Implications for China, Europe, and the Global Economy
Former US President Donald Trump’s stance on trade policy, particularly regarding tariffs, was a hallmark of his administration from 2017 to 2021. Recent discussions about his proposed tariffs in his second term have reignited debates on their potential global impact. His “America First” doctrine aimed to prioritize domestic industries and reduce the U.S. trade deficit. However, such policies often lead to economic ripples affecting international trade, various industries, and geopolitical relations.
Trump’s Proposed Tariffs Policy
Although it is too early to get a better picture about the implications of Trump’s tariffs on the global trade, however, some studies have been done based on the numbers he mentioned during his election campaigns. Still, the magnitude and impacts of the potential tariffs is uncertain. Trump proposed 60% or more tariffs on Chinese goods and 10% to 20% tariffs on European goods. Trump also has suggested imposing a blanket 10% tariff on all imports to the United States. This sweeping measure builds on his earlier tariffs, such as those imposed on Chinese goods during the US-China trade war and the duties on European steel and aluminium. Additionally, he suggested 100% or more tariffs on electric vehicles to the US.
More recently, the US President-elect Donald Trump has threatened again to impose tariffs on the United States’s three largest trading partners – China, Mexico, and Canada on his first day in the office on January 20. He proposed 25% tariff on all Mexican and Canadian imports and an additional 10% tariff on Chinese goods on the first day of his administration. However, it was not clear what this additional 10% tariffs mean, is it in addition to what is suggested during his election campaign or in addition to the already imposed tariffs on Chinese imports. The correct answer could be revealed when these tariffs have become the law of the land.
The rationale for these tariffs includes:
• Reducing Trade Deficits: Shrinking the U.S. trade imbalance by making imported goods more expensive and encouraging domestic consumption. According to Trump, generally, these tariffs are in response to unfair trade practices and unfair advantage, however, the latest measures are to encounter the flow of illegal drugs and undocumented migrants across the US border.
• Reviving Domestic Manufacturing: Trump thinks the tariffs are inevitable for Protecting American industries from what he considers unfair foreign competition.
• Strengthening US Leverage: Many experts argued that these high tariffs are practically difficult to implement as they would lead to significantly reduced trading between US and other key markets or even reduced to 0% trade between US and China. They think Trump is setting a high bar and will be using tariffs as a bargaining tool to negotiate better trade deals with China and other major trading partners during his presidency.
Implications for Different Countries
Economist have warned that the tariffs would be devastating to workers and jobs and the overall global trade and economies, not just the exporting countries but also the US. For example:
China:
The world’s second largest economy and the largest exporter is expected to be the key target for Trump’s tariffs policy.
• Economic Impact: A 60% blanket tariff would exacerbate tensions from the US-China trade war. Chinese exports to the US would face higher costs, potentially decreasing demand and affecting China’s manufacturing sector. China is expected to retaliate to US tariffs making US goods and Technology more expensive to the world’s second largest population. According to the London School of Economics and Political Sciences (LSE) research paper, Proposed tariffs put forward by Donald Trump could reduce gross domestic product (GDP) in the United States by -0.64% and in China by -0.68%. Although not a favourable outcome for both countries, however, China is expected to feel more pain as it is export oriented, manufacturing based economy, which is already going through a difficult period due to property market crisis.
• Supply Chain Adjustments: Multinational companies might rethink their China strategy to diversifying production to countries like Vietnam or India to bypass US tariffs.
Europe:
Although Europe’s exports to the US are under 4%, however, tariffs on its exports will have some impact on its already low-growth economy.
• Trade Frictions: Although the economic impact is expected to be limited, as per LSE paper, the European Union would face a GDP reduction of -0.11%. Europe, a significant trade and geopolitical partner of the US, might retaliate with its tariffs, leading to a tit-for-tat trade war.
• Impact on Key Industries: European automakers, such as BMW and Volkswagen, which rely heavily on the US market, could face significant challenges. Germany will be the biggest loser in this regard as its exports to the US are higher than many other countries of the block.
• Geopolitical Tensions: Strained US-EU relations might hinder broader cooperation on global geopolitical challenges as well as climate change and security.
Rest of the World
• Emerging Economies: Countries like Mexico, India, and Brazil might see opportunities to replace Chinese exports to the US or at least fill the gap, but they could also face tariffs on their goods that will make their goods more expensive to the US buyers.
• Developing Nations: Export-dependent economies could suffer as higher tariffs reduce demand for their products in the US. Some of the countries could be beneficiary of the US tariffs on Chinese goods as they would be able to buy Chinese goods at cheaper prices due to their less appeal in US.
Implications for Sectors and Industries
• Manufacturing: US manufacturing could see short-term gains as domestic goods become more competitive. However, industries relying on imported raw materials might face higher production costs, potentially offsetting these benefits.
• Technology: US tech companies relying on global supply chains could encounter higher costs for components. This might increase product prices, affecting consumers and limiting competitiveness.
• Electric Vehicles (EV): According to the LSE paper, “the proposed 100% tariff on imported vehicles would significantly impact the affordability of electric vehicles (EVs) in the US market, potentially slowing adoption rates and hampering efforts to reduce transport emissions, given that imported EVs currently account for approximately 30% of the US electric vehicle market”. Moreover, this would be a negative development for the fight against decarbonisation and climate change initiatives.
• Agriculture: Agriculture is often targeted in retaliation to tariffs. US farmers could lose access to key export markets, as seen during the US-China trade war when China imposed tariffs on soybeans and other American crops. In addition to China, Europe may also consider similar moves making US agriculture products less competitive.
• Retail and Consumer Goods: Retailers relying on imports would likely pass increased costs onto consumers, leading to higher prices and inflation, which can potentially result to declines in consumer spending.
Broader Economic and Geopolitical Implications
• Global Trade Dynamics: A blanket tariff policy could undermine the rules-based global trading system, encouraging protectionism and trade fragmentation. This would harm global economic growth and disrupt supply chains.
• Inflationary Pressures: Higher import costs could fuel inflation in the US, compounding existing economic challenges and potentially prompting tighter monetary policies, which will lead to higher for longer scenario when it comes to interest rates policy. Moreover, the proposed US tax and regulatory policies are growth positive but will bring inflation and debt sustainability risks as any cuts on taxes would need to be funded through more debt.
• Geopolitical Realignment: Countries might seek to reduce reliance on the US market by deepening regional trade agreements, such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) or the African Continental Free Trade Area (AfCFTA).
Conclusion:
Trump’s proposed tariffs represent a continuation of his nationalist economic policies, aimed at prioritizing domestic industries and jobs. However, the global economy’s interconnected nature means such measures could have wide-ranging repercussions. While certain US