Thread by @JKempEnergy

TARIFFS AND TRADE
Earlier in my career, I focused on trade liberalisation and negotiations
Current articles about trade are generating more heat than light, so I thought I’d offer some observations ...

The General Agreement in Tariffs and Trade was reached in 1947. Tariffs and trade wars during the 1930s made all countries worse off. Policymakers had learned the hard way that there are no winners from a trade war, only losers

GATT 1947 built on the key terms of earlier bilateral trade treaties and turned them into a multilateral general framework (most off the terms in the GATT had appeared in treaties before)

GATT imposes two basic obligations on its signatories (originally called CONTRACTING PARTIES but now called members under the WTO)

(1) Most-Favoured Nation: parties must give equal treatment to goods and services from all other parties. Any preference given to one must be given to all
(2) National Treatment: once goods and services have cleared customs they must be treated same as domestically produced items

GATT then created a series of exceptions to these general rules (for regional trade agreements, anti dumping, anti subsidy, national security) but tries to limit the exceptions strictly to ensure they do not undermine the basic principles

GATT parties conducted a series of trade negotiations (called trade rounds) in which they negotiated reductions in tariff levels
There were eight of these rounds since 1947 culminating in the Uruguay Round (1986-94)
A ninth round was launched in 2001 but has not been finalised

GATT parties negotiated over maximum or bound tariff rates
Countries are free to apply lower rates in practice but may not exceed the bound rates

Each negotiation was structured as an exchange or balance of “concessions”
You lower tariffs on item A by x% and I’ll lower tariffs on item B by y%

Negotiations were intended to produce a “balance of concessions”
There has never been any intention tariffs should be reciprocal on individual items
Each country negotiated for improved market access for its own exporters while offering concessions on certain imports in return

Each government defined its own negotiating priorities
Each round was structured as a single undertaking
Nothing was agreed until everything was agreed

Reflecting these priorities, the tariff schedules tend to show most tariffs clustered around an average low level, but with much higher peaks to protect certain sensitive items
Peaks differ for every country

Every country set its own priorities
Deals were only done when every country thought it had got a fair exchange

It makes no sense whatsoever to compare tariffs levied in the same item by Country A and Country B
If A levies a lower tariff on item X, B probably levies a lower tariff on Y as part of the deal

Given comparative advantages, it makes no sense for countries to levy similar tariff rates
e.g. the United Kingdom (pre-EU) was not terribly worried about protecting its wine growers and citrus producers but was worried about protecting steel firms

Tariffs are not uniform and are not reciprocal
But in the real world that doesn’t matter much

GATT/WTO negotiators tend to talk about “concessions”
In reality, consumers have been enormous beneficiaries from trade liberalisation which has been a major driving force in rising incomes and living standards since WW2
So they aren’t really concessions at all

In the past, when trade tensions have arisen, perhaps because the structure of trade flows has changed, countries have responded by launching a new round of negotiations
But the Doha Round has stalled since 2001 which is one reason that disputes and tensions have risen

Tariffs benefit producers/workers at the expense of consumers. In general they make countries poorer. There is a literature on optimal tariffs that can make countries better off as a whole but it depends on very special circumstances. I can’t think of a single real world example

In trade liberalisation the GAINS to consumers outweigh the LOSSES to producers. So trade liberalisation represents a Pareto improvement. The winners COULD compensate the losers fully and still be better off

In practice, of course, those compensatory transfers do not usually happen, which is why trade liberalisation can be very painful for some firms, workers and communities, even as it makes the country as a whole better off

But the problems that arise from trade liberalisation stem from the (lack of) internal redistribution rather than from any flaw in liberalisation itself. In other words the fault lies with tax and spend policies not with trade liberalisation

US/EU have generally prioritised increased market access for services (eg finance, banking, accountancy) and high-tech products while trying to limit concessions for sensitive declining industries such as steel

Trade liberalisation is becoming more complicated as the focus shifts from tariffs, which are now very low in most cases, to non-tariff barriers, including health and safety regulations, technical standards and investment restrictions

Every country imposes a wide range of non-tariff barriers (e.g. China on joint ventures, the United States on airline ownership and domestic shipping).

NTBs go to the heart of the regulatory state and state sovereignty, which is what makes them so hard to liberalise. One country’s NTB is another country’s vital health/safety/national security regulation

But in principle NTBs can be controlled by ensuring they are applied in a non-discriminating way (MFN and National Treatment) and are no more restrictive than necessary to achieve their stated legitimate purpose

Overall the GATT/WTO system has worked very well and been a major driver of post-WW2 prosperity by enabling much greater specialisation. If that prosperity is no longer being shared out fairly, blame politicians and domestic policies, not the trading system.

There are problems and abuses in the trading system. And they are not just limited to China. But the solution is to increase liberalisation not retreat from it