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What past trade policies teach us about today's tariffs landscape?
243 Plays2 hours ago
The fundamental rules of trade are changing but history has a funny way of repeating itself. Vivek Ramachandran, Head of Global Trade Solutions at HSBC, sat down with Stephen King, Chief Economic Advisor at HSBC, and discussed what past trade policies teach us about today’s global landscape. People say we live in “unprecedented times” – but do we really? Watch the in-depth conversation to find out.
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Transcript
Introduction to HSBC Global Viewpoint Series
00:00:01
Speaker
Welcome to HSBC Global Viewpoint, the podcast series that brings together business leaders and industry experts to explore the latest global insights, trends, and opportunities.
00:00:13
Speaker
Make sure you're subscribed to stay up to date with new episodes. Thanks for listening, and now onto today's show.
00:00:23
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We're clearly living through unprecedented times, or are we? What can we learn looking back at history? What should we learn from economic theory and how did we get to
Stephen King on Tariffs: Benefits and Drawbacks
00:00:33
Speaker
where we are? I'm delighted to be joined today by Stephen King, ah the Chief Economic Advisor for HSBC, the World Trade Bank.
00:00:39
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So I'm going to start with three questions and force you to answer either yes, no, ah qualified depends. One, ah tariffs can be beneficial.
00:00:50
Speaker
That's a tricky one. Yeah, they can be in certain circumstances, but it's not something you'd really want to advocate most of the time. Two, a trade surplus is preferred to a trade deficit. In terms of economic theory, no, because the whole world cannot have a trade surplus with itself.
00:01:06
Speaker
So every every trade surplus, there has to be a trade deficit. That's not a depends. No. Three, a US trade deficit is the inevitable consequence of the US dollar being the reserve currency. That is most likely to be correct, yes.
00:01:20
Speaker
Let's unpack your answers. Take us through a little bit about the history of tariffs. So tariffs can be used for, I would say, three main reasons. The one that has been dominant, I would say, since the end of World War II is to use tariffs to force other countries to change their policies in other ways, maybe to buy more imports from let's say the US might otherwise have been the case to open up the domestic markets to allow more competition those domestic markets.
00:01:46
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A second reason is to support what termed infant industries. So if you've got an industry that is still relatively small compared with your international competitors, you haven't quite got the economies of scale.
00:01:58
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You use an infant industry argument to protect your industry in its sort of fledgling beginnings. And the third reason, very, very simply, is that you use tariffs as a source of of revenue.
00:02:12
Speaker
The U.S. s started with this. And I mean, at the point of independence, I think Alexander Hamilton was probably the biggest advocate for tariffs.
Historical Tariffs and Their Economic Impacts
00:02:19
Speaker
Britain, too, was an enthusiast for for tariffs. There's nothing unusual about tariffs in those days.
00:02:26
Speaker
In actual fact, after the Napoleon it was, um Britain and came up with its own version of tariff protection in the form of the so-called Corn Laws to protect domestic farmers and landowners um from competition from much cheaper grain elsewhere in the world. So effectively, the domestic price of grain in the UK was significantly higher than the global price to the benefit of farmers, landowners and the people who worked um on the land.
00:02:54
Speaker
The problem with all this was of course that if you're paying more for your daily bread than if you're ah a manufacturing worker, a factory worker, as people increasingly were in the early 19th century, um if you were in sort of urban situation,
00:03:08
Speaker
you're actually worse off as a consequence of the tariff. And one thing that's worth stressing here is that tariffs tend to be redistributional within the country that's using the tariffs. benefits some groups, it actually is a significant cost for other groups. In economic terms, it takes away the consumer surplus and moves it to the manufacturer. But even within the manufacturing sector, it redistributes, is your point? Yes. So again, with the corn laws, landowners, farmers did absolutely fine.
00:03:32
Speaker
But if you were a ah factory owner, the problem you have was if people are spending too much money on their daily bread, they had less money left over to spend on the things that you were producing from your factories. So demand for your goods you were producing was lower than they might otherwise have been. So there's a kind of redistribution of the fact that created winners and losers domestically and it's worth stressing, led to significant political reform in the 1830s and 1840s, which in turn led to the end of the Corn Laws, the abolition of the Corn Laws. And what happened to the agricultural sector at that point?
00:04:06
Speaker
Well, that point it shrank significantly. So in the late 19th century, British agriculture ah fell and fell. The number of people employed fell and fell. But of course, this was more than offset by huge expansion of manufacturing um over the same period of time.
00:04:20
Speaker
um And it is worth stressing that often when you have a tariff, it protects a certain industry. But when you remove the tariff, that industry loses that protection. ah But the broader economy may actually flourish, which was certainly true of Britain in the second half of the 19th century. if you Am I right in saying, say, Britain, after the con laws, actually moved towards free trade?
00:04:41
Speaker
But that was actually when America was quite protectionist. So in in the late 19th century, um ah whereas the UK committed to yeah virtually not quite zero tariffs, but very low tariffs,
00:04:53
Speaker
ah The US is pushing for significantly higher tariffs, partly because the North had won the Civil War. um The North was the home of manufacturing, as opposed to the South, which was involved with commodity trade of all sorts involving cotton and tobacco and so on. um and the North wanted to pursue protection of infant industries.
