Energy Affordability - Tariffs Deep Dive
Energy Affordability - Tariffs Deep Dive
Contents
Introduction
The History of Tariffs
The US-China Tariff War
Industrial Symbiosis: A Solution?
The Role of International Institutions
Concluding Remarks
Bitesize Edition
In January 2018, Donald Trump commenced this current iteration of the tariff war against China, also known as the trade war. Previously, the Smoot-Hawley tariffs and the tariffs of 1828 were two of the periods in history that saw the largest tariff rises.
This spiralled over time into the tit-for-tat moves that we saw during Trump’s Presidency. When Biden came to office, these tariffs were kept in place, and in May this year were raised once again on materials that will be key for the future of technological innovation.
With countries pivoting to greater self-sufficiency and domestic production in key industries, where is this trade war taking us? Will it continue for decades to come, and are there any strategies that will limit the impact these periods of instability have on the world?
Introduction
Last week we discussed subsidies in the energy sector. Today, I’m going to discuss another monetary tool, the tariff. Do tariffs benefit the country imposing them, or do they weaken them? What are the key characteristics of the tariff war we find ourselves embroiled in today, and are there any solutions that could avoid this race to the bottom?
The History of Tariffs
Tariffs aren’t a new concept in the world of international trade. In 1930, the Smoot-Hawley Tariff Act saw the United States impose tariffs on imports from other countries. The United States had seen increases in productivity at the time due to electrification and the establishment of the motor vehicle industry. Huge technological innovation was underway, but the United States found itself in a problem of overproduction. Imports of manufactured goods were rising, which is something tariffs would seek to limit, but the export of manufactured goods was rising even faster.
The problem truly emerged when considering food imports and exports. Food exports were falling and with the beginning of the Great Depression in late 1929, the United States wanted to protect US farmers from imports from abroad. Hence the tariffs arrived.
These were the second largest tariffs in the history of the United States, with the largest coming with the Tariff of 1828.
Different types of tariffs can be seen below:
Ad Valorem Tariffs
Specific Tariffs
Compound Tariffs
Tariff Quotas
Anti-Dumping Duties
Countervailing Duties
Safeguard Tariffs
Retaliatory Tariffs
Environmental Tariffs
Valuation Tariffs
Seasonal Tariffs
Preferential Tariffs
Prohibitive Tariffs
Today, we’re entering a new period of shifting trade dynamics. This is marked by the tariff war between China and the United States.
US-China Tariff War
Also known as the trade war, this element of geopolitical competition started in January 2018. Donald Trump was in the White House, and he began to enact tariffs and trade barriers on China, which he had labelled as Public Enemy Number 1 during his presidency. His first tariffs were on solar panels, of which 8% of imports came from China in 2017. Trump also placed tariffs on washing machines at the same time.
Trump’s reasoning for the tariffs was to undo “unfair trade practices” and “intellectual property theft”. It has been an issue within the United States of China reverse-engineering US products to advance their innovation, hence a contributing reason for the tariffs. But the Chinese didn’t buckle under the trade measures imposed by Trump. They accused Trump of protectionism in a period where global trade had advanced economic growth, and increased economic interconnectedness leading to less conflict. Thus the Chinese enforced retaliatory measures. China’s initial response saw tariffs imposed on 128 products it imports from the United States, which also included aluminium. Other tariffs were on cars, pork, soybeans, fruit, nuts, and steel piping.
An underlying trend in these tariffs is a focus on industries that will be vital for the future of technology. Semiconductors and energy industrial buildout are especially pertinent to this as seen through the Inflation Reduction Act and the CHIPS Act In the United States. Other tariffs in key industries include steel, aluminium, aircraft parts, batteries, satellites, medical devices, and weapons.
After what seemed to be a reduction in tensions after Liu He, a top economic advisor to Xi Jinping, visited in May 2018, Trump reversed declining tensions by imposing a 25% tariff on $50B of Chinese goods shortly after.
