I'm Stephen Carroll, and this is Here's Why, where we take one news story and explain it in just a few minutes with our experts here at Bloomberg. Not so long ago, the conventional wisdom was that more free trade was better for everyone. Here's a Nobel laureate, Milton Friedman in the nineteen eighties.
You know, let's suppose three of us are out in a boat in the ocean, and one of the fellows in there takes out a gun and shoots holes in the bottom of the boat. Is it the sensible thing for the others of us to do to take out our guns and shoot more holes in the bottom of the boat. That's kind of a silly notion, isn't it. But yet that is exactly the notion of protection and retaliation.
But in recent years, politicians like Donald Trump have sought to turn that once widely held view on its head.
We're doing things for this country that should have been done for many, many years. We've had this abuse by many other countries and groups of countries that were put together in order to take advantage of the United States, and we don't want that to happen. We're not going to let that happen. It's probably one of the reasons I was elected, maybe one of the main reasons.
At the time, many thought those policies would be a one off. But now Joe Biden's doubling down, adding to duties on sectors that China wants to dominate.
Only not competing our companies is cheating.
And we've seen dammy chair in America.
So here's why trade tariffs are back in vogue and Bloomberg's trades are. Brendan Murray is here to explain high Brendan. Now, tariffs aren't new in global trade, but how much were they used before this US China trade war started Undernald Trump.
Tariffs globally have been going down since the end of World War Two, when countries decided that it's better to a trade with each other than to fight each other. That came to a crescendo in the nineteen nineties when things like the NAFTA agreement in North America came about and the WTO was created. The World Trade Organization a
place where the rules could be codified and enforced. Now fast forward another five years in China joined the WTO, and a lot of people thought a lot of Western officials thought that China would play by these rules and become a more integrated economy into the rest of the world. Bill Clinton gave a well known speech back in March of two thousand.
Many Americans have looked to China to see either of the world's next great capitalist tiger and an enormous mother load of economic opportunity for American companies and American workers, are the world's last great communist dragon and next great threat to freedom and security.
A lot of US officials, and particularly the past two US administrations, would say we've gotten the communist drag in version of that scenario, the one that controls its economy in ways that you heard President Biden say amounts to cheating. So you've seen the past two US administrations use tariffs as this blunt instrument to try to balance the scales, as it were, against American industry.
So how can countries like the US, though, raise tariffs if such increases violate the rules of the World Trade Organization.
Well, for the EU, they haven't really deployed widespread tariffs. Brussels is bound and would say that they are bound by WTO rules. The WTO is an institution that believes tariffs should stay low and not ever be raised. In the US, the authority to levy tariffs has for a long time been granted the authority of Congress. That has drifted more toward the executive branch to the White House in ways that the president and President Trump did so in a big way, and President Biden has followed through
and kept those tariffs. To use legal methods to raise tariffs on countries that it believes are cheating or there's some threat to national security, another exemption where the president can impose tariffs on countries in the case of steel and aluminum especially.
Are the US tarfs working? Are they reducing imports from China?
Well, there has been some pain on the Chinese economy for sure. China as a share of US imports has fallen from the top source of US imports to number three, and the overall trading partner China ranks number three, behind Mexico and Canada, so China's share is definitely going down.
But there's some debate about and some data that needs to be analyzed here about whether some of that trade is just going through Vietnam or through Mexico through Chinese affiliates and that that direct trade might be going down, but this diverted trade is actually where we're seeing it go. The other issue is that the US trade deficit. Donald Trump would say, look, this is the biggest example of the unfairness in the global trading system. Is the US
trade deficit. Well, it hasn't gone down at all. In fact, it's gone up. In the past three years. The US goods trade balance on an annual basis has topped a trillion dollars for the past three years. That's up from about eight hundred billion before Trump took office.
Brandon, I love a fun fact. What on earth is a chicken tax? And what's that got to do with anything?
