Since January 2018, the United States has carried out one of the most massive swings in foreign economic policy since the trade wars of the 1930s, abandoning the multilateralism forged after World War II and adopting a new strategy of going it alone. The implications for U.S. and global economic growth are enormous, and the consequences for U.S. firms’ ability to access foreign markets are sweeping.
The defining characteristic of this shift has been uncertainty. The U.S. has:
- Unilaterally raised tariffs on hundreds of billions of dollars’ worth of imported goods, on many by as much as 30 percent.
- Further threatened to increase tariffs on billions of dollars more goods from places as diverse as the European Union, Guatemala, Japan, Mexico, Turkey, and Vietnam, sometimes for reasons unrelated to trade relations.
- Withdrawn from the 12-nation Trans-Pacific Partnership (TPP) pact, which it previously led.
- Threatened to withdraw from trade agreements even with close allies.
- Gutted the arbitration body that helps enforce member obligations under the World Trade Organization (WTO), which may soon throw more than 70 years of global goods market integration into a tailspin.
- Concluded a contentious set of negotiations to close the United States-Mexico-Canada (USMCA) trade agreement this month, but added to its foundational provisions a 16-year sunset clause when it will expire unless renewed, with reviews stipulated every six years.
What are the macroeconomic effects of these shifts in trade policy? In some ways, it can be hard to see the extent. After all, the U.S. average effective tariff (the “AVE”) is still only 2.7 percent based on recent Census data (using year-to-date through August to compute the ratio of duties collected to overall imports for 2019). While tariffs produce large costs for buyers, they are to some degree offset by increased tariff revenue for government coffers and profits for protected industries. The overall loss to U.S. gross domestic product (GDP) from tariffs in 2018 and the first half of 2019, estimated using standard workhorse models, without accounting for complexities like uncertainty, amounts to a few tenths of one percent – which may sound small, but can represent an average cost of hundreds of dollars per year for a U.S. household.
Read More: https://hbr.org/2019/12/what-unilateralism-means-for-the-future-of-the-u-s-economy