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On trade, trade wars and cosmetics

  • April 19, 2018

I am not a good cook. But it cannot be denied that my wife is even worse than me. On the other hand, she is ruthlessly clean and tidy, while I am messy and disorganised.

Given that tasks are allocated equally in our household, we trade. I cook. She cleans up. Everyone is happy with this arrangement. This way the kitchen is spotless, and we are spared chicken nuggets six nights a week.

If you will forgive some generality, so it is with real trade. If countries concentrate on what they do best, and trade, efficiency is maximised. If efficiency is maximised, wealth increases. In the sometimes contested and politicised world of economics, this is something that economists agree on.

This insight lies at the heart of the world trading system.  Since the second world war, we have gradually moved away from protectionism towards free trade, under a system of rules (overseen by the WTO) which aims to deter abuse and promote a degree of fairness. This period has coincided with unprecedented prosperity. Freer trade has been a significant factor in this. Globalisation may be a dirty word for some, but the decline of protection, and cheaper transportation, have helped millions escape a life of subsistence poverty. It is true that freer trade can have negative effects in some communities, but overall the economic effect is positive. 

Now it seems we are in the early stages of a global trade war, a move backwards towards protectionism. President Trump has recently tweeted that trade wars 'can be won easily'. This is, to put it mildly, inaccurate. It is not even clear what it would mean to 'win' a trade war, since protectionism will reduce economic efficiency overall, so there are losers on all sides. The Trump administration admits that the cost of US made cars will increase as a result of the steel and aluminium tariffs, because manufacturers will need to buy more expensive materials.

At the time of writing, the EU is exempt from the Trump tariffs. This may change. But the president signalled his intentions long ago, and the EU has been preparing for the possibility of retaliation accordingly.

The aim of retaliation is not to raise revenue or to protect EU industry. It is to get Trump to back down. One view is that measures should attack his supporters. Hence the Chinese have concentrated retaliation on agricultural products which will hit the rural areas which are more sympathetic to Trump. 

Which brings us to cosmetics. Some cosmetics products are on the EU draft retaliation list. This is puzzling, for two reasons. First, the conventional wisdom says that tariffs should be placed on goods for which there is a trade deficit. But in fact, the EU exports 50% more of the relevant cosmetics products to the US than it imports. Not only does this fail to hit Trump where it hurts, it also means that any counter retaliatory measures from the US would hit the EU industry harder.

Second, cosmetics and personal care is a global business, and companies make manufacturing and distribution decisions with a global overview. 67 % of the US cosmetic export that is targeted in the draft retaliation list benefits EU companies who either own the exporting US brands, or who outsource manufacturing to US subcontractors. EU tariffs in this context are an own goal.

I understand why the EU needs to act. The world trade order is worth defending, imperfect as it no doubt is. Some argue that trade wars prefigure international conflicts of a worse kind. That our industry is now potentially caught in a trade fight only adds to the frustration, and to the sense of foreboding.

 

John Chave, Director General, Cosmetics Europe

  

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