So it doesn't have anything to do with chickens, at least not the feathery kind. So the chicken tax dates back sixty years. In the early sixties, Germany and France wanted to put tariffs on American chicken exports. Well, this turned into just a mini trade war, and the US put tariffs on a number of things, including pickup trucks,
another all American sort of product. So as time's gone on all those other tariffs other than the one on pickup truck imports have gone away, but to this day, at twenty five percent tariff on pickup trucks has been imposed on foreign producers. So this is the reason why you don't see Volvo pickup trucks or Porsche pickup trucks driving around on American streets. These are protected to this day.
And it's the point is once tariffs get imposed and then there are economic interests that depend on them, they're very hard politically to remove. So the chicken tax, as it's called to this day, is one of those examples that economists would cite that say, look, you know, tariffs can have an influence, but they tend to be kind of difficult to get rid of.
Brandon, This is exactly why we need you to explain these sort of things to us. This is, you know, a debate that's been focused very much around the US and China. But how does Europe fit into this, because it's relevant to this part of the world as well.
Right, So the US's response has been characterized as preemptive, trying to get in front of some industries, the green energy industries, electric vehicles, and so on, before China becomes the dominant player in these industries. If it's not already. So this is the preemptive approach from the American side. The European side has been called more reactionary. The European
Union is investigating Chinese made electric vehicles right now. That decision is going to be announced and in the next several weeks or maybe a month or two, and we could see tariffs on electric vehicles made in China coming into the EU, so similar to what the US has done. So Europe is a bit behind the curve. But as one European official said recently, look, you know it's taken a couple of decades, but we realize that we're quote unquote getting played by China.
Knowing that you have been played, of course, teaches you that you need to watch out to be much more observant. We've talked about the present, we've talked about the past. What's the future, then what's the next frontier in the global tariff base?
So the tariffs that we've talked about apply to goods and services. The kinds of services that we've been used to over the years. Those are real estate services or consulting services, the kinds of transactions that go across borders face to face. The new frontier in the trade world is e commerce and what's called digital trade. That's anything that's transacted digitally. Say a concert ticket that you buy
in the US and it gets emailed to you. Well, it doesn't cross through any port, it doesn't go through any airport, and there's no custom duty on that. So digital transactions, there are no rules for the global Internet when it comes to taxing these sort of commerce. So there's a big debate at the WTO about what to do about this. Some countries like Indonesia or South Africa want to put tariffs on e commerce transactions as a way to collect revenue and as a way to protect
their domestic technology companies. The US has a dominant role in data flows and e commerce, with the big tech companies based in the US. Europeans are also concerned. So there's no telling which direction this is going to go in, but people are increasingly concerned that we're headed toward a more balkanized kind of global Internet, which means you know, one day you might be downloading a book on your vacation in Bali and you know it'll come with ten percent tariff on it.
And just briefly, Brandon, we've talked about the WTO quite a bit in this as well. How useful is the WTO in the today in the tomorrow world of policing these trade tariffs.
Well, the WTO is going through a sort of existential problem right now. No one is really playing by the WTO rules. Its appeals function is not working, so the rules of global trade and the enforcer of those rules isn't really operating. So it's a big question where the WTO goes from here. Former President Trump has talked about quitting the WTO.
The World Trade Organization. As you know, I've had a dispute running with them for quite a while because our country hasn't been treated fairly. China's viewer as a developing nation, India's viewed as a developing nation. We're not viewed as a developing nation. As far as I'm concerned. We're developing nation too.
The WTO has a really big challenge to become relevant again in an environment where countries are just increasingly going protectionist.
Brenton Murray Bloomberg's Trade Zara, thank you so much for bringing us that explanation of the debate over tariff's past, present and future, and for more explanations like this from our team of twenty seven hundred journalists and analysts around the world. Search for quick take on the Bloomberg website or the Bloomberg Business app. I'm Stephen Carroll, and this is here's why. I'll be back next week with more. Thanks for listening.