The current tariff regime is no longer abreast of the times

Donald Trump is right. The current tariff regime is no longer suitable for today’s world economic order. However, it would be highly complicated to change the system. Nor will the global tariff dispute unleashed by Trump lead to a solution of the problem. Indeed, all will suffer from the upside tariff spiral.

Actually, the Europeans do not really have any cause to complain in the current discussion about punitive and protectionist tariffs. According to the calculations carried out by the Munich-based ifo Institute, the unweighted average tariff imposed by the EU on goods imported from other countries is around 5.2 per cent while the average tariff levied by the USA on imports is 3.2 per cent. But this simple average paints only a fuzzy picture: across the many product groups it does not reflect the economic importance of the goods involved in foreign trade. This is clear in the product group “cars” which is currently the subject of discussion. At the moment, the EU imposes a ten per cent tariff on US cars while the USA demands only 2.5 per cent for cars imported from the EU. But the USA levies 25 per cent on light trucks, pick-ups and SUVs.

US President Donald Trump picks up on this ten per cent, criticizing it as unfair because far more European or German cars are sold in the USA than US cars are sold in Europe. Apart from the fact that the choice of one’s own car is an individual buyer-decision and that a not insignificant number of European and German cars are in the meantime produced in America and some of them are re-exported from there, the current tariff regime also dates back to an era with completely different objectives. Today’s tariffs are the outcome of the so-called Uruguay Round (1986-1994), a multilateral liberalization round with 124 members. These negotiations led to the foundation of the World Trade Organization (WTO).

The underlying economic conditions and ambitions of the time were very different from today’s. While the emerging markets hoped to gain easier access to the markets of the industrialized countries, the objective of most of the industrialized nations was to protect certain key industries. Most European countries, for example, wanted to protect themselves against Japanese car imports. For the USA, by contrast, better access to the markets for its agricultural products was more important. For this and other reasons the USA agreed to the EU’s comparatively high export tariffs on cars.

In the meantime, the structure of world trade has changed. Globalization has progressed, creating world-wide and cross-border value-added chains. Many of the emerging markets are now completely integrated in these value-added chains, as shown by China’s accession to the WTO. The former Warsaw Pact countries are now also members of the WTO. The EU has in the meantime grown from 12 to 28 members and is now one of the world’s largest economic areas. Trade in finished products, which was still at the center of negotiations in the Uruguay Round, has now lost importance in favor of trade in intermediate products. Multilateral negotiations conducted since then on a realignment of existing tariffs, for example within the framework of the Doha Round, have stalled.

Since 1990 several bilateral preferential agreements have been signed in order to circumvent tariff regime problems within the framework of the WTO and to achieve a greater liberalization of free trade. By 2010 over 500 agreements had been signed, leading overall to a significant reduction in average external tariffs. This greatly increased the volume of world trade and fueled global economic growth – until the financial crisis hit. Since the crisis, the number of new preferential agreements that have been signed has decreased significantly. The most recent and popular example was TTIP, the free trade treaty that was planned between the EU and the United States, but which ultimately came to nothing.

The current tariff regime is no longer really appropriate for the current world economic order. In this respect the US government and US President Trump are right. It would presumably also be very difficult to change the current regime as many countries would have a lot to lose. However, Trump’s aggressive approach will supposedly not bring any immediate success, either. Initially, Trump will be supported in the tariff dispute by the very stable US economy. But the pace of economic growth would probably also slow down in the USA in the event of further escalation. What’s more, the countries concerned are unlikely to simply give in.

It is far more likely that tariffs will initially spiral upwards and the trade partners will probably only come to their senses and return to the negotiating table when economic growth slackens in all countries. In relative terms the US economy will probably lose less than Europe and Asia. This is precisely what the USA’s tactics are based on.

Overall, a slowdown in the momentum of economic growth is to be expected, especially in Europe. How much it slows will depend on how long the tariff dispute goes on. But at the moment there is no sign of its coming to an end any time soon

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