US tariffs
We seem to be entering an era of further rowback from the multilateral global trade network. Commitment to, and confidence in, the existing multilateral mechanisms is weakening and some parties are more willing to act unilaterally. Arguably the high watermark of trade liberalisation occurred in the later 1980’s, and the 1992 Uruguay Round was a miracle marked by bitter opposition to further liberalisation, after which progress on multilateral agreements for tariff reductions virtually ceased. In recent times the pressure has been growing to increase rather than decrease tariffs.
Tariffs are paid by companies importing goods from overseas, not by the foreign companies selling the products. Tariff hikes are essentially a protectionist measure designed to shield domestic industry from international (usually cheaper) competition.
The history of such measures however suggests that they may actually disincentivise innovation and efficiency saving in the protected industries, and the cost of import substitution is significant. Increases in import tariffs could also lead to a rise in inflation if the company buying the goods (the importer) passes on the cost by charging their customers more, especially if there is no acceptable domestic substitute.
Increased tariffs do not directly benefit the protected industry, and retaliatory tariffs do not benefit the affected exporters or the industries relying on imports targeted in retaliation.
Even so US President Trump is using tariffs as a weapon of trade policy. The first tariff measures took effect in February and March and further, wider measures were announced on 2 April.
Major US trading partners including Canada, Mexico and China which were hit first almost immediately imposed “countervailing” duties on locally-imported US products. China for example has targeted US agricultural products, and counter actions could well include non-tariff measures as well as additional tariffs.
President Trump has in turn threatened retaliatory tariffs against countervailing tariffs, which could lead to a “tit-for-tat” spiralling trade war. But conversely, he has said that there could be exemptions and/or reductions in the tariff levels imposed if the policy achieved its desired objectives. Most recently US tariffs against imports from the UK were notably lower than for some other countries.
UK Business Secretary Jonathan Reynolds argued in March that the UK has a strong case to avoid US tariff action, given the amounts Britain exported to the US are small in comparison to other countries and sectors such as defence arguably have different priority settings. These considerations may have had some effect in limiting US action against UK exporters, but did not prevent imposition of the “baseline” tariff rate.
The UK has said it will not retaliate immediately to new measures, despite many in the steel industry calling on Britain to join the European Union and Canada in a co-ordinated response.
It is worthwhile giving some thought to how things could develop, and I think there are 7 possible situations which might impact businesses trading with the US and it is worth considering the possible repercussions, wherever in the world your company is located, all of which might equally apply to any similar action – whether from the US or another country – and whatever industrial sector is targeted:
1. Producers of affected products in the targeted sectors located in the countries concerned may seek alternate markets including the UK. The Mexicans signalled this as a possibility for them. No doubt Chinese and EU companies will do the same.
2. It is likely that some producers may (try to) sell to the UK at or below “market price” – aka dumping – which in turn could lead to an increased possibility of anti-dumping or countervailing action by the UK (Trade Remedies Authority). The European Commission will likely become more active in policing pricing of imports into the EU.
3. Conversely UK imports might become relatively more cost-competitive in the US market> If UK products attract a lower US tariff rate, some companies may relocation production to the UK and UK exports to the US will be cheaper..
4. More expensive “luxury” brands tend to be less sensitive to tariff hikes than mass-market products. This might lead some UK exporters to attempt to up-sell or re-brand as luxury products, if this is a viable strategy for them.
5. If the US imposes tariffs on UK goods, this will affect US customers’ costs, with implications for business including deferment or cancelling of buying/investment decisions. This will be most painful for companies involved in ongoing trading relationships and will potentially limit international expansion opportunities for some successful brands.
6. It is a near certainty that the UK or EU (which has robustly countered President Trump’s assertions) will impose countervailing retaliatory duties. Retaliatory tariffs would not necessarily be in the same sectors as those targeted by the US.
7. There is a possibility of a dispute being raised at the WTO. The idea of increasing tariffs unilaterally appears to be inherently contrary to WTO rules, especially if the tariff rates for the products concerned are “bound” by international treaty. Thus far, this does not appear to have happened but someone, possibly the EU, might want to do it just to signal their commitment to the existing international trading order. If a dispute is raised the history of earlier disputes (e.g. Boeing/Airbus) suggest that a WTO dispute process is unlikely to lead to a reduction in the relevant tariffs in the short- to medium-term.
In the case of (additional) tariff measures imposed by the US against a country unilaterally, any countervailing measures will be aimed specifically at the US, which could significantly inhibit US exports, and any retaliatory measures might not – indeed probably will not – be aimed at the same sectors as targeted by the US administration, cf Canada.
It is possible that in future other countries (India, China or Japan perhaps) may decide to follow suit in pursuit of their own interests if they perceive this as an effective tool to support their own interests.
The recent measures announced by the US apply to all imports. It is likely that any response in terms of reciprocal tariff would need to be similar in scope.