13 November 2024

ECIPE's Henig: Europe’s Renewed Trade Policy Challenge

Inevitably talk is already turning to the way in which US trading partners will respond to Trump’s proposed 10% or even 20% tariff. There aren’t going to be good answers to that, but we’ll be better prepared if we understand the starting point.

President Trump’s return to the White House means that trade policy will return to prominence. For one thing we know for certain is that he believes the US has done badly economically from the rest of the world, and that this needs to change.

That the US has been comparatively thriving in a world of slow growth is irrelevant to his world view. Unemployment is low but the nostalgia for the days of factories in evert town is evidently high. This may be ‘trade-blaming’ technology and domestic decision-making, but that has a long history.

By contrast, the Biden administration preferred to subsidise new production facilities and not really talk about trade. What we can also say is that this approach failed comprehensively. There is always some undercurrent of suspicion about imports, in almost every economy, and when the volume is turned up on that it cannot easily be ignored.

Inevitably talk is already turning to the way in which US trading partners will respond to Trump’s proposed 10% or even 20% tariff. There aren’t going to be good answers to that, but we’ll be better prepared if we understand the starting point.

For the UK the figures are stark. This is a trade relationship dominated by services, with the largest category of ‘other business services’ responsible for £58 billion in the four quarters to the end of Q2 2024. By contrast the largest goods sector, of medicines and pharmaceutical products, was only worth around £8 billion.

EU Member States will have different patterns, but the first takeaway is that the entire trade relationship is not at risk from goods tariffs. This is not going to be a return to the world of the 1930s.

Even within that goods trade, a considerable amount of it will be intermediates going into US production of final products. This will apply for example to automotive parts for US cars, or Rolls Royce engines for Boeing planes. While it is impossible to judge the politics at this point, we can assume that there will be considerable lobbying efforts in Washington from US manufacturers concerned that more expensive domestic production will actually increase imports of final goods.

Remember the t-shirt that was produced at the height of Trump’s first Presidency by Scott Lincicome of Cato, that “Tariffs not only impose immense economic costs but also fail to achieve their primary policy aims and foster political dysfunction along the way”? Well, the idea that even the Trump team will be united on their approach seems extremely unlikely, never mind once elected representatives are lobbied by industry in their areas.

This is modern globalisation, a world of international supply chains of goods and services, in which countries do not have the powers that politicians claim to direct their economies. In 2016 the UK voted to leave the EU with the slogan of “Take Back Control” but that has proved not to be possible. Technology was responsible for the loss of factories in the US, and Artificial Intelligence may yet have the same effect on services jobs.

 

ECIPE