China responded with a 25% tariff on $16B of goods imported from the US. Trump then announced a 10% tariff on $200B worth of Chinese goods, which would increase to 25% by year’s end. Trump threatened an additional tariff on $267B of imports from China if the Chinese retaliated. China did respond a day later with a 10% tariff on $60B of US imports. May 2019 saw Trump raise his previous 10% tariff on $200B worth of goods to 25%. In June, China raises tariffs on $60B worth of US goods. In short, lots of tit-for-tat.
Despite Trump’s tariffs, which aimed to reduce the US trade deficit with China, the 2018 trade imbalance was a record $323.32B. The overall trade deficit with all countries was $621B, the highest since 2008.
In January 2020, the Phase One Agreement was made, albeit a tense one. The aim was to address and rebalance the economic relationship between the United States and China. A few months later came the COVID pandemic, and many tariffs were given exceptions as the two superpowers aimed to ensure global supply chains continued to operate smoothly. After this, we were back to more tit-for-tat.
Honestly, the tit-for-tat moves are enough to give anybody a headache. The specific products are important, indicating what each country values technologically and areas where one country wants to limit the technological innovation of the other country. The biggest issue is the question that I mentioned in the introduction. Did this benefit the United States, China, or neither?
After Trump lost in November 2020, Joe Biden maintained the tariffs. Does this mean the United States has benefitted from these increased tariffs on imports from China?
Not necessarily. This is one such issue that is still unfolding. Both sides have experienced negative economic impacts since 2018. The United States did receive billions in tariff revenue, while steel and aluminium industries received a boost due to decreased competition from China. However, consumers received the brunt of the rising costs after importers had to pay more due to the tariffs and passed these prices on. This affected farmers so much that subsidies had to be provided to limit the damage caused by Chinese counter-tariffs on agricultural products.
Coupled with the COVID-19 pandemic, this period also saw global supply chain disruptions. Realigning supply and demand takes time, and during the period of imbalance, this is reflected in higher prices if supply is decreased. This again was felt by consumers and everyday citizens through inflation and higher bills.
As for China, it has contributed to a shift in economic thinking. China used to be a manufacturing exporter to the world. They are now trying to grow their domestic consumption. They have also diversified trade. Just as China accused Trump and the United States of protectionism, it appears they are now pursuing similar goals to a certain extent.
Hence why this overarching series I release on Thursdays is called “self-sufficiency”. It doesn’t refer to countries completely isolating themselves, but lines are being redrawn, and a level of self-sufficiency protects a state from potential supply-demand imbalances.
This tariff war also runs much deeper than only trade. China announced it will speed up its decreasing of US treasuries it holds. The Chinese have also been accused of artificially lowering their currency to make exports cheaper, thus increasing their attractiveness. China and the IMF rejected these claims, but the reality is true that a lower currency incites exports. The exchange rate between the United States Dollar and the Chinese Yuan is the place to keep an eye on here.
The tariff war had a sudden clear restart earlier this year. In May, we saw Biden impose additional sanctions on solar cells, lithium-ion batteries, steel, aluminium, and medical equipment, among other items. The tariff and trade wars will drive the next few decades of geopolitical competition, and in my opinion, won’t go away anytime soon. Geopolitical conflict can now be fought in multiple fields. Trade and financial warfare are two such examples.
If these trends are set to continue, do we have any solutions that countries can adopt to limit the impact of these measures?
Industrial Symbiosis: A Solution
Is industrial symbiosis a potential solution to all our problems here? This is a collaborative strategy where businesses, sectors, and countries work together to utilize each other’s by-products and waste. The result is greater efficiency and reduced waste. This sounds like a strategy that could enable the establishment of circular economies. After all, one country’s trash could be another treasure. The establishment of these new supply chains could also provide hedges to supply chain disruption. With networks already established, these could be repurposed during periods of crisis to share the abundant resources in one country with another country in which the resource is scarce.
Countries are now pursuing a level of self-sufficiency, with many restoring production to a more domestic focus on the countries near them. This reduces the potential of supply chain disruption to bring global trade to a standstill, but lengthier supply chains shouldn’t be cast aside, especially if they’re with trusted partner states with similar ideologies and goals.
This is an option that should be pursued. However, can we reach the point where protectionist, self-sufficiency strategies such as this aren’t required? How can we reduce this tit-for-tat environment in which we find ourselves?
