Recent market activity has been affected by the fear of increases in import duties. The President, against the wishes of his own party, has introduced tariffs on imports from numerous countries on the grounds that international trade for the US is not on a level playing field and, in the case of China, US companies lose billions every year due to intellectual property theft. The recent threats from our trading partners (or competitors) and counter-threats by the President have increased the chance of a trade war, but is President Trump right?
That question may seem easy to answer, but in reality, it isn’t. One method of measuring the degree of fairness in trade is by comparing the average tariff rate. Since tariff rates vary by goods, the simple average can be calculated by adding up all the tariff rates and dividing the total by the number of import categories. The problem with this method, however, is that a country could have high tariffs in categories that are the major sources of trade and low tariffs in the categories in which very little trade is conducted. In this case, the degree of protectionism would be underestimated. To avoid this problem, a second method can be used, a trade weighted average. This method is calculated by weighting each tariff by the share of total imports in that category. This method is not without flaws either. If tariffs in some categories are so high that it inhibits trade in those categories, the weighted average tariff would be reduced, thereby underestimating the degree of protectionism. So, the answer to the question is not cut and dried.
The President has pointed out that US duties on imported passenger cars is 2.5% compared to the EU’s 10.5%. However, he has failed to mention that the US collects duties of up to 25% on imported light vans. Looking at the average tariffs, calculate by either method described above, developed countries tend to charge slightly higher tariffs than the US on manufactured goods. For agricultural products, that difference increases. So, the President has some justification for his stance and his criticism of previous administrations since tariffs are the consequence of negotiated trade deals.
What about Chinese theft of intellectual property? Intellectual property (IP) refers to creations of the mind and include inventions, literary and artistic works, and designs, to name a few. While IP rights have been protected by law in China since 1979, alleged theft of IP — from counterfeiting famous brands and stealing trade secrets to pressuring companies to share technology to gain access to China’s vast market — has long been a complaint of foreign companies. The EU Intellectual Property Office estimates that counterfeit goods account for 12.5% of China’s total exports, or over 1.5% of its GDP. Furthermore, in 2015, The US Chamber of Commerce determined that 49% of seizures due to intellectual property rights infringements emanated from China. Even Chinese officials, including President Xi Jinping, acknowledge that the protection of intellectual property rights has not been sufficient. So, even though IP rights are protected by law, damage awards are very limited, evidence gathering is difficult, and there is a bias against foreign firms. As a result, theft is still a major problem.
So the US may not be playing on a level field when it comes to international trade, but does it matter? Tariffs reduce trade and increase costs. Free trade, or trading with as few tariffs as possible, enables people to buy cheaper goods from products made anywhere in the world. Consequently, people can afford to buy more, which creates more demand, which increases employment and boosts economic growth. However, not everyone wins. Some jobs in wealthier countries, like the US, have been lost to developing nations, where costs are cheaper. The President’s goal is to protect US jobs by lowering tariffs on US goods and reducing the US trade deficit. The increase in tariffs is the President’s way of forcing other countries to lower their tariffs. If he is successful, US companies will benefit and global growth will be enhanced. If, however, he is not and US tariffs are increased and other countries counter with increased tariffs of their own, the opposite will occur and economic growth will suffer worldwide.
Washington Trust Bank believes that the information used in this study was obtained from reliable sources, but we do not guarantee its accuracy. Neither the information nor any opinion expressed constitutes a solicitation for business or a recommendation of the purchase or sale of securities or commodities.
Rick Cloutier, CFA is the Chief Investment Strategist for Washington Trust Bank with over 25 years of portfolio management and investment experience. He is responsible for directing the portfolio management, research, and trading activities for the bank’s multi-asset class strategies. He is also responsible for overseeing the client portfolio manager team and portfolio analytics team. Rick has written numerous articles for Investopedia and wrote a weekly column for the Fall River Herald News in Massachusetts. His research has appeared in numerous journals, including the Journal of Investment Management and Financial Innovations, the Journal of Business Management and Economics, and the International Journal of Revenue Management. He provided a nightly commentary on WALE radio and authored the novel Caveat Emptor. Rick earned his MBA at Boston University.