Free Trade Matters
You cannot tariff yourself rich
In today’s newsletter:
Trump’s misguided trade war
Our Energy Analyst’s take on Starmer’s call for more nuclear reactors.
On the podcast: free trade, falling productivity, and the market approach to energy policy.
and more….
“I think a lot of people are tired of watching other countries ripping off the United States. This is a great country. […] They laugh at us behind our backs. They laugh at us because of our own stupidity.”
“We let Japan come in and dump everything right into our markets.”
These were Donald Trump’s words in the late 1980s. To the extent that there is such a thing as "Trumponomics" - this is it. Trump has always seen trade as a zero-sum game in which other countries “rip off” the United States. And this time, he is acting upon those convictions to a much greater extent than last time.
He has already slapped a 10% tariff rate on most imports from China, and unless he cancels it at the last minute, a 25% tariff on imports from Canada and Mexico is scheduled to follow. Tariffs on imports from the EU are then only a matter of time.
Trump is trying to achieve two mutually exclusive things with this. Firstly, he sees tariffs as a tool to promote domestic industries. Secondly, he has described tariffs as “a tax on a foreign country”, which means, he sees them as a (from his perspective) cost-free way to raise revenue. (He is, in Trumpian terms, trying to “rip off” foreign countries.)
Suppose he could achieve his second aim. (Spoiler alert: he will not.) Suppose importers will simply take the hit, and absorb the tariffs in the form of lower profit margins, rather than pass them on to American consumers. In that case, there can be no stimulus effect for domestic industry. If consumer prices are unchanged, consumers have no reason to change their behaviour. The only thing that could make consumers substitute domestically produced goods for foreign imports in large numbers would be a noticeable increase in the price of the former, making latter relatively more attractive. So to the extent that a tariff is “a tax on a foreign country”, it cannot also be a boost for domestic industry.
The empirical evidence, of course, shows that a tariff is nothing like a tax on a foreign country. It is a tax on domestic consumers, because it does get passed on to them. But does it at least stimulate domestic industry?
Well, some industries, sure. But, as mentioned, it can only have that effect if it hits consumers where it hurts, thus making them poorer. These poorer consumers will now have to cut back on something else, so inevitably, some other industries will suffer. You cannot tariff yourself rich.
In the longer run, the main cost of tariffs is that they roll back the international division of labour, tying up valuable productive resources in sectors where they should not be. This would be bad news for us in Britain too, irrespective of whether or not we are in Trump’s crosshairs for a tariff treatment of our own.
Kristian Niemietz
Editorial Director
P.S. The best way to never miss out on IEA work, get access to exclusive content, and support our research and educational programmes is to become a paid IEA Insider.
IEA Podcast: Executive Director Tom Clougherty, Editorial Director Kristian Niemietz, and Director of Communications Callum Price discuss Trump’s tariffs, the Bank of England’s forecast, and the Government going nuclear.
Rate cut 'too little, too late' for stagnant economy, says Julian Jessop
Commenting on the Bank of England's decision to cut interest rates to 4.5%, Julian Jessop, Economics Fellow at the Institute of Economic Affairs, said:
The Bank of England’s decision to cut interest rates today was welcome but overshadowed by a gloomy set of forecasts. The Bank has been forced to cut because the UK economy is crashing.
The Bank now expects GDP to stagnate in the short term and to grow by just 0.75% in 2025 as a whole – half the pace predicted as recently as last November.
Moreover, headline inflation is now expected to rise as high as 3.7% later in the year. This seems too pessimistic, given the weakness of money growth and the slump in the real economy. But at least the MPC has shown it is willing to look past the temporary effect of higher energy costs and focus on underlying price pressures.
The Bank will probably continue lowering rates gradually but rates will remain 'restrictive', meaning that they will still hold back growth. It would have been better to cut by at least 0.5% today, as recommended by the IEA’s shadow Monetary Policy Committee and by two members of the real MPC.
Remember also that the OBR had already factored in another 1% of cuts over the next year or so (to 3.5%) in the October Budget. Rate cuts along these lines will not therefore improve the forecasts for the public finances.
Overall, it is good news that rates have been cut, and they will almost certainly be cut further over the course of 2025. But the key driver is the worsening economic outlook, with growth stagnating and inflation expected to pick up sharply. Again, the MPC appears to be doing too little, too late.
In the Daily Mail
News, Views & Upcoming Events
More nuclear reactors 'excellent news', says IEA Energy Analyst Andy Mayer
It is excellent news that the government is taking steps to remove barriers to building new nuclear power. Britain needs affordable reliable low carbon generation, and nuclear power is the best option today.
The Hinkley Point C impact assessment noted it takes 14-17 years to build that type of reactor in the UK. The best places in the world can do it in 5-6 years. Liberalising site selection is a start to bridging that gap, but other reforms need to follow.
A regulatory task force is good, but runs the risk of trying to please multiple interest groups, particularly environmental and nimby groups, rather than slashing red tape. It could be captured by a specific nuclear technology group, rather than encourage competition.
They could speed this up by creating ‘freeport’-style regulatory sandboxes on the new sites that recognise the standards of safe and fast builders like South Korea, then letting the best in the world compete to provide us with clean power.
Free market groups welcome nuclear power planning reform, CityAM
Sarwar says nuclear veto ‘holding Scotland back’, Daily Business Group
Communications Manager Reem Ibrahim was on BBC Politics Live on Wednesday, alongside Novara Media’s Ash Sarkar, Conservative MP Gareth Davies and Labour MP Andrew Pakes.
I think the Rosebank application is absolutely right to go ahead because ultimately, if we do increase the supply of energy ... it does bring down prices.
Trump has misread US history – we will all pay the price, Managing Editor Daniel Freeman, CapX
Donald Trump’s tariffs: what’s happening and what could it mean for the UK?, Economics Fellow Julian Jessop quoted in Full Fact
The era of regulatory overeach hurting Britain’s prospects must end, argues Economics and Policy Fellow Matthew Lesh in CityAM
Europe must stop lying to itself, International Programmes Manager Harrison Griffiths argues in The Critic
Brexit Britain 'should be spared' from Donald Trump tariffs as EU 'next in firing line', Economics Fellow Julian Jessop quoted in the Express
Julian Jessop, an economics fellow at the Institute of Economic Affairs think tank, suggested the UK would avoid tariffs, pointing to the country's more balanced trade with the US compared to the EU.
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Why doesn't the IEA just listen to what Trump is saying with respect to tariffs on Mexico and Canada. He has made it clear that they are just a lever to persuade Canada and Mexico in particular to police its own borders and stop the flow of drugs and illegal migrants pouring into the US. It is hardly an unreasonable request. Is the IEA also suffering from the Trump Derangement Syndrome afflicting the progressive class.
As to China there is nothing free or fair about China's way of doing trade. China has massive state subsidised over capacity, and it is dumping goods at or below cost on the west. Firstly this has the benefit of keeping the CCP in power by maintaining some growth. And secondly it is usefully destroying western industrial capacity which will make it easier for China to invade Taiwan.