WHEN we were young adults the economic super power was Japan.
It was in a similar position as China is today.
We lived in awe of the economic miracle which was rebuilt after World War 2.
It didn’t last. That early success was built on the back of post-war reconstruction, strong regulations and tariffs which protected Japanese companies from international competition. What followed that period of prosperity was 30 years of Japan repeatedly suffering a series economic recessions.
Contrast Japan with Australia’s world record 27 consecutive years of positive economic growth.
The difference between the two countries?
Former Federal Treasurer and Prime Minister Paul Keating.
In the early 1990s, while Japan was protecting, Paul Keating slashed tariffs and forced Australian industry to become internationally competitive.
We believe this, along with floating the dollar, provided the foundation for our current world record run of economic growth. That’s how important it was.
Paul Keating was a student of economic history … US President Donald Trump obviously isn’t.
His decision to lift steel and aluminium tariffs is just plain dumb.
His rhetoric is that he believes countries like China are taking advantage of the US and he’s striking back.
The funny thing is that China isn’t even in the top 10 of US steel imports.
His rationale is simply naive.
History tells us protectionist trade wars are bad for economies and don’t really create long term jobs.
That’s basically the reason why his chief economic adviser Gary Cohn quit last week.
Just when the US economy is bouncing back nicely from the devastation of the Global Financial Crisis, a tariff decision like this can single-handedly undo years of progress.
The logic can be compelling; “raising tariffs lifts the prices of imports, which encourages consumers to buy local, which in turn creates more jobs.”
But the reality is a little more complex than that.
It stifles innovation
If business relies on protection, it gets lazy. There is less incentive to invest in research and innovation plus it stifles entrepreneurship.
Funnily enough that’s exactly what has made the US great. The ability of US business to innovate and to shift away from inefficient rust-belt industries.
The top five most valuable American companies as listed on their sharemarket are all technology companies … all of them have been created in just the last 35 years. Apple, Alphabet (Google), Facebook, Microsoft and Amazon.
By contrast the average age of the five most valuable companies on the Australian Stock Exchange is around 100 years.
It’s one of our great economic challenges while free trade (and sheer size) has helped the US innovate.
An escalation can get really nasty
The big question is where will it stop. Many believe it’s a bit of Trump bluster playing to his heartland voters. Let’s hope so.
If the steel and aluminium decision is the start of a wider ranging program of tariff increases it doesn’t bode well for a trading nation like Australia.
It will be tougher to export and that will harm our jobs.
Just look at the range of companies listed on our sharemarket whose profits depend on their export strategy. Not just resource stocks, but building materials, agriculture and high end manufacturing.
Trump claims his decision is based on national security.
To protect the American economy and the jobs of workers.
That leaves the same door open for other countries to use the same rationale in a tit-for-tat program which could lead to an all out trade war.
China, the EU, and Canada are already making threats to raise tariffs on US export icons like bourbon, Levi jeans and Harley Davidson motorcycles.
Also remember China is America’s bank. The US has been funding its budget deficit by issuing government bonds of which China is the biggest investor.
If they decide to stop investing, or sell US bonds, interest rates will rise and Trump will have a lot more to think about.
These things can easily get of control with devastating consequences.
A world divided into heavily protected trading blocks could cause a recession.
The hardest hit can be the smallest
Bottom line is prices go up if the cost of materials (like steel and aluminium) goes up and the ripple effect can be huge.
Steel is used in a wide array of products, from equipment and car parts to canned goods which all could be forced to increase prices and shed workers to make up for the higher costs a 25 per cent tariff would impose.
Meanwhile, a 10 per cent tariff on imported aluminium could hurt workers at companies that make anything from aeroplanes to products packaged in aerosol cans.
Much of the damage would be to smaller companies less able to absorb a 25 per cent price hike on a vital raw material.
The range of products incorporating these materials, either directly or somewhere along the supply chain, the retail sector of the economy could be hit especially hard.
The other thing to remember for, say, retailers is that it’s not just the products they sell, but it’s all of the equipment, the buildings, the racks in the stores, the forklifts in the warehouse.
Thankfully the US is a smaller, but still significant, export market for Australian companies. Our future is in Asia, particularly China, which is now our biggest customer by far.
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