Suddenly, the news is full of stories about tariffs and trade wars. This is really not a surprise. President Trump is merely doing — albeit in a bit more of a rush and more widely than was anticipated — exactly what he said he would do.
The received wisdom is that imposing tariffs is a significant break with the established order. But the reality is that the situation is a little more complex than that. While they may not be tariffs as such, the various taxes and regulations imposed by certain countries and trading blocs, such as the European Union, can be see as barriers to trade. U.S. companies often complain of the cost of complying with Europe’s General Data Protection Regulation, for instance. But many U.K. businesses are also counting the cost of Brexit in terms of extra border controls and related bureaucracy.
Nevertheless, the actions of the new president and any counter-measures that other countries do constitute a serious threat to the rules-based system of international trade that has grown up under the aegis of the World Trade Organization, which celebrates its 30th anniversary this year. This is creating just the sort of uncertainty that business leaders do not like. For the moment those in the UK and EU are not directly affected. But nobody is confident that this will continue. In an article on its website last week, the Confederation of British Industry, a trade body representing many of the U.K.’s biggest companies, said: “In response to the threat of U.S. tariffs, the E.U. could consider reimposing tariffs on U.S. imports that were suspended under the E.U.-U.S. deal with the first Trump Administration. Without action, the tariffs are already scheduled to enter force in March 2025 (targeting products such as orange juice, peanut butter, Harley Davidsons and bourbon). The E.U. might extend tariffs to a range of intermediate goods to mirror any action by the US. Or it could seek to use new trade remedies such as its ‘anti-coercion instrument’ to target US services exports (notably technology), or introduce new preferential rules for public procurement.”
Tackling China, generally assumed to be the main target of any tariff campaign initiated by the Trump Administration, could prove just as tricky. While further action against the likes of steel and electric vehicles is expected, analysts have suggested that any increase in tariffs on Chinese consumer goods would have to be quite selective in order to minimise the direct impact on U.S. households.
Herein lies the problem with tariffs. For all the clamoring for protection from what is perceived as unfair competition, they can end up causing more problems than they solve. Yes, they can — as we have seen with Trump’s interactions with the Canadian and Mexican governments — be used as a weapon to win concessions beyond the economic. They can, as Bill Canady, a seasoned business executive and author of books on business turnarounds, points out, also be valuable in “buying time” to enable the development of a new industry or business, or to enable an appropriate labour force to be created. But if they are persevered with for too long they can end up stifling innovation.
Exhibit A in the case against tariffs is usually the Smoot-Hawley Tariff Act of 1930, which was sponsored by Senator Reed Smoot and Representative Willis C. Hawley with the intention of protection U.S. farmers and businesses from foreign competition by increasing tariffs on imports by about 20%. More than 25 countries retaliated by increasing their own tariffs on American goods, leading to a sharp fall in global trade and, by common agreement, helping to exacerbate the effects of the Great Depression.
Even if that doesn’t happen, it is hard to see it not contributing to inflation, if not directly then through producing the same sorts of supply chain disruption as we saw in the aftermath of the pandemic. This, of course, would amplify the cost of living crisis that is doing so much to fuel rage in the U.S. and elsewhere.
The real issue is the failure of successive governments in countries like the U.S. and the U.K. to help communities replace the manufacturing jobs that they sent to places like China and Mexico with meaningful and, above all, well-paid roles. To see how this works, just look at Germany. Until recently, the might of its industry — particularly the auto sector, which has been tied up with the national psyche — has made it something of an outlier. But now that the likes of Volkswagen, Mercedes and BMW are suffering from the twin threats of governments’ push for a move away from the internal combustion engine and the arrival in the electric vehicle market with cheap Chinese models, there is growing dissatisfaction and, not coincidentally, rising support for extreme politics, especially on the right.
What leaders like Trump and indeed his counterparts in the U.K., Germany, France and elsewhere should be doing is investing in training. And not just for young people. Given rising life expectancy levels, it is no longer sensible to follow past practices and retire people early. Even old dogs can be taught new tricks.
In many economies, there is a mismatch between employers, who complain of skills shortages, and job candidates, who are frustrated by a lack of opportunity. Writing in the Financial Times last week, Jodie Kirshner, a research professor at the NYU Marron Institute, pointed out that many U.S. companies were responding to rising geopolitical tensions and the exposure by the pandemic of frailties in lengthy supply chains by seeking to bring manufacturing home. Indeed, Canady said in an interview last week: “I spent the first part of my career sending factories to China, now I’m bring them back.” That is all very well, but, as Kirshner writes, “the biggest stumbling block for any initiative that seeks to bring more jobs to America” is a lack of properly skilled workers. And you could say the same for the U.K. and many other countries.
As has been said in this space before, recruiters would do well to revert to hiring for potential and to take the view that almost anybody can be equipped with new skills if the approach is right. Canady says that at volatile times like this leaders need to be highly responsive and ready to respond quickly to any sudden changes in circumstances. Being a “fast follower” is more beneficial than being the first to act and you certainly do not want to be in the trailing pack.
Leaders also, as he says, have to at times like these be open and honest in their communications, but also aspirational and hopeful. Giving people back the feeling that it is worth working hard and developing their expertise is likely to be much more effective in dealing with the current malaise than starting a trade war. The trouble with wars of any kind is that they can quickly escalate and have unintended consequences. They also tend not to solve anything.
Mexico, for example, may have averted tariffs for now by agreeing to measures that are possibly not new to make its border more secure. But it is also pretty confident that, with its citizens reportedly commanding wages that are only a fraction of those in the U.S., it is unlikely to be losing much business from its American customers.