The Role of International Institutions
International institutions exist to manage and address issues on a global scale. They are supposed to promote peace, facilitate cooperation, set norms and values, and resolve conflict.
Unfortunately, there are multiple examples of nations not listening to these organisations. The United States announced in 2022 that Trump’s tariffs were in breach of global trade rules regarding the tariffs on steel and aluminium. The Biden administration disputed this ruling and rejected reversing the moves Trump made. This led to criticism from Brussels.
If international institutions can be ignored with no consequence, what can be done?
This weakens the international system and leads to spiralling tensions, fragmentation, and economic fallout.
Look towards the United Nations, also. The veto power in the Security Council ensures one nation can limit the progress of a majority in agreement. The ignorance of passed resolutions also occurs, seemingly without repercussions, such as the ceasefire in Gaza. Our international institutions need reform, to ensure no country is above them. Punishment for digressions must be enforced, and accountability, transparency, and trust promoted. Nations can compete, as is expected. But no nation should be above the collective institutions established to ensure no competition strays into conflict. We’ve seen multiple examples of conflict arising with no consequences, specifically in Russia-Ukraine, and The Middle East. Other issues continue in Sudan, Myanmar, the West African Juntas, and Afghanistan, among others.
It’s when our international institutions are respected that uncontrollable tit-for-tat can be addressed, and a pullback from any brink can be structured, not self-imposed by those actively involved. In a self-imposed pulling back, all it takes is two bad actors. I’d state the world likely has many more than two bad actors.
Some could believe this is unrealistic, especially as some countries trend towards a more authoritarian stance. To pull back from any brink, either a more powerful player needs to step in, multilateral cooperation or diplomacy can occur, incentives can be aligned, or legal mechanisms pursued, among other strategies. International institutions can enact all these potential strategies and hence must be reformed to represent all nations, to ensure we limit the likelihood we slip from competition into conflict.
Concluding Remarks
Interest rates, inflation, key resources, subsidies, efficiency, opportunity cost, tariffs, and subsidies. The energy sector is a complex interaction of many characteristics. All need to be considered.
I’ve stated before, that if we wanted a cleaner world, we should have started 40 years ago. We’ve lived through a period of the lowest interest rates ever, and we haven’t taken advantage of it. Productivity has fallen in developed countries, and it seems like a missed opportunity. A new energy infrastructure buildout would have boosted productivity, and cost much less than the transition will now cost. Regulation and politics have disrupted the energy sector, at a time when we needed to be pushing on. But alas, if the best time to start was 40 years ago, the second best time is now.
The biggest problem we face is where the money to pay for all this comes from.
An element of this entire topic is the perception of different actors towards Chinese overcapacity. Remember it was overproduction in the United States that brought on the Smoot-Hawley tariffs in the 1930s, and today we’re in a strikingly similar situation. In China’s increasing market share in key industries, geopolitical competitors see this as China seeking control of global supply chains, which could then be weaponised. In this scenario, China’s domestic reserves and overcapacity would, in theory, see them better weather a supply chain war, and this worries geopolitical players.
In contrast, China’s overcapacity has lowered prices around the world, and given other underdeveloped and developing countries an opportunity to access materials to develop at a cheaper price. Just because the developed world sits happily in its bubble, celebrating the falling poverty rates over the last century, many still live well below the poverty line. China’s overcapacity provides a better opportunity for these countries to move forward, provide a better future for their citizens, and increase quality of life. More on this next week.
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Sources
https://www.imf.org/en/Publications/fandd/issues/2023/06/B2B-subsidy-wars-elizabeth-van-heuvelen
https://en.wikipedia.org/wiki/Smoot%E2%80%93Hawley_Tariff_Act
https://chatgpt.com/c/66d9947b-465c-800e-ab36-0b43facbea42
chatgpt.com
https://fas.usda.gov/topics/china-phase-one-agreement
https://en.wikipedia.org/wiki/2020_United_States_presidential_election
https://en.wikipedia.org/wiki/China%E2%80%93United_States_trade_war
https://www.bbc.co.uk/news/business-45899310