00:05:14
Speaker
Let's look at the a couple of big events in the last century.
The Smoot-Hawley Act and Global Retaliation
00:05:17
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1930, the Holly-Smooth Act. Maybe completely different, but put in the same bucket often as the Nixon shock. That came about in 1930, in a period when the US s was already very, very protectionist. Tariffs had only risen in the 1920s to a significant degree.
00:05:32
Speaker
um And it's worth stressing that although a lot of commentators tend to think that Smoot-Hawley contributed to the Great Depression, it it may have done to just to a certain degree, but the timings aren't quite right. First of all, Smoot-Hawley was being discussed before the Wall Street Crash in 1929, and the the process of coming up with legislation predated the Wall Street Crash.
00:05:49
Speaker
um And secondly, the the depression itself didn't really get going until 1931 and was more to do with a ah c collapse in the financial system than to do with the tariffs that came through.
00:06:01
Speaker
To cut a long story short, and Smoot-Hawley was designed initially to protect US farmers. would be under tremendous pressure in the 1920s. But it's also worth stressing, US farmers were actually pretty inefficient. um the The share of employment in US agriculture was double that in the UK, which was in in one sense a reflection of the underemployment or the lack of productivity of people in US s farming.
00:06:27
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um But the the big consequence of Smilt-Hawley really was that As soon as the Americans had imposed these tariffs, other countries responded and responded in a very, very big way.
00:06:38
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So the most famous example of this is is something which came about from the British Empire, which was called imperial preference. um And effectively, imperial preference was home producers first, empire or imperial producers second.
00:06:54
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everyone else third. So effectively, there's a kind of ranking of where Britain would trade, who with and under what terms. um And a number of other countries also imposed tariffs or quotas on US products.
00:07:06
Speaker
So actually, in many ways, the Smoot-Hawley tariff was a a self-inflicted wound for the US because other countries thought, well, you are the aggressor here, we're going to respond to you. And the overall consequence, of course, was that um tariff levels went up dramatically and remained very high even after the Great Depression. they remained high through the 1930s, partly for political reasons, of course.
00:07:30
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um And it wasn't really until after World War two um that there was a process of dismantling those tariffs that had risen so much in the 1920s and 1930s. And subsequently, we kind of went through a period with low tariffs still... Well, they gradually fell. They weren't low at first, but successive rounds of what was called the General Agreement on Tariffs and Trades, the predecessor of the WTO, contributed to stripping away of tariffs year by year, decade by decade.
1971 Nixon Shock and Trade Dynamics
00:07:57
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So by the time you get to sort the late 1960s, tariff levels generally much lower than they were. um And then you have the Nixon shock that comes through 1971 associated with the idea of the dollar breaking away from gold under the Bretton Woods exchange rate system. But it's also a shock that is associated with tariffs.
00:08:17
Speaker
Nixon wants to force other countries to revalue their exchange rates against the US dollar. There's a sense that There are widening trade imbalances. The US is feeling uncomfortable about a larger and larger current account deficit, which in those days, it was big and by the standards of the day, although it's tiny compared with where we are nowadays.
00:08:35
Speaker
um And um the idea was that the Americans, Washington, would threaten tariffs onto mostly American allies, and this is Japan, Germany, and so on and so forth, and but with the sort of hint that if they were to revalue their exchange rates, the tariffs would then be removed.
00:08:52
Speaker
um So by the end of 1971, the yen's quite a lot stronger than it had been. um The tariffs are eventually removed. lost about six months or so. So as it turned out, um the change forced upon other countries was probably smaller than Washington wanted.
00:09:07
Speaker
but So the revaluation of the yen at the time was really very, very modest. um And there were two reasons for this. The first one was that a young Henry Kissinger was one of the first to recognize that other countries were planning to retaliate, a bit like Smeet-Hawley in 1930.
00:09:22
Speaker
And that was something that was potentially dangerous because you get a sort of house of cards collapsing very quickly. And the second reason is that although I think Nixon had plenty of domestic political support for tariffs in the middle of 1971.
00:09:36
Speaker
By the time people began to experience the consequences of tariffs at home, so big increases in prices of a whole range of different goods in particular, um public enthusiasm for those tariffs began to fade because it became associated with higher inflation than had been expected.
00:09:53
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um And so um there was a sort of rather rapid retreat. But the two or three things I think make the world very different in 2025 to even 20 years ago.
00:10:04
Speaker
One is trade in services is a significant percentage of global trade. so And trade in services moves across borders quite seamlessly. And it's much more difficult to tariff. so So services may continue to open up that. so Second is obviously supply chains now crisscross a lot more.
00:10:21
Speaker
So the global supply chains are, it's not linear. So components going across borders, it's not as much as just telephoning the end product or stopping the end product from coming in. You've got to rewire entire supply chains, which have taken decades to build. One thing about that, though, I think, which maybe the US has seized upon is that, of course, supply chains generally shortened ah during and post-COVID.
