Chain Reaction Podcast Tariffs, Trade Policies and Supply Chains – Special Edition

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In this episode Tony Hines takes a look at tariffs, trade policies and how they impact supply chains. Is managing international trade through the blunt instrument of tariffs and quotas fit for purpose in the 21st Century? Should governments be looking for better ways to facilitate trade? We begin by examining a brief history of tariffs by taking a look at how they developed as an instrument to grow the British Empire in the 18th Century and how tariffs became the genesis for the United States to exist.
When Adam Smith published his influential book the first about political economy Britain had an empire that stretched around the globe. An empire that was protected by favourable trade policies to the benefit of the East India Trading Company established in 1601. There was much interest from France under Napoleon and from Prussia in Smith’s ideas. The system of market regulation based on tariffs and quotas was known as Mercantilism. Governments thought that they could regulate trade to their benefit whilst simultaneously deriving income from taxes. The system developed a complicated elaborate structure of customs duties on imports and exports. What these taxes actually did was create monopolies for certain interested parties particularly the British East India Company.
At the time Smith was attacking the Mercantilist policies there was a dispute brewing in the American colonies over Tea Trade.  A minister of the Crown with responsibility for the thirteen colonies in America wanted to tax tea and enforce regulations on a variety of commodities to the letter so that Britain could make them pay taxes to support the cost of their own defence. These enforced regulations were unenforceable at a distance of 3,000 miles and the states had little ability to regulate them in the ways demanded by the British.  Earlier in the eighteenth century the British Government had implemented a range of taxes on the cotton trade which woollen manufacturers promoted to protect their trade in textiles. Arguments grew louder after the publication of Smith’s Wealth of Nations and free trade became the mantra (Laissez-faire – let it alone). Businesses argued that these were not matters for the state to concern itself with. Mercantilism was abandoned and William Pitt the younger was an outspoken advocate and adopted the policy when he became Prime Minister in 1783. Progress was interrupted by the French War with Napoleon’s army by which time Britain had amassed a large national debt to fund the war. Trade regulation continued until William Huskisson became President of the Board of Trade under Pitt in 1823.
The Free Trade movement set the agenda for economic growth and through it Britain prospered until Chamberlain began to revive interest in tariffs at the start of the wars with South Africa in the first decade of the twentieth century. In 1944 the Bretton Woods Agreement set out to establish a complex system to manage international trade  through a General Agreement on Tariffs and Trade (GATT) .  The agreement  laid the foundations for the establishment of the World Trade Organization (WTO) on the 1st January 1995.  Today the WTO manages a complex system of trade regulations mainly through tariff and quota arrangements in 163 countries. The WTO also deals with trade disputes through its appeal procedures.  All of this despite the fact that most economists think that tariffs do more harm than good. Supply chains work best when there is no friction. Tariffs cause friction through customs checks, bureaucracy and additional costs added to what would otherwise be a simple commercial trade. Supply chains have to establish systems to cope with this. When trade agreements change they cause disruptions and there are inevitably winners and losers in the process.  Read Full Article