Protectionism such as raise in custom tariff rates has taken the spotlight recently on a global basis. In general, it is rather a controversial topic however, from a Marine underwriter’s perspective it is nothing but a concern. Unlike most other lines of business, Marine insurance has direct impact from the consequence of protectionism. Especially Cargo insurance will have an immediate hit if the global trade starts reducing it's volume.
The positive aspect which is assumed to be relatively smaller than the negative aspect is the possibility of domestic industries picking up new business when the import cargo stops flowing into the country. This may turn out to be some new domestic transit needs which could generate some domestic transportation (inland marine) insurance. However, in most states the ocean cargo insurance is much larger than the domestic in terms of premium volume. The negative impact on the ocean cargo insurance would probably exceed the positive impact on domestic transportation insurance.
From a general point of view, if protectionism in global trade starts to rise globally, it could be considered that the impact to cargo insurance business could be proportional to the size of the cargo premium volume which will turn out to be quite an impact for these top notch countries.
When we look back in history, in United States the Smoot Hawley Tariff Act of 1930 which was enacted following the Great Depression of 1929, took the average tariff rates up to 59.1 percent effecting over 20,000 imported goods. This caused 66% of decrease in imports to the United States, one of the most famous protectionism actions taken in history. Measures of retaliations were taken by other states and the rise of global protectionism lead the world to a confrontational situation a typical understanding of world history which gives us the negative image of tariff raise.
The important factor that I want to point out here is the exchange rate of the currencies.
Back in those days it was fixed exchange rates. That means if the tariff rate was raised 30 percent, it would directly increase 30 percent of the exporting/importing cost. Today the global standard is of course, floating exchange rates. Happened to face the international trades over two decades, what I found is that the fluctuation of the exchange rate is something exporters and importers are much more exposed to in today’s trading.
If governments or central banks were to take a weak currency policy, it has a potential of easily offsetting the raised tariff rates. The raise in tariff rates would be more of a symbolic act of protection and therefore it can draw considerable attention. However, the reality is, ten percent fall of currency will offset a ten percent raise in tariff. If a currency had been weak and had been enjoying the strong exporting power for a certain period of time, the tariff raise at the opponent state could be considered as a struggle trying to reduce the debts.
Say a certain currency was 30 percent weaker than a decade ago, starting a 15 percent raise in tariff rates could be something like adding cups of water to a leaking bucket. Currency control could be more of a crafty, foxy strategy. Moreover, unlike the tariff which is item specific, the currency fall will work on all exports across the board regardless of item.
With all that being said, protectionism still could be a concern for Marine insurance, I must say. If states are to start taking measures that are not subject to WTO rules, the consequence will obviously become a turmoil. The concerns of global trading heading into a shrinking spiral which we now see quite often in general, is something that we also share within our industry as well. It is safe to say free trade is in our common interest as Cargo Underwriters.
Free trade being a common interest of Cargo Underwriters, the “modern” free trade that should be pursued going forward would be an "ethically controlled" trade which is fair and equitable among the parties involved.
We are standing at the dawn of modern free trade…will the sun rise?
Autor: Tom Shinya, Manager Tokio Marine & Nichido Fire Insurance (Quelle: Tokio Marine)
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