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Costly Tariff Spat Masks Deeper Trade Problems

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08/18/2019 | 07:15am EDT

By Jason Douglas

In waging a trade war on several fronts, President Trump appears to be turning the clock back to a bygone era, when high barriers to trade were a daily fact of economic life.

In fact, the tit-for-tat tariff fight between the U.S. and China is the public face of a global slide toward protectionism that has been going on for a decade and shows few signs of slowing.

Some Trump administration officials have portrayed tariffs as a short-term tool to pressure countries into negotiating better trade agreements. But many economists say the recent proliferation of such measures is holding back U.S. and global economic growth.

Mr. Trump's levies on products ranging from steel and solar panels to textiles have raised the average tariff applied on imports purchased by the U.S. to just over 4%, according to analyses by Deutsche Bank AG and UBS Group AG.

That is considerably higher than the same figure for some of the countries in the president's sight. The average tariff on imports to the European Union is around 1.8%, according to the World Bank. Canada's is 1.5%.

However, China -- the president's chief antagonist in his trade disputes -- levies an average tariff on imports of 4.6%, Deutsche Bank estimates.

The last time the average U.S. tariff levied on imports was anywhere near its current level was in the 1970s, figures from the World Bank show.

Mr. Trump's threatened tariff extensions, if implemented, would push the rate higher still. His latest threat to slap a 10% levy on a swath of Chinese consumer goods by Dec. 15 would nudge the average tariff to more than 5%, Deutsche Bank estimates, or 7% if those tariffs ratchet to 25%. Throw in additional tariffs he has threatened on Mexican imports and European cars, and UBS calculates the average tariff on goods imports to the U.S. would reach just under 9% -- a level unmatched since 1947 and before the long, postwar effort to break down overt trade barriers and boost global trade.

Raising average tariffs to such a level would put the U.S. on a par with countries including Sri Lanka, Brazil and other less developed economies where governments often seek to shield domestic industries from foreign competition.

"What we have is a change of direction for the U.S." in terms of free trade, said Rob Martin, an economist at UBS.

Mr. Trump is just using every available tool to level the playing field on trade, combating a strategy of unfair competition pursued by many countries, a White House spokesman said.

Most economists say restricting trade imposes costs on businesses, consumers and the wider economy. UBS calculates the blossoming trade conflict has kept the U.S. economy around 0.75% smaller than it would have been had tariffs stayed where they were.

Global output has also taken a hit: UBS says the world economy is around 0.4% smaller than it otherwise would have been. The damage will rise to 0.7% if Mr. Trump pulls the trigger on all threatened tariffs.

The International Monetary Fund recently cited trade tensions as the prime reason it lowered its global 2019 growth forecast to 3.2% from its April projection of 3.3%. The world economy expanded 3.6% last year.

Some economists, though, say tariffs don't tell the whole story and may be a misleading signal for gauging the true state of global openness to trade.

For one thing, applied average tariffs measure levies imposed on goods actually bought in any given year, meaning they can swiftly change if importers, faced with higher prices, decide to buy from somewhere else. For example, recent data shows Chinese imports from the U.S. fell 30% on the year through June as importers shunned U.S. soybeans and natural gas in favor of cheaper alternatives.

Nor do tariffs necessarily explain patterns of global trade. Consider American automobiles, whose relative unpopularity in Europe owes more to narrow streets than EU import duties, said Sam Lowe, a trade-policy expert at the Centre for European Reform, a London-based think tank focused on EU affairs.

"When Trump moans about American cars and the EU, what he really wants is for European consumers to change their preferences," he said.

Simon Evenett, professor of international trade and economic development at the University of St. Gallen in Switzerland, said policies such as regulations, tax breaks and export subsidies have been distorting trade for years.

This year alone, for example, Canada said that it would make up to $755 million of taxpayer cash available to the oil and gas sector to boost exports. France, Germany, Italy and the U.K. said they are bankrolling an EU microelectronics project with loans and grants worth around $2 billion. Brazil and Argentina have taken steps to limit import competition in cars.

Mr. Evenett, who oversees the Global Trade Alert project that tracks developments in trade policy, estimates that in 2019 around 73% of global trade will be affected by some trade-distorting measure. That compares with 35% a decade ago.

Efforts to revive economies weakened by the financial crisis have driven the shift, he said, and while the U.S. isn't innocent of such practices itself, it is often on their receiving end. Nearly 59% of U.S. imports this year are subject to some trade-distorting measure. But in China, it is 75%.

"We have a system that has really quite distorted, but it looks open," Mr. Evenett said.

Write to Jason Douglas at jason.douglas@wsj.com

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