Monday, December 22, 2008

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.


Anonymous said...

When he says we he means in France.
No way he will be crying over Landrover Jaguar for example.

Martin said...

Re train journeys, Laban.

Or indeed journeyed through Lanarkshire, or walked the streets of Greenock.

paul ilc said...

The UK is not an industrial wasteland.

In 2005/6 (the last year for which comparative figures are available), the UK was the 6th largest exporter by value of manufactured goods in the world (behind the US, Japan, China, Germany and Italy - but well ahead of France in 8th place).

Incidentally, ignoring the Euro area and considering only states,in 2006, the UK had the 4th largest service sector - well behind the US, Japan and Germany.

Overall, the UK was the third largest exporter of goods and services in the world - ahead of China, Japan and France.

(Source: POcket World in Figures, The Economist, 2008/9)

Anonymous said...

Expect to see the Greens vigorously promoting tarriffs and other trade barriers. With exemptions for middle-class staples such as wine, pasta, rice, etc...of course.

Martin said...


Where are the figures from?

Anonymous said...

Re Paul's numbers.

We often hear about how the UK is one of the worlds biggest arms suppliers.

Maybe its true but I see little evidence for it.

Generally given a choice foreign militaries dont buy much in the way of British guns, tanks, aircraft, ships, helmets and so on.

Even British police forces favour US kevlar helmets rather than the Brit version. No-one wants the SA80 assault rifle, not even British squaddies.

As for army trucks, we dont make trucks any more, so that cant count.

I suspect its down to a few one off deals. Tornado for the Saudis, Hawk planes for the USN and selling off surplus RN ships.

Does anyone know any different?

Anonymous said...

We often hear about how the UK is one of the worlds biggest arms suppliers.

This may be true or false. Perhaps you could ask yourself who makes the claim. Many still maintain (despite all the evidence to the contrary) that Saddam was armed by the US and the UK. Total bollocks of course but true if your SWP membership card is up to date.

paul ilc said...


My source, which I give at the bottom of my comment, is The Economist.

paul ilc said...

Anon 0830:

As far as I can see from an internet search, UK defence contractors (eg BAe Systems; Rolls Royce; Smiths; GKN; Qinetiq; Vosper Thorneycroft, Alvis, etc) supply aircraft, artillery, communications/IT/electronics, missiles, naval vessels, ordnance, armoured vehicles, engines, helicopters, and maintenance/professional services.

Anonymous said...

We sell an awful lot of Radar equipment in a clever little scam. We sell a country a radar, then we sell equipment that can block that radar, then we sell equipment that can get around the blocking of the radar, then we sell something that can disguise stuff from radar, then we sell radar that can get around the disguising of radar.

Anonymous said...

Honda cars, Toyota cars, Peugeot, Vauxhall Opel, Ford, BMW Mini. Easily forgotten as they are not "British" - just happens that not only do we make a lot of them, and export them, but we now sell a lot of parts into those "foreign" cars.

Anonymous said...

Can anybody tell me where this "We don't make anything anymore" meme first arose?

paul ilc said...

Anon 10:55: Good point. I'd overlooked that.

Anon 10:57: Yes. And recently (2006? 2007?) UK car production broke all records, I believe...Not bad for "an industrial wasteland"! (Martin, are you listening?)

Anon 10:59: I don't like The Dawk's pseudo-scientific term - meme - for a popular idea, but I sympathise with your question. Where did this bizarre idea spring from? Perhaps Laban and Martin can enlighten us?

Granted the UK has gone from being the "workshop of the world" to being a major but second-rank manufacturer, and certain UK communities (who believed they had jobs for life, generously subsidised by the rest of us) have had to feel the pain of the readjustment to economic reality (eg the NE of England, parts of the West Midlands, Lanarkshire), parts of the UK appear economically desolate --- but only because of their lack of enterprise and their culture of welfare dependency.

Elsewhere manufacturing has grown steadily and sustainably. So, for example, in Cambs and parts of W Suffolk, new hi-tech manufacturers thrive providing products that the world wishes to buy.

So the UK is not "an industrial wasteland". But economic Cassandras, like Martin, will not be deterred: against all the facts they will reiterate their views, I fear. That said, even if Laban's economic perceptions tend to be skewed, his cultural critique is surely spot-on!

Anonymous said...

I dont like the meme.

Its not without some utility but the degree to which the likes of Dorkins pushes it is going too far down the route of nurture vanquishing nature.

That is the paradox that many liberals face. Evolution, rationality is all very well when bashing Christian creationists. When it comes to intractable racial differences they dont want to know.

togo said...

Notice how massive bailouts for the
financial sector are never denounced as "protectionism" by the mainstream

Anonymous said...

The Economist is the 'intellectual' cheerleader for globalisation.

It's now feeling a bit uneasy because the whole system may well unravel.

Anonymous said...

We still manufacture things, yes, but our manufacturing is owned by foreign companies, which means the profits ultimately go abroad.

The financial sector has no nationality, and as such it is ridiculous that the taxpayer should bailout private companies which have no loyalty to this country.

The City wants cheap labour yet also thinks the taxpayer should pay for their bonuses. Their contempt for ordinary people is plain to see.

We are being screwed.