Where better to start than with this:
When a car is sent to the United States from China, there is a Tariff to be paid of 2 1/2%. When a car is sent to China from the United States, there is a Tariff to be paid of 25%. Does that sound like free or fair trade. No, it sounds like STUPID TRADE – going on for years!
— Donald J. Trump (@realDonaldTrump) April 9, 2018
And he’s right, you know. The US tariff on the import of cars is indeed a mere 2.5%. China’s own tariffs are indeed 25%. If you don’t believe either him or me, consult the WTO’s own data on the matter.
America’s tariffs on car imports are very low, albeit not the lowest in the world (many countries, including Japan, Iceland and Norway have zero tariffs). China’s are high but hardly the highest (in Europe, as you probably realise if you’ve been following the Brexit debate, the going rate is 10%; in the Maldives it is 100%, though being an archipelagic nation with few roads, perhaps they can get away with it).*
But tariffs are only one tiny part of the story. Which is something worth rehearsing (and no doubt re-rehearsing) as the world stumbles towards what some people fear could be a trade war. If tariffs were the only thing that mattered, you’d expect to see a correlation between a country’s tariff rates and the amount of trade it sucks in.
You’d expect to see incredibly high US car exports to Japan, for instance. After all, as I mentioned above, Japan has no tariffs on car imports; it has a large, wealthy population, many of whom like to buy cars. Ergo you’d presume there would be much greater US car penetration than somewhere like China, right?
Wrong: as we saw not that long ago by the departure of Ford from the Japanese car market, US carmakers have long struggled to gain a foothold in the country. Indeed, in 2014, the US exported a mere 19,000 cars to Japan, fewer than it sent to Kuwait or Korea, and a fraction of the 300k-plus it exported to China. Tariffs, you see, are only half of the problem.
Far more significant are what economists call non-tariff barriers. That might mean safety regulations and stringent rules on importers to put their cars through complex and onerous tests before getting them to market. It might mean bizarre environmental rules that mean one type of diesel engine won’t work in another country because the emissions of an obscure gas are too high. It might mean rules and regulations making it difficult to sell your cars in the country.
In Japan there are no tariff barriers but there are all sorts of non-tariff barriers. For one thing, it is extremely hard for outside companies to establish a dealership network. There are complex, tedious safety tests as long as your arm. And there are quite literal barriers too. Japanese car parks tend to be smaller than those you’ll find in North America, so US cars are too big to fit through the barriers. They are too wide for many of the country’s streets. BMW actually makes adapted models of its cars to sell in Japan. The 3 series has special handles and wing mirrors that make it a tad narrower.
While around the world tariffs are falling, the fact is these other non-tariff barriers are on the way up.
Indeed, while the US has dropped many of its tariffs down to zero or thereabouts, it has been as guilty as many countries at raising those invisible trade barriers. According to UNCTAD’s database on this stuff, when it comes to cars, the US has 46 non-tariff barriers to Chinese imports. China, on the other hand has a grand total of 5 non-tariff barriers affecting cars.
In other words, by some measures the US has more barriers on its car imports than China. But they are invisible rather than visible barriers: technical standards, rules on car seats, seatbelts and so on.
It’s worth dwelling on this point for another reason. The US has tended to shift away from tariffs to non-tariff barriers over recent decades because, frankly, tariffs don’t have much of a track record of success. Indeed, part of the reason so many in business are urging President Trump not to impose tariffs (as the tech industry has just done) is because they don’t work.
And that’s before one considers the deeper problem: that tit-for-tat trade battles tend to make everyone worse off: the country that imposes them, the consumers that have to pay them, the country trying to trade through the barrier. The reason plenty of presidents in recent decades – from Nixon to Bush have threatened tariffs and then later abandoned them – is that they benefit no-one.
Whether they will force China and other countries to the negotiating table – and whether this was simply Mr Trump’s goal – is another question.
* for simplicity’s sake here (and in the measure of non-tariff barriers) I’ve selected a mid-range car with an engine between 1.5 and 3l. ISO code 870323 if you’re counting.
UPDATE: Interesting response on twitter: