President Donald Trump seems to believe that tariffs can help to bring manufacturing back to the States.
Trump’s tariffs have so far been aimed at four targets, the U.S. neighbors Canada and Mexico, China and, soon to come, the European Union.
During his first term Trump negotiated the U.S.M.C.A. with Mexico and Canada, a free trade zone covering the U.S. and its neighbors. He is now attempting to change the rules of it. But the way he does so is inconsistent.
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On January 21 Trump promised tariffs on Canada and Mexico. On February 1 he announced them. Three days later he delayed the implementation of those tariffs. On February 27 he said the tariffs would go into effect on March 4. On March 5 he was again forced to pull back (archived):
President Trump said on Wednesday that he would pause tariffs on cars coming into the United States from Canada and Mexico for one month, after a 25 percent tariff that he placed on America’s closest trading partners a day earlier roiled stock markets and prompted stiff resistance from industry.
Karoline Leavitt, the White House press secretary, read a statement from Mr. Trump on Wednesday saying that White House had spoken with the three largest auto makers, and that a one-month exemption would be given to cars coming in through United States-Mexico-Canada Agreement.
A one-month exemption is a joke. It takes years to move parts production from one country to another. There are hundreds of companies in Mexico, Canada and the U.S. which make the myriad parts that go into a car. It is an completely integrated industry which took years to build.
U.S. car manufacturers had trusted that U.S.M.C.A. would hold. Should the tariffs apply anytime soon they will have to increase their prices by hefty margins or halt their production.
Trump’s tariffs in north America can largely be seen as pressure method for gaining some valuable concessions from neighboring countries. They are part of a negotiation scheme and unlikely to be a longer term problem.
But Trump’s tariffs against China are a different animal. The Trump administration views China as a strategic enemy and would like to seriously hurt it. But China is able to hit back (archived):
Minutes after President Trump’s latest tariffs took effect, the Chinese government said on Tuesday that it was imposing its own broad tariffs on food imported from the United States and would essentially halt sales to 15 American companies.
China’s Ministry of Finance put tariffs of 15 percent on imports of American chicken, wheat, corn and cotton and 10 percent tariffs on other foods, ranging from soybeans to dairy products. In addition, the Ministry of Commerce said 15 U.S. companies would no longer be allowed to buy products from China except with special permission, including Skydio, which is the largest American maker of drones and a supplier to the U.S. military and emergency services.
Lou Qinjian, a spokesman for China’s National People’s Congress, chastised the United States for violating the World Trade Organization’s free trade rules. “By imposing unilateral tariffs, the U.S. has violated W.T.O. rules and disrupted the security and stability of the global industrial and supply chains,” he said.
Trump claims that tariffs on China are necessary to stop the illegal import of Fentanyl, an addictive synthetic opioid widely used in the U.S.
China counters that it already has put strong controls on Fentanyl and its precursor chemicals. It can not be blamed for a problem that solely exists within the United States:
The reason why the fentanyl issue in the US is so serious has never been external; it has nothing to do with China, which strictly prohibits drugs. Illicit fentanyl started to enter the US market as early as the 1980s. Later, media revealed that US pharmaceutical companies concealed the addictive properties of synthetic opioids and that doctors overprescribed painkillers, leading to widespread addiction among patients. Statistics show that with 5 percent of the world’s population, the US consumes 80 percent of the world’s opioids, but still has not permanently scheduled fentanyl-related substances as a class. The almost abnormal demand has boosted the development of the illegal fentanyl market, fundamentally contributing to the proliferation of fentanyl in the US.
The Global Times points to the social causes of drug addiction:
[T]he lack of social governance in the US has exacerbated the drug problem. US Vice President JD Vance described a similar situation in his autobiography. Many low-income families live in chaotic community environments with a lack of education and supervision. This has led to many children living in adverse conditions of drug abuse and trafficking, forming a vicious cycle that is difficult to break.
China’s government spokesperson is promising to fight back:
Intimidation does not scare us. Bullying does not work on us. Pressuring, coercion or threats are not the right way of dealing with China. Anyone using maximum pressure on China is picking the wrong guy and miscalculating. If the U.S. truly wants to solve the fentanyl issue, then the right thing to do is to consult with China by treating each other as equals.
If war is what the U.S. wants, be it a tariff war, a trade war or any other type of war, we’re ready to fight till the end.
Such language from China is far from the usual one. It therefore seems unlikely that there will soon be a compromise between the U.S. and China.
With respect to Europe the U.S. claims that it is importing more goods from Europe than it can export to it. That is true but does not cover the full width of economical relations. The U.S. is exporting way more services (think software) to Europe than Europe is exporting to the U.S. The total of goods and services exchanges is a wash. If the U.S. insist on putting tariffs on European goods the EU can counter adding a toll to all U.S. services. The results would be, in theory, a tie.
Tariffs however are dangerous. They distort markets and add significant costs to all participants. Their pain will be mostly felt by U.S. consumers:
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All the planned tariffs would take the US tariff rate to above 20% in just a few weeks, the highest since pre-WWI. As Joseph Politano points out, the costs of these actions are enormous, covering $1.3trn in US imports or roughly 42% of all goods brought into the United States, or the single-largest tariff hike since the infamous Smoot-Hawley Act of nearly a century ago.
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The total costs of these tariffs would raise $160bn from US consumers and businesses paying more for their purchases of imported goods, with more to come. Trump’s Tuesday measures are only 40% of his proposed measures. If the next batch is implemented, it would raise the cost of imports to over $600bn, or 1.6% of GDP.
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So worried is the International Chamber of Commerce in the US, that it reckoned that the world economy could face a crash similar to the Great Depression of the 1930s unless Trump rows back on his plans. “Our deep concern is that this could be the start of a downward spiral that puts us in 1930s trade-war territory,” said Andrew Wilson, deputy secretary-general of the ICC. So Trump’s measures may go well beyond “a little disturbance”.
Reprinted with permission from Moon of Alabama.
