Aftershock: The pervasive effects of tariff hikes

After half a century of falling import tariffs, a profound shift is under way. Recent tit-for-tat actions by the US, China and others mean that a return to the destructive broad-based tariff increases of the 1930s is a genuine possibility. Critics of free trade are right to assert that trade liberalisation has had some negative consequences. But tariffs will not address these issues. Rather they will have diverse negative effects that will swamp any limited positive impact. Commissioned by ICC and the Qatar Chamber for the ICC World Trade Agenda initiative, this report examines 10 areas where these negative effects could be felt:

• Inflation: Tariff increases will likely cause an uptick in inflation in the US, particularly if the dollar weakens. The UK appears even more vulnerable to an inflation spike.
• Supply chains: Tariffs are unlikely to lead to major new “reshoring” of production back to the US. Some companies will shift production from China to neighbouring countries, but this is a more costly and complex process than many imagine.
• Export growth: Retaliation from other countries means that import tariffs will act as a “tax on exports”. Export-focused sectors like the UK automotive industry are at risk.
• Productivity and rent-seeking: Tariff hikes will channel resources towards import-competing firms and shield them from competition, weakening productivity growth.
• Economic growth: Tariff increases hurt economic growth, although the timing and scale of these negative effects will depend on a variety of factors.
• Poverty: Tariff increases are likely to disproportionately hurt poorer households through their effects on inflation and/or employment.
• Inequality: Tariff increases may have a certain equalising effect if they disproportionately affect output in high-value-added sectors and facilitate the expansion of low-value-added sectors, as is expected with Brexit. However, any boost in inequality would come as a result of a decrease in overall output and growth.
• Health: While not the focus of recent tariff increases, tariffs levied on health products can cost lives, particularly if developing countries implement them (for instance, as several already do on mosquito nets).
• Environment: The EU’s experience of levying tariffs on Chinese solar panels demonstrates that such moves can hurt environmental goals—an effect that the US is now likely to experience.
• Politics: Recent tariff increases are a response to the political polarisation caused by trade liberalisation.