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Hi, David here. We're doing a new thing with the Briefing Room podcast, which is we're packaging up some bits you may have heard before on other programmes which are still very relevant, so they can explain specific things that are going on in the world. This week, tariffs. Donald Trump is in the White House, and he warned in his inaugural address that the US will tariff and tax foreign countries to enrich our citizens.
So let's find out exactly what a tariff is and how they've been used in the past. Here with me is Duncan Weldon, economist and author of 200 Years of Muddling Through.
Duncan Weldon, what is a tariff? I mean, the best way to think of a tariff is just to call it a tax. A tariff is essentially a tax imposed on foreign goods as opposed to domestic goods. And at what point is a tariff imposed? So a tariff is imposed at the time that a good is imported. I mean, say that we have domestically produced cars and foreign produced cars. The government could put a 20% tariff on foreign produced cars. So at the time that a foreign car was imported into Britain...
you know, there'd be a 20% tax on that. Now, let's just go through a brief history of tariffs. Have they always existed? Have they always been popular, unpopular? So if you go all the way back to sort of the early modern period, the 1600s, the 1700s, you know, governments at that time ran themselves generally with an economic system that has come to be called mercantilism. And mercantilism was a belief that
exports were good for your country and imports were bad. Because if your country was importing stuff, you were sending money, gold, to foreigners to pay for them. The idea was you want to keep imports out because imports aren't good for you.
If you talk about the history of it, Britain was for a long time what was called a free trade nation. Britain embraced free trade in the 19th century all the way into the 20th. Britain was a country which didn't really have tariffs, which was happy to have foreign goods flowing into Britain. Other countries took different approaches. Germany and the United States in the 19th century had a lot of protectionism.
The general sense, though, is after the Second World War, in the rich world, the developed economies, tariffs were generally low and falling until about a decade ago. Let's go back to the question of who actually pays the tariffs. You say it's a tax. You say it's levered at the point where the good comes in. But who actually pays for it?
Well, if you listen to Donald Trump, it's the country on which the tariffs have been imposed. Sadly for Donald Trump, economists would disagree. If you put a 20% tariff on Chinese imports into the United States, ultimately the costs of that are going to be paid by American consumers. Now, they probably won't pay 20% more. Some of it will be absorbed in the forms of lower profit margins. The currency of the country subject to tariffs might fall to offset tariffs.
some of it. But ultimately, it means higher prices for consumers. Now let's look again at the trends over time between free trade and tariffs. We've lived through the era that people call globalisation and I think it was a general presumption that globalisation meant the freest of free trade that you could get. I mean completely. We had falling tariff levels, rising global trade throughout the 1980s, the 1990s, all the way up to 2008.
more goods were imported, more people crossed borders, more capital crossed
cross borders. And yes, the general move was towards lower tariffs, more free trade. Now, economists were always clear that if you've got two countries engaging in trade that is mutually beneficial, both countries benefit from this trade. But economists aren't stupid. They could see there were winners and losers within countries from free trade. Now, what an economist would tell you is the number of winners in any country, the overall gains, outweighed the losses.
That doesn't mean there weren't losers. In an ideal world, some of those gains would have gone towards compensating the losers. What you mean is, if, say...
Ohio steel workers lost their jobs, but cheaper Chinese steel came in, then actually some other American industries would be benefiting from that. Overall, America is benefiting from this trade. But yes, there are losses among, say, Ohio steel workers. And yes, in an ideal world, your domestic political system would be able to take some of those gains from the winners and compensate the losers because there is more money than there would be otherwise. Now, that obviously didn't always happen.
Now overall, does the size or shape of your economy impact on whether free trade or tariffs are good or bad for you? The size of your economy does matter for a couple of reasons. Firstly, because if you're a continental-sized economy like the United States that can produce domestically an awful lot of different goods and services and have different bits of specialisation, you can probably be more self-sufficient than a small open economy like Britain or the Netherlands or France.
Secondly, because if you've got a lot of economic weight in the world, it is easier to throw that weight around. If a small country puts tariffs on a large country and the large tariff responds with its own tariffs, the small country is not going to win that economic fight. Now, what do you do if you're a country like the UK and you're facing competition in certain markets from China and you were just to say, we won't have any tariffs at all, we will just let it rip? Would we stand in danger of losing whole industries?
Economists would say, in a first best perfect world, there are no tariffs anywhere. We buy from the most efficient producers wherever they are in the world. Now, we don't live in a first best world.
There are distortions in the world. If you're looking at something like China, the argument becomes that, say Chinese steel in the last decade, that what European steel producers have faced is not free and fair market competition because the Chinese government has shoveled cheap loans and artificially subsidised and kept costs down for Chinese steel producers. They
They've produced too much steel and then, in the terminology, they're dumping that steel on foreign markets. Now, there is a case if you're facing dumping, you know, artificially cheap Chinese steel, to use tariffs to hold that out for a while. Now, I think that's fair in that case. The problem is, though, this is a very slippery slope. What counts as fair competition? What doesn't count as fair competition?
