America First – At what cost?

America First

Just as economies around the world show signs of growing in sync (which is rare) Donald Trump has announced tariffs on imported steel and aluminium. Stock markets reacted badly to the news, on fears of a possible trade war. After taking rising interest rates and stock market volatility in their stride, the threat of protectionism may dent continued investor confidence in economic recovery.

Not their first rodeo

Although Donald Trump did promise tariff measures during his election campaign, as part of the “America First” agenda, they still caused the resignation of his Secretary for Commerce who thought it a bad idea.  It must be said that the US does have a history of protectionist measures. In the Great Depression of the 1930s the average tariff on imported goods rose by approximately 20%. This is considered to have contributed to the slump in world trade during that turbulent decade.

“Rust belt” decline, more than meets the eye

Trump’s move can perhaps be seen as a reaction against globalisation, in which there are winners and losers. The big US tech companies have benefited from globalisation but other domestic industries lost out. It is perceived by many that America’s “rust belt” has been a key loser. However the reality is perhaps more nuanced. It is true that US steel employment has decreased by 50,000 since the turn of the century. However the US steel industry does make a profit, production has actually risen since 2010 and job declines are more to do with greater efficiency in steel mills than foreign competition. Therefore one wonders if the domestic steel industry needs help? Looking at aluminium where imports account for 90% of the market, tariffs will raise costs for those industries which use aluminium. Is that a benefit?

Tariffs or quotas?

Protective policies are generally used to shield domestic industries against foreign competition.  Tariffs are usually the most favoured way of implementing such a policy as they raise the price of imported goods versus domestic producers, usually to protect industries hit by recession or depression. An alternative route is to impose import quotas, setting a limit on the total permitted imports of a particular good, which is generally thought to be more effective than tariffs. After all, some users may be willing to pay the higher price.

Most economists see protectionism as a bad thing. First it is bad for the consumer by making goods more expensive and restricting choice. Second, it can prop up inefficient industries, which without competition may stagnate, fail to innovate and simply pass on higher costs than might otherwise be the case. And finally a trade war may spread. Others countries may retaliate as the Chinese have already done with US imports. If this means an overall reduction in world trade no one will benefit. And finally, a trade war can be stagflationary, damaging growth and raising inflation.

To be continued…

So where will this end and could it derail our economic recovery? If the trade war does escalate then that will probably be bad for stock markets. If it leads to less world trade then it follows company sales will suffer, if they can’t cut costs to maintain profits. Any resultant fall in earnings will diminish the value of shares. Let’s hope that the rosy picture of synchronous growth we saw at the start of the year does not turn somewhat darker. Watch this space!


The above article was previously published by Parmenion on 12th April 2018