UBS: Trump's trade war is trying to take us back to the 1800s - but Harley Davidson has proved it won't work
- UBS Wealth Management chief economist Paul Donovan says Trump's trade war is reminiscent of the 19th century.
- In a globalised world, tariffs are ineffective, Donovan told clients on Tuesday.
- He cited the example of Harley Davidson's announcement that it is moving production out of the USA.
The escalating trade war spearheaded by President Donald Trump is reminiscent of the 1800s, according to a senior figure at Swiss bank UBS.
Speaking to clients in a daily audio update, UBS Wealth Management's chief economist Paul Donovan described the tariffs imposed by the Trump administration on the EU and China, as well as retaliatory tariffs from the affected parties as a "19th century tax."
"Back in the 19th century, trade taxes sort of worked. They were net economic negative forces, but companies generally didn't have much choice about where they made things," Donovan said.
"Companies were nationally focused and couldn't move production around the world at will. Tariffs are a 19th century tax."
As a result, recent tariffs imposed by Trump simply won't work, Donovan said.
"Modern trade is a lot more complex [than in the 19th century] and transnational companies dominate. Around 40% of global trade is estimated to take place within companies, moving things from one subsidiary to another. That gives companies a degree of flexibility to avoid trade taxes."
In the past couple of months, President Trump has sparked a major global trade conflict by announcing tariffs on hundreds of billions of dollars worth of goods produced in places including China, Mexico and the EU, driven by a belief that all are undermining the US economy by producing goods for less money.
The conflict took another turn on Monday when Harley Davidson, the iconic US motorbike manufacturer, announced that it would shift production out of the country to avoid the scuffle between Trump and the EU.
The company said that retaliatory European taxes on imported motorcycles will have a "significant impact" on its business, increasing the cost of motorcycles by $2,200 on average, so has decided to move production elsewhere.
Trump hit back at the move, saying on Twitter that he was disappointed with the decision.
"Surprised that Harley-Davidson, of all companies, would be the first to wave the White Flag," Trump said. "I fought hard for them and ultimately they will not pay tariffs selling into the E.U., which has hurt us badly on trade, down $151 Billion. Taxes just a Harley excuse - be patient!"
Donovan, however, says that the move makes perfect sense in the context of the new tariffs. Here's his full argument (emphasis ours):
"This is entirely reasonable from a business perspective. Moreover, the European Union is highly unlikely to pursue Harley Davidson specifically. The EU was aiming to hurt the US economy with its taxes to achieve political ends. While Harley Davidson was making bikes in the United States the EU taxes hurt the US economy, Harley Davidson, and potential the EU consumer, if the taxes were passed on. If Harley Davidson switches production elsewhere, the EU taxes hurt the US economy, but do not hurt Harley Davidson, and do not hurt the EU consumer. Welcome to 21st century trade."