US economy is affected by this needless self-harm
Cargo containers stacked at the Port of Los Angeles. Trump has proposed a universal tariff on goods imported by America of between 10 and 20 per cent
All this should worry us in Britain. We are the single biggest overseas investor in the US. Even if British imports end up being exempted from the Trump tariffs – and we’ll come to that in a moment – we will still suffer dire consequences as the US economy is affected by this needless self-harm.
We have been here before. In 1930, Congress passed an Act imposing levies on some 20,000 imported goods.
US trade fell by two-thirds. Erstwhile allies, notably Canada, retaliated with tariffs of their own. Prices surged, leaving Americans with less to spend and causing the economy to cramp up.
The recession, which had been coming to an end, was instead deepened and prolonged. Unlike Britain, which stuck to free trade and enjoyed a decade of impressive growth, the US condemned itself to the Great Depression.
Do Americans really mean to go through all that again? It is true that, these days, most trade is in services, which are not subject to tariffs. But, even so, most observers believe that Trump’s declared policy would reduce the world’s economic output by between 1 and 4 per cent.
Sophisticated observers claim that the tariffs won’t take effect, because the whole thing is a negotiating tactic. The very prospect of a trade war will make the Chinese hang drug dealers and the Mexicans police their border and the Canadians – well, perhaps Trump wants them to ditch their prime minister, Justin Trudeau, to whom he has taken a dislike.
Trucks queue to cross to the US from Mexico. Trump’s decision to raise customs duties in his first term led to retaliatory tariffs from China, India, Turkey, Canada, Mexico and the EU
The trouble is that, even as a negotiating tactic, tariffs are self-defeating. Trump’s decision to raise customs duties in his first term led to retaliatory tariffs from, among others, China, India, Turkey, Canada, Mexico and the EU, some of them still in place.
Why did these countries respond to America by self-harming, inflicting equivalent injuries on themselves? Because, in these situations, politics edges out economics; the desire to retaliate overcomes self-interest.
To make matters worse, this protectionist spasm coincides with rising global tensions. The war in Israel has, as feared, spread both to Lebanon and directly to Iran. There are fears of cyber attacks against Britain; one Cabinet minister speaks of millions being left without power.
Meanwhile, as the war in Ukraine approaches its endgame, Western missiles are being used for the first time on Russian soil and Russia is responding with long-range strikes against Ukrainian cities.
Just as during the 1930s, domestic protectionism and international instability are in danger of forming a vicious circle. As people become poorer, they turn to more authoritarian policies, which make them poorer still.
The wars of the early 20th century were products of a protectionist age. That is why, in 1945, the victorious allies were determined to re-establish free trade.
‘The whole world is concentrating on attaining the objectives of peace and freedom,’ declared President Truman in 1947, the year that established what is now the World Trade Organisation. ‘These objectives are bound up completely with a third objective: re-establishment of world trade. In fact, the three – peace, freedom, and world trade – are inseparable.’
The next six decades vindicated him. But we are now, again, moving in the opposite direction.
What can Britain do? For whatever reason, the incoming US President has a soft-spot for us. He loves the Royal Family. And so – he tells everyone – did his mother, who emigrated from Scotland in 1930. People around Trump are signalling that Britain can exempt itself from his proposed tariffs by signing a comprehensive trade deal with the US.
Such a deal was being negotiated between Trump and Boris Johnson up until 2021. Joe Biden, who did not want to see Brexit rewarded, and who in any case had promised during his election campaign to halt all trade deals, suspended the talks. But the work already completed remains on the table.
There is no question that Britain should revive the talks. The US is our single biggest export destination, and a trade deal would have happened decades ago had it not been for our EU membership, which subjected us to the protectionist interests of Continental producers.
There is no clash. We already have a tariff-free trade agreement with the EU. Why not get one with the US, too?
The trouble is that Labour, in opposition to the trade talks under Boris, invented some absurd scare stories, ranging from Trump wanting to buy the NHS to his flooding this country with ‘chlorinated chicken‘.
Keir Starmer’s instinct will be to suffer in solidarity with the EU rather than do a deal with a man whom elements of his party have built into a symbol of depraved greed. He is at risk of missing his opportunity. If he does, it won’t be only our country that suffers.
This is a pivotal and dangerous moment when many feel the world is edging towards a global conflict. British leaders are supposed to exert a wise and calming influence on our chief ally, moderating American policy in the interests of the world at large.
If only we had a leader up to the task.
Lord Hannan is president of the Institute for Free Trade.