Bankers worried about a 1930s-style trade war need to look beyond the row over tariffs. Export incentives and often trade finance itself are where the real distortions lie, writes Brian Caplen.

No doubt US president Donald Trump’s nationalist trade rhetoric plays well in the US rust belt from where he draws considerable electoral support. It also allows foreign leaders to portray him as an irresponsible protectionist who wants to dismantle the international liberal order and take the world back to the dark ages of the 1930s.

But in adopting this stance, those foreign leaders are being totally disingenuous. The data shows that since the financial crisis, trade discriminatory policies have been ramped up across the G20. The measures taken, however, do not in the main involve imposing tariffs. Subsidies, government procurement initiatives and localisation measures are where trade discrimination takes place in the modern era, making talk about a return to Smoot Hawley (the US tariff rises blamed for the 1930s depression) a bit of an irrelevance.

In a paper written for the Global Trade Alert (an organisation set up in 2009 to monitor trade protectionism), Simon J Evenett and Johannes Fritz note that the total amount of G20 exports facing various forms of crisis-era protectionism reached 73% by the end of 2016 up from 42% in 2009.

Tax-based export incentives are the leading discriminatory measure affecting 56.23% of G20 exports while trade finance measures impact nearly 25%, up from less than 3% in 2009 and 2010. Much of trade finance, say the authors, “appears to have departed from its original purpose and increasingly looks like export subsidisation through the back door”.

Import tariffs, by contrast, only affect just over 8% of G20 exports, meaning that the current war of words over tariffs is the wrong conversation to be having.

Interestingly, given Mr Trump’s dislike of the North American Free Trade Agreement, the G20 country engaging in trade protectionism the most since 2008 is the US (​showing that it went on throughout the Obama era) and the countries that have​ transgressed ​the least are Canada, South Korea and Mexico.

Economist Phil Mullan says in an article for the UK online magazine Spiked: “Many tariff alarmists have their own protectionist financial and regulatory policies, and represent a bigger threat to economic progress and international harmony than Mr Trump’s 'America First' policies. And the more mainstream protectionist measures pursued by ‘globalist’ leaders in the West are much more established than those of the self-proclaimed ‘economic nationalists’.”

Brian Caplen is the editor of The Banker. Follow him on Twitter @BrianCaplen

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