Financial History Issue 133 (Spring 2020) | Page 15

Great Depression, a period most scholars
say was prompted by the introduction
of tariffs (import taxes) by the United
States in 1930 under the terms of the
Smoot Hawley Act. Those tariffs further
restricted global trade and America, and
much of the world, suffered. When the
world returned to war in 1939, the declines
in trade continued. By the time WWII
ended in 1945, trade as a percentage of
GDP was a paltry 4.2%, or less than a third
of its pre-WWI peak.
After WWII, and with America taking
the lead in the new international system
dominated by the US dollar, trade once
again started. Until recently, that growth
showed little sign of stopping. The excep-
tions are the widespread economic shut-
downs caused by government reaction
to the covid‑19 virus, and the trade war
between the United States and China, the
world’s two largest economies. A big part
of the phenomenal trade growth over the
last three decades has been the concerted
effort by world leaders to reduce levels of
tariffs and increase trade.
The leading body in this push is the
World Trade Organization (WTO), which
took over from the General Agreement on
Tariffs and Trade (GATT). Founded in
1995, the WTO’s efforts have born tremen-
dous fruit in terms of reducing tariff levels.
In 1994, the weighted average tariff rate
was 8.6%, which fell to 2.6% in 2017. More
recent numbers have likely increased due
to the friction between the United States
and China. Nevertheless, a reduction of
almost seven-tenths in overall tariff levels
is impressive. It is partly responsible for
the continued rise in trade.
The correlation between lower tariffs
and increased trade also works vice-versa
and makes the recent US-China trade
dispute worrying. Rising tariffs are never
good for international trade, and few cred-
ible economists think differently. In Feb-
ruary, right about the time the covid‑19
crisis was causing mayhem in Wuhan,
China decided to cut the tariffs on some
US goods. Whether these two things are
related isn’t clear. It is also still unclear
whether there will be a resolution to the
US-China trade conflict when the pan-
demic ends. Economists will no doubt
monitor whether tariff levels fall or rise
when the pandemic ends.
There’s another concern over the
future of trade: Non-tariff barriers. The
United Nations wrote a report focused
on the matter in Asia last year, stating the
following:
Fueled by legitimate public policy con-
cerns, as well as ongoing trade ten-
sions, the number of non-tariff mea-
sures (NTMs) has risen significantly.
While NTMs often serve important
public policy objectives linked to sus-
tainable development, the trade costs
associated with NTMs are estimated
to be more than double that of tariffs.
(Author’s emphasis)
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