Tariffs and Trade Wars: An Obsolete Tool or a Powerful Weapon?
Are tariffs really a tool of the past or are they still a powerful weapon in the economic arsenal of nations? In a globalized world, where goods and capital cross borders at unprecedented speeds, the idea of taxing trade seems anachronistic. Yet tariffs have returned to the center of modern trade wars, sparking tensions between economic powers such as the US, China and Europe.
Behind every tariff levied there is a complex political strategy: protecting domestic industry, rebalancing trade deficits or simply responding to internal pressures. But how effective are they really? And above all, who pays the final price?
Gianmarco Ottaviano, Full Professor of Economics and Boroli Chair in European Studies at the Bocconi Department of Economics, guides us on a journey through history and current events, revealing the economic and political mechanisms that regulate tariffs. This analysis is not limited to economic theory, but explores the social and political consequences of an instrument that continues to divide the world.
Are tariffs just a tool of the past or are they still useful?
The passage of goods across borders has always been controlled. To take Milan as an example, there are gates along the Spanish walls where toll stations used to be located. Anyone who came to Milan to sell their goods had to pay a tariff. They are a useful tool especially for states that are weak from the point of view of organizing tax collection, because it is the easiest way to collect tax revenue. It is in fact widely used in developing countries.
In 2021, however, many nations in Africa signed a Free Trade Agreement with the intention of creating a single market and reviving the economy. Is it working?
Actually, the amount paid by a truck transporting goods when crossing a border on the African continent is just one of the many tariffs that are levied. There is a World Bank report that highlights another series of payments imposed by the police, gendarmerie and other more or less official forces.
Has there been a decrease in the number and size of tariffs globally?
Certainly. Since the end of World War II and even more so since the 1970s, there has been a progressive decrease in tariffs. So, going back to the initial question, there are and always have been tariffs and they have been the rule rather than the exception. However, the amount and relevance of these tariffs have drastically decreased, and that is where globalization comes into play. This globalization is driven by political choices and not only by commercial ones.
What is the role of the World Trade Organization?
The WTO – which includes around 160 countries – operates a highly regulated situation. It is officially a free trade institution, although in reality some agreements under its leadership allow for tariffs and other forms of protection. And the WTO has a special tribunal that handles any disputes. However – focusing on current events – the President of the United States can issue an executive order and impose a tariff instantly. And here a mechanism is established that is best explained with a metaphor: if one person stands up in a stadium to get a better view, and those around that person all get up for a better view at the same time, in the end everyone’s view is as if they were all sitting down. In other words, they are worse off than before. Similarly, if a country "receives" a tariff and responds by imposing one of its own, the situation is evened out by damaging both countries involved.
But ultimately, tariffs provide a benefit to some, if not to everyone.
It’s a matter of realpolitik. Rather than asking whether tariffs are good for all Americans (or all Europeans, Chinese, etc.), the question of whose interests are being served should be asked, because it is precisely these interests that exert pressure and take precedence over others. A tariff on the US import of cars is good for the US automotive sector because it reduces competition, but a tariff on the US import of steel is good for those who produce it in the United States, but it is less good for the US automotive sector itself, which will have to buy this American steel paying more for it than the Chinese steel it may be paying for now. Tariffs therefore have a strong redistributive power.
While at the same time angering consumers, who may find themselves the final recipients of price increases.
Consumers who buy cars may wonder why they should be taxed to support an industry – e.g. the American auto industry – which from their point of view is less competitive. In essence, the question that is asked is: Why do I have to be the one to pay? So this goes back to the conclusion above, namely the issue of redistributive impact.
Tariffs are therefore also a political tool.
Yes. If a tariff is introduced, consumers find themselves having to pay a higher price, but sometimes without fully understanding why and how this increase has been determined. If, on the other hand, a tax is put on polluting vehicles, everyone understands perfectly well where it comes from and therefore can react. Tariffs are often a less transparent way of achieving results that would be difficult to achieve with more transparent methods.
And potentially, they are also an instrument of "war".
Within the WTO, there is a regime of trade peace, regulated by treaties. If someone violates these treaties, the injured party can go to the WTO court. This is also what happens to citizens, if a person is injured by someone the most correct reaction is to take legal action, not to take revenge into their own hands, otherwise civil peace is violated. A country that feels injured by the commercial behavior of another country and thus places a tariff is like breaking the windows on someone’s car who has unduly parked in the wrong spot, for example. Tariffs are therefore an instrument of "war" when they are used for the purpose of aggression and coercion. Many of the measures taken by Western countries against Russia can be translated into the logic of restricting trade.
A world without tariffs, however, is still far from being possible. Will it ever happen?
As already mentioned, for some countries they are the only source of income that allows them to maintain what little state apparatus they have – e.g. a police force and a judicial system. Of course, these are developing countries. But that is not the only reason. There are situations for which free trade is not the best solution. One example is the issue of reducing polluting emissions, which is very dear especially to European countries. This leads to increased costs for European companies, which then perhaps find themselves having to compete with companies located elsewhere – where they do not have to comply with environmental requirements – and then sell on the European market. This is why the European Union has established the Carbon Border Adjustment Mechanism which, to put it simply, imposes an offsetting tariff on companies importing carbon-intensive goods produced in non-European countries that do not comply with European CO2 emissions manufacturing standards. This shows that there are several situations in which the free market is not the best solution.
What should we really expect from President Trump on this front?
Trump has many things on his agenda, some of which are incompatible. One of the objectives is to protect the American manufacturing industry – which risks affecting Italy in particular – while another is to reduce the trade deficit, both the absolute deficit and bilateral deficits with various countries. Of course, these countries include China. It is perceived as a great emerging economic rival, and it raises concern also by virtue of the response the Asian country gave during the first trade war in 2018, but also during Biden's protectionist maneuvers in more recent years. Even the attempt to prevent China from accessing American technologies in the end did not yield the desired results. And then there is the military discourse, where China is still behind the US but has the means to close the gap. Returning to tariffs, so far Trump has rattled his sabre mainly towards Mexico, Canada and the EU, more than China. Even the threatened 60% tariffs went down to 10%. The reality is that the US has understood that placing tariffs only on China does not prevent Chinese goods from entering its territory, and therefore wants to target any triangulations through the so-called "connector" countries. As for Europe – an issue that hits closer to home – if it learns how to join together, a situation similar to China’s will be reached, with some tariffs arriving and others not, but still with less deleterious effects than feared. If the various countries remain divided, on the other hand, they would carry little weight against the American giant.