Trade War or Trade Bargain?

The American President may be opening a trade bargain rather than beginning a trade war.

The following piece is written by Morgans Chief Economist, Michael Knox, in relation to recent commentary regarding potential tariffs.

Recently, the American President has suggested increasing US steel and US aluminium import tariffs. He has also suggested increasing other US tariffs to mirror the same levels as other competing countries. To discuss this, we look at information on import tariff levels in different countries provided by the World Trade Organisation (WTO). The WTO is an international organisation that regulates international trade.

The WTO came into being on 1 January 1995 with 123 member countries. The WTO now has 164 member countries and 23 extra countries with observer status. China joined in 2001 but only after 15 years of negotiations.

Hong Kong has been a member since 1995 and Taiwan became a member in 2002. It turns out that WTO members do not have to be just countries. They can also qualify if they are a customs territory with full autonomy in the conduct of their external commercial relations. WTO members represent more than 96% of global trade.

As well as memberships for all its individual countries, the European Union demanded a membership for itself (but they would, wouldn't they). Iran is not a member of the WTO. The Holy See is an observer, not a member.

Like many international organisations, the WTO is based in Switzerland. It has over 600 people in Geneva (which I am told is a nice place to have lunch). The WTO regulates the international trade in goods, services and intellectual property. This regulation is aimed at the enforcement of WTO agreements previously agreed by the members. The members of the WTO agree to allow Most Favoured Nation (MFN) status to other members. (Exceptions also allow for preferential treatment of developing countries, regional free trade areas and customs unions.)

In Table 1 below we see the trade weighted average tariff levels granted by some important members of the WTO to other members of the WTO under MFN status.

The members shown in Table 1 are the United States, the European Union, Australia, China and India.

These tariff levels are interesting given the poorly informed debate that has recently occurred about President Trump and import tariffs on steel and aluminium.

It is important to note that the US has the lowest level of tariffs of any of the countries or members in the table.

The US trade weighted average tariff is LOWER than that of the European Union. It is important to know, because of the way the European Commission President, Jean-Claude Juncker, has been pontificating (sorry Pope Francis) about what revenge he will take on the US by increasing EU tariffs.

Juncker speaks with such rectitude, you can almost convince yourself he is sincere and genuine. The EU has a higher weighted average tariff level, primarily because of higher tariffs on imported agricultural products. This is caused by the Common Agricultural Policy, which supports the price of European agricultural products. The Common Agricultural Policy, mostly came into existence in 1962 to stop the French national character from being besmirched, by eating imported food and drinking imported wine.

The Australian Trade weighted average tariff rate, is higher again than that of the European Union. This is not because of Agricultural policy. The trade weighted level of agricultural tariff in Australia is lower than that of either the United States or the European Union. Australia has a higher rate protection against imported manufacturing products. This includes a higher import tariff on cars that we don't make any more. This gives us a slightly higher rate of import tariff on non-agricultural products than China.

China, the second largest economy in the world, has a higher average import tariff (trade weighted) level than either the United States, the European Union or Australia. In spite of being the world’s largest manufacturing economy, China has a higher rate of protection on non-agricultural (manufacturing) products than the United States or the European Union. The real stand out though is Chinese agricultural tariffs. These are higher than even those of the European Union. China appears to keep these high rates of import tariffs because, in times past, it was an emerging economy. It is safe to say that as the world’s second largest economy, it has now "emerged".

India is the world’s fastest growing major economy. In current dollar terms it has the seventh largest economy in the world. It also has the highest average tariff level trade of the five WTO members in the table. India's average trade weighted level of tariff is around three times that of the United States. Its trade weighted level of agricultural tariff is ten times that of the United States and fifteen times that of Australia. Perhaps, we as Australians, can only justify this high level of protection from India, because they have such a good cricket team.

Conclusion

Poorly informed public debate would suggest that the USA has recently embarked upon a "Trade War "against other important members of the World Trade Organisation. Closer examination shows that the US has a lower average import tariff trade weighted average import tariff than either the European Union, Australia, China or India.

The American President has talked about dumping duties and raising tariffs to levels which mirror those of the European Union and China. Another solution might be that the European Union and China reduce their import tariffs down to the lower level, that the US charges them, for importing their products.

Perhaps the Europeans and the Chinese might bring actual sincerity to the debate on international trade rather the pretend sincerity of Jean-Claude Juncker.