Tariffic !

The trade barriers are starting to go up. While the company formerly known as British Steel, now Indian-owned, faces 30% production cuts, India is raising steel tariffs to protect its domestic production capacity. At the recent G20 meeting, participants swore to uphold free trade - then went home and raised duties on steel (India) and cars (Russia - a decision which provoked protests).

The Economist is distressed.

Tariff increases may be the protectionist’s barrier of choice, despite limits agreed by members of the World Trade Organisation (WTO). This is because in the past decade many countries have unilaterally cut tariffs to well below those limits. They have plenty of room to raise them without breaking any rules.

If all countries were to raise tariffs to the maximum allowed, the average global rate of duty would be doubled, according to Antoine Bouet and David Laborde of the International Food Policy Research Institute in Washington, DC. The effect could shrink global trade by 7.7%.

China has announced tax rebates for its favoured exporters, as well as pegging its currency at what America sees as an unrealistically low level. In many countries there's pressure for more import duties.

“Post-imposition of the duty, the prices for imported zinc would go up, thereby inclining buyers to opt for domestic variants,” an official of a zinc company said.

He seems to have grasped the concept pretty well. The Economist is reminded of the 1930s and the Smoot-Hawley tariffs. In fact, the increases weren't that hefty compared with the already-existing tariffs. But :

Smoot-Hawley did most harm by souring trade relations with other countries.

And that's the point. America was then the great world exporter. By provoking retaliatory tariffs, she cut off her nose to spite her face, as Ambrose Evans-Pritchard, again in Cassandra mode, explains :

There has been much talk lately of America's Smoot-Hawley Tariff Act, which set off the protectionist dominoes in 1930. It is usually invoked by free traders to make the wrong point. The relevant message of Smoot-Hawley is that America was then the big exporter, playing the China role. By resorting to tariffs, it set off retaliation, and was the biggest victim of its own folly.

Britain and the Dominions retreated into Imperial Preference. Other countries joined. This became the "growth bloc" of the 1930s, free from the deflation constraints of the Gold Standard. High tariffs stopped the stimulus leaking out.

It was a successful strategy - given the awful alternatives - and was the key reason why Britain's economy contracted by just 5pc during the Depression, against 15pc for France, and 30pc for the US.

Could we see such a closed "growth bloc" emerging now, this time led by the US, entailing a massive rupture of world's trading system? Perhaps.

Interesting to see that the 1930s depression in the UK was apparently nowhere nearly as bad as in the US, thanks to Imperial Preference - the policy of making the British Empire as nearly as possible a free-trade zone. Some remnants of Imperial Preference - like the favourable UK import regime for Caribbean bananas - only vanished relatively recently. Not that depression was a picnic for those affected - my grandfather was unemployed for pretty much the whole of the 1930s, with occasional labouring work on Government relief schemes, and his daughter went to school with cardboard in her shoes.

We have no Empire any more, so that avenue is closed to us - and America is not the world's exporter any more, so the lessons of Smoot-Hawley don't necessarily apply to them either.

Protection can work pretty well for a nation with a devastated economy and infrastructure wishing to rebuild. Japan and Korea did pretty well out of it - can you think of any candidates closer to home ? The South African and Rhodesian economies under the impact of sanctions did not collapse, but substituted imports and became self-sufficient.


I must admit I had M. Sarkozy down as a Brit-style price-of-everything sell-the-grandmother merchant. Maybe not so, although he's probably just playing to the gallery :

"We cannot be the only continent in the world that does not support its builders and manufacturers. We have to help our industrial infrastructure," Sarkozy told the assembly.

"Otherwise we are going to see an industrial wasteland."

What do you mean "are going to see" ? M. Sarkozy obviously hasn't taken a train between Birmingham and Wolverhampton or Sheffield and Leeds.