If you are a country who is on the receiving end of this dumping, you don't necessarily want your own bit of that industry devastated in the short run. If a country like, say, as big as the United States says, well, actually, we are going to deploy tariffs as a major element of policy, part of it for trade, maybe some of it for...
other reasons, will that country be able to get away with it without feeling the pain of it in the short, medium and long terms? So I think in the short run, if the United States was to move heavily towards tariffs, in the short run, we'd see an awful lot of economic pain in China, in parts of the European Union, in bits of Britain that export to the United States.
In America, in the very short run, you'd see a pick-up in inflation as prices rose because of these new taxes. We should call them taxes in this case, put on lots of goods. But in the short run, you might even see a boost in American output. But, and it's a big but, in the medium to the longer term,
What you're left with is higher inflation, more costly goods in America, and more importantly, less competition for American industry, less efficiency, less productivity, and slower growth in the long run. The general effect of moving towards this sort of protectionism will be maybe a short-term boost in employment and output, and that's a maybe, but almost certainly a long-term cost in terms of inflation and weaker productivity growth.
Duncan Weldon. Now let's find out what we know about Donald Trump and tariffs from the last time around. With me is Sam Lowe, partner at Flint Global, a financial consultancy. Sam Lowe, have tariffs always been an issue for Trump? Trump's love of tariffs stems from different assumptions.
One is that tariffs create leverage, so he can threaten a 10% tariff or 20% tariff on a country and they will give him something he wants to avoid those tariffs. The other reason I think he likes them in the context of being president is that he found he was able to apply them in some instances without having to go through the full democratic process, without having to involve Congress, without having the needing to be a vote.
And the third reason is that it seems he's become increasingly fixated on the idea that other countries are taking advantage of the US. By taking advantage, I mean they are persistently selling more to the US than they are buying. And he sees tariffs as a means of addressing that and rebalancing said trade. It does seem paradoxical that the richest and most powerful economy in the world sees itself as a victim of trade. And Trump's even annoyed with America's trade relationship with Canada today.
Does it make sense? It doesn't make sense from the outside. The idea that the richest country on earth is somehow being penalised by the system it largely created is seemingly absurd. But the point I'd make is that it's quite a commonly held view in the US and it straddles party line.
Many Democrats also believe that the current trading system as it's set up penalizes U.S. workers, that it's led to offshoring of jobs. It's led to the offshoring of heavy industry and manufacturing. It's led to the growth and development of China to the point that it's become a competitor. So while it does seem absurd, it's not an uncommon view in the United States.
Let's look back at the Trump first administration and be a bit more specific about what tariffs he brought in when he was in power for those four years. The first tranche of tariffs were related to solar panels and washing machine imports. So this was a he imposed a global tariff, a tariff on solar panels and washing machines imports.
from everywhere. And this did lead to some retaliation from China, for example, South Korea, bringing a WTO case. And this was in early 2018. World Trade Organization. World Trade Organization. And around the same time, he initiated new tariffs on steel and aluminium. So this is a 25% tariff on imported steel, 10% tariff on aluminium. And this is really what most people think of when they discuss trade wars in the context of the First
Trump administration because these tariffs triggered a reaction from everyone. The EU reacted by putting eventually tariffs on headline, well-known American companies such as Harley Davidson and also different whiskeys.
China also reacted. Trump had to negotiate with Canada and Mexico. It triggered quite a lot of global uncertainty and disruption. The third category, which people also talk about, is a lot of the China-specific tariffs. Trump eventually imposed tariffs on around $335 billion worth of US imports, and China retaliated as well. In the midst of this, people forget Trump actually negotiated a trade deal with China in this time, which saw some of the tariffs
fall away. But these tariffs did linger and continue into the Biden administration, where President Biden really did just continue on the same trend. Then other tariffs related and export controls related to semiconductors. There are also the discussion about applying tariffs to all automobile imports into the US on a national security basis, which is very confusing for those of us who don't consider cars a national security issue.
But those never materialized. He did threaten tariffs on Mexico in relation to illegal immigration across the border, although that was dealt with at the time via an agreement with the Mexican government. So he really does enjoy tariffs.
What can we say about that first administration, the impact the tariffs that were imposed actually had? In terms of the impact on the US consumer, all of the studies that have been done demonstrate that these tariffs came at a cost to the US consumer. But I suppose...
The point Trump would make is that the US economy fared very well during that time. So there's a question to how much that was really felt. The tariffs have also been shown to demonstrate that they negatively impacted those US manufacturers that used inputs from abroad. So import parts and then put them together in the US increased their costs. But again,
The Trump-1 economy was pretty buoyant. So the academic view and all the evidence suggests that these tariffs were negative for the US economy and also negative for the trade partners they were imposed on. But it's not necessarily viewed that way by the politicians involved.
Thanks very much for listening to today's Explainer. We'll be publishing these every week, a new mini-series. So make sure you follow The Briefing Room on BBC Sounds or wherever you get your podcasts so that you don't miss an episode when we publish them. And also remember you can go back and listen to any of our recent episodes on BBC Sounds. They're available now. Until the next time, goodbye.