US tariffs pose a danger to the global economy

Innovation and productivity will be casualties from a trade war

The US commerce secretary Wilbur Ross said that the rise in US steel prices reflected 'profiteering' by speculators © EPA

Having spent a long time hoping that it was all bluster, the world’s investors, companies and policymakers have been forced to admit that a trade war is under way. How far it escalates remains unclear, but initial responses do not suggest an easy way of defusing the conflict.

The companies in the line of fire will certainly be affected. Shares in German carmakers — the auto sector is the next industry in Donald Trump’s sights — fell in unison this week after Daimler was the first major vehicles company to issue a profit warning because of tariffs. The US president’s threats against EU car exports are still in their early stages, but Daimler suffered because its US operations, which sell into China, will be hit by the retaliatory duties Beijing is imposing on American cars.

No country wins in a trade war, whatever Mr Trump thinks. The bizarre comments by his commerce secretary, Wilbur Ross, that the rise in US steel prices following the imposition of tariffs reflected “profiteering” by speculators merely underlined the economic illiteracy involved. If you restrict the supply of something, its price tends to go up. That is how tariffs are supposed to work.

There is no excuse for ignorance about the potential import of what Mr Trump has done. When the US hit trading partners with its infamous Smoot-Hawley tariff in 1930, Congress spent almost no time beforehand discussing potential for retaliation. The escalation into a global tit-for-tat protectionism, though it did not cause the Great Depression, made it worse. Many years of patient work during the creation of the postwar trading order were required to undo it.

These days, there should have been little doubt that the likes of China and the EU — and even Canada, despite its dependence on trade across the American border — would reciprocate Mr Trump’s tariffs. That makes those tariffs even more reckless.

If anything, the pain that countries will cause by retaliating is even more immediate than in the 1930s. Compared with earlier decades, the global integration of supply chains means that many imports are destined for use in domestic production. Cutting one’s own car manufacturers off from specialist imported components is a spectacularly stupid move.

True, the estimated direct cost of even a severe trade war is less dramatic than might be feared. The Peterson Institute in Washington reckons that if Mr Trump imposed his 25 per cent tariffs on cars and car parts across the board and all trading partners retaliated, it would reduce output in the US car industry by 5 per cent and employment by 4 per cent. That would be a shock, but not a huge one. Even a full-blown trade war, with tariffs on all goods worldwide raised to 10 per cent, would reduce global GDP by less than 2 per cent.

But more damaging than the immediate threat is likely to be the longer-term impact on innovation and productivity. Modern supply chains are not just disaggregated production lines. They are networks for learning and technology in which knowledge is created and disseminated across the globe.

The US is right that China, with its forced technology transfer, attempts to capture and exploit too much of this knowledge purely for its own benefit. But the answer to that is to make the system run more openly and fairly, not to destroy it.

Mr Trump’s tariffs are leading the global economy into a highly dangerous place. More enlightened governments must do their best not to multiply his egregious errors.

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