Trump, tariffs, and market turmoil

As the raft of tariffs announced by Trump last week come into force, we examine how this is possible in this era of global trade, and how the UK may be adversely affected, despite it having one of the lowest tariff rates applied. Is this the end of globalization?

According to the US, global trading partners have been keen to negotiate. Despite this, the imposition of tariffs has gone ahead. Only China has announced retaliatory tariffs, and the response was swift from the US, raising the China tariff to 104% from today (9^th April)

The turmoil in the markets reflect the severity and potentially damaging consequences of this US announcement.

The rules of international trade appear to have been swept aside, or at least ignored, in this opening salvo from the US. The World Trade Organization (WTO), of which the US is a member along with 165 other countries covering 98% of world trade, exists to lower barriers to trade for the economic benefit of all members. WTO agreements are negotiated and signed by a large majority of the world’s trading economies and ratified in their parliaments. These agreements form the legal foundation for global trade. Essentially, they are contracts guaranteeing WTO members' important trade rights. They also bind governments to keep their trade policies transparent and predictable, which benefits everyone.

One of the cornerstones of the WTO multilateral trading system is the ‘most favoured nation’ (MFN) principle. This principle seeks to replace the frictions and distortions of power-based (bilateral) policies with the guarantees of a rules-based framework where trading rights do not depend on the economic or political power of individual participants. It states that the best access conditions offered to one country must be offered to all trading partners (outside of a free trade agreement). The announcement of a differentiated tariff regime by the US clearly ignores this fundamental rule.

So, what happens next? China has already filed a dispute with the WTO appellate committee. However, due to the US having previously blocked the appointment of new judges, the committee is currently paralyzed and unable to process any disputes, potentially allowing a rise in protectionism.

It is too early to conduct any detailed analysis due to the volatility of the situation. However, commentary that compares one country’s tariffs with another and concludes that the UK has ‘got off lightly’ may not fully understand the intricacies of world trade. Trade in takes place within a complex network of trading partners. The knock-on effect of tariffs against one trading partner will be felt across that network. For instance, a 20% tariff on EU goods going to the US could lead to an excess of products on the EU market, potentially putting downward pressure on domestic prices.

The main exporters of beef to the US include Canada and Mexico, both of which are currently facing a 25% tariff. Does this create an opportunity for UK beef producers, who will only face a 10% tariff? It is unlikely. Currently, the UK accesses the US beef market via a rest of world (ROW) tariff rate quota (TRQ), which it struggles to access as it is filled, largely by Brazil, in the first month each year. Outside of that TRQ, UK beef producers already face a 26.4% tariff, making UK beef uncompetitive. In fact, UK producers may suffer from the excess product from Canada and Mexico, along with Australia looking for new world markets and putting downward pressure on global prices.

It is a similar picture for pork, with the EU, Canada, and Mexico being the current main suppliers. Any excess pork from these markets, particularly the EU, will have a direct effect on domestic pork prices.

So, nothing is straightforward. As the picture becomes clearer, we will be looking at each sector in turn to determine the likely impact. Our analysis will no doubt be subject to change as the global picture emerges, but we will do our best to keep our levy payers informed in this fast-moving area.