Tariffs and trade wars

The world today is approaching what has been termed as global economic chaos. Geopolitics is usually affected by wars, economic depressions or global pandemics. This imminent global chaos is the virtual result of one man’s actions – President Donald Trump. His imposition of severe tariffs on countries, friends and foes, has been the major cause. This has been worsened by the inconsistency of even his most severe trade policies. This imposition of tariffs has been inconsistent and has caused a virtual roller coaster in the world economy. Stock markets all over the world have literally been experiencing severe drops and inflation and recession have become generally accepted as the next economic disruptions that will happen worldwide.

It is the inconsistency and the extremely high rates and the suddenness of Trump’s tariff wars which are causing confusion in the global economy. Tariffs are taxes or duties imposed by a government for goods and services that are imported or, in some cases, exported. This is not a new concept because the history of tariffs stretches back thousands of years.

In the ancient civilizations such as Mesopotamia, Egypt, Greece and Rome, tariffs were imposed on goods entering and leaving their territories to regulate trade and generate revenue. Even five to six centuries ago, the emerging nation-states used tariffs as a tool to fund governments and protect domestic industries. Even at that time, high tariffs on imports were being used to achieve a favorable balance of trade. During the Industrial Revolution of the 18th and 19th centuries, many countries adopted tariffs to protect their own local industries from foreign competition. Even the United States was already implementing tariffs during the 19th century to protect its young industries.

The use of tariff reached a peak in the early 20th century when even the United States imposed stiff tariffs on imports during the Great Depression. However, this act resulted in exacerbating the global economic downturn by reducing international trade.

After the Second World War, there was a global shift towards reducing tariffs in order to promote global trade. The establishment of institutions like the General Agreement on Tariffs and Trade (GATT) in 1947 and its successor, the World Trade Organization (WTO) in 1995, aimed to lower tariff barriers worldwide.

However, tariffs remain a significant economic tool often used to protect domestic industries or as a response to trade imbalances. However, while tariffs can protect domestic interests, its imposition also risks creating trade wars that can lead to economic stagnation.

Donald Trump has justified the imposition of tariffs as a means of protecting domestic industries from foreign competition and for generating government revenues. By protecting local industries, Trump believes that this can prevent job losses due to competition from cheaper foreign imports. He has also proclaimed that tariffs can reduce reliance on imports and foster the development of domestic self-sufficient industries.

Tariffs can also be used as a leverage in a government’s foreign policy and allows governments to push for better terms in international agreements.

Trump has been heard to use this argument when for instance, he said publicly that the best way for Canada to escape the imposition of higher tariffs was by becoming the 51st state of the United States.

The United States has also imposed the highest tariffs on China in an obvious bid to weaken the Chinese economy and to impose better terms for American business in China. Personally, it is the protection of domestic industry that I find is the strongest argument for the imposition of tariffs. The rise of China as a manufacturing giant and the source of cheaper imports led to the obliteration of many domestic industries in countries like the Philippines. There was a time, for example, when there was a thriving footwear industry in Marikina. The entry of cheap footwear from China forced most of these companies to close, rendering thousands of workers unemployed.

Even in the Philippines, there is now a major debate whether we should allow the importation of rice and other food products to lessen domestic prices. The other side of the argument is that importation will jeopardize the livelihood of numerous farmers and fishermen in our country. In order to prevent this, the only solution is either to increase tariffs or minimize the importation of food products.

We can see that there are advantages to imposing tariffs. However, this must be weighed against several disadvantages also. Tariffs increase the cost of imported goods which leads to higher prices for consumers. The result is a virtual reduction of the purchasing power of the consumers.

Tariffs can also protect inefficient domestic industries from competition and discourage innovation and productivity improvement. On a global scale, tariff impositions can lead to trade wars, which is what is happening today. Nations are retaliating with their own tariffs to counteract the Trump tariffs. This is escalating into trade wars which are not only harming global trade relations but economic stability all over the world.

I do not think that we can have a world without tariffs. However, the current trade wars have amplified the importance of multilateral organizations like the WTO to find the optimum solution to these trade dilemmas and ensure that the interests of even the smaller economies are also protected from a world dominated by the actions of a few great powers.