00:10:44
Speaker
It's interesting. The underlying data doesn't always back that. No, I fully accept that. Because if you look at the average distance traveled by physical trade, mercantile trade, over the last six, seven years, the average traded good has gone up in distance marginally.
00:10:59
Speaker
So in some cases, supply chains have got longer and just less transparent. well they they may be longer, but they may be shorter in another way, which is that, for example, if you have trade between three countries, now you've got trade between two.
00:11:14
Speaker
If the two countries doing the trade with are further apart from each other, you may have a longer supply chain in terms of distance traveled, but actually fewer stops on the way. But interestingly, I think where we've gone from trade between two countries to now trade between three, because a lot of the low-value assembly is actually but what's been outsourced.
US Dollar's Dominance and Volcker's Policies
00:11:30
Speaker
Just touch upon how the dollar came about to be such the dominant reserve currency because was it Keynes who proposed, what did he propose, Bancor? Bancor, which was ah an alternative to the... on On the IMF SDR, I guess, right, was what he was proposing, some weighted currency as an international settlement tool.
00:11:48
Speaker
What Keynes had in mind um was the idea that countries with both current account deficits and current account surpluses would be equally obligated to adjust their economies to remove the imbalances.
00:12:02
Speaker
um What we've discovered in hindsight is that countries with deficits are sometimes forced to adjust because there's a ah sudden stop, particularly emerging markets, a sudden crisis whereby capital no longer is coming into the country. It has to deflate its economy hugely to to reduce the size of its current account deficit.
00:12:21
Speaker
but there typically is very little pressure on the current account surplus countries to adjust unless you're using American style tariffs. So you come back to the 1980s, the Plaza Record, what Japan subsequently does, partly it's through the threat of tariffs that forces the Japanese to accept a stronger yen, but in other circumstances they probably wouldn't have gone there.
00:12:39
Speaker
Now the peculiarity of all this is that Keynes' plan was rejected by the Americans because at the time the Americans had current account surplus. So they didn't want to be under pressure to, to to if you like, have to adjust their economy.
00:12:56
Speaker
And of course, the boot is now on the other foot that having having not accepted Keynes' plan, Now, and there's a recognition, and this has really started in the 1960s with the sort of so-called Triffin dilemma, that if you are the issuer of the world's reserve currency, you tend to run the current account deficit.
00:13:14
Speaker
The current administration will tend to say, well, the deficit shows that the dollar is overvalued, that other countries are cheating and so and so forth. And it's because of our reserve currency status. But I can think of at least one other country which has mostly had a deficit since, oh, I know, the last 30, 40 years, and no suggesting its kind of currency is the reserve currency, yet it quite happily runs a deficit each and every single year.
00:13:37
Speaker
And that's Australia. Australia, one sense, proves that the reason for having a deficit does not necessarily have to be because the reserve currency status. Nevertheless, the the the the the reasons why the dollar became the reserve currency was A, the collapse of the British Empire.
00:13:53
Speaker
ah B, the c collapse of the gold standard. C, the fact that the US was the dominant victor after um World War II. And D, that um although the Soviets were initially involved in Bretton Woods discussions, it was clear that the Cold War was going to mean that there was going to be a separation of interest, um which meant that for the so-called free world, the dollar was yeah totally, utterly dominant.
00:14:18
Speaker
And in terms of the Bretton Woods design, because the dollar was fixed in value against gold and because all other members of the Bretton Woods system were supposed to either revalue or devalue against the dollar and hence gold.
00:14:33
Speaker
And the idea was that it was incumbent upon all the others to adjust their currencies. So in one sense Bretton Woods was a kind of quasi gold standard because the dollar was supposedly as good as gold.
00:14:45
Speaker
That all breaks down in 1971 and for while there's chaos. um for a while there's chaos After the chaos comes Paul Volcker, chair of the Fed in the 1980s, determined to get rid of inflation once and for all.
00:14:58
Speaker
He raises interest rates in the US s dramatically. ah Money pours into the US, so the capital inflows are very, very high. But in the process, he also reduces inflation steadily year after year after year.
00:15:10
Speaker
As inflation comes down, it's a bit like saying the dollar returns to being as good as gold. Because if inflation is low and stable as it proved to be, then people ah are then more content to hold dollars.
00:15:23
Speaker
And what is striking is that in the 1970s, the gold price goes through the roof. In the nineteen eighty s thanks to Volcker and the renewed credibility of the Federal Reserve and the dollar, the gold price begins to fall
Conclusion: Learning from Economic History
00:15:36
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back again.
00:15:36
Speaker
principle of international rules and international agreements founded with the Bretton Woods institutions has mostly worked well um over the last 70 or 80 years.
00:15:49
Speaker
Stephen, I'm conscious we could spend another hour going through historical incidents and lessons from economic theory. But the idea today was to shed some light on what we can learn from history, how we got to where we are.
00:16:02
Speaker
So thank you again, Stephen. Thank you very much, Rebecca.
00:16:21
Speaker
Thank you for joining us at HSBC Global Viewpoint. We hope you enjoyed the discussion. Make sure you're subscribed to stay up to date with new episodes.