Corridors Under Siege

Banks Brace for a New Tariff Regime

Two weeks before Donald Trump walked out into the Rose Garden, the group chief financial officer of Standard Chartered PLC stood in front of a room of investors in London. “I mean a real trade war, if people have not read their books and they haven’t figured out what happened in 1930 with everyone beggaring their neighbor, yes, there are terrible scenarios out there,” he said. “But one hopes that people have read and people don’t want to cut off their noses to spite their faces.”

He was talking about the Smoot–Hawley Tariff Act, signed into law by President Herbert Hoover as a protectionist trade measure to shield American industries from foreign competition during the onset of the Great Depression. The Act raised tariffs on over 20,000 imported goods to a weighted average rate of around 20%. Did it work, as Ben Stein memorably asks in Ferris Bueller’s Day Off? (Anyone, anyone?) It did not work, and the United States sank deeper into the Great Depression.

Standard Chartered’s CFO was right to be anxious about a rerun. Each of the forerunner banks that would eventually combine to form Standard Chartered was hit hard back then. Although they didn’t do much business in the US, they were set up to facilitate international trade – which had started to slow. Even before the tariffs came into effect, the chairman of Chartered Bank had complained at his annual general meeting about a sharp fall in demand for Japan’s silk exports. When tariffs were raised on agricultural imports, the price of most internationally traded commodities collapsed, falling by 50% or more by the end of the year. Chartered’s Rangoon branch, whose principal business was financing local rice exporters, lost just over £39,000 in 1931, compared with aggregate operating profits of some £32,000 for the whole of the 1920-30 decade. The pre-tax loss for the overall group came close to £1 million in 1931, roughly cancelling the profits recorded over the previous three years combined.

Of course, it’s difficult to disentangle the impact of tariffs from the broad economic malaise, but banks with business models geared to international trade flows suffered – an important consideration today, given that Donald Trump’s tariffs are even higher than those imposed by Smoot–Hawley. Estimates put their weighted average rate at between 22% and 29%; tariffs haven’t been this high since 1904.

Much has been written about the tariffs – about the unorthodox way they were calculated, about the unusual reaction of the US Dollar, about the economics of trade, about the prospects for recession. Amid the market sell-off, banks were especially hard hit. In the US, bank stocks fell almost 10% on the day after the tariffs were announced, twice the decline in the S&P 500 index. To explore how global banks are navigating this threat – from Standard Chartered’s corridor strategy to Canadian banks’ stress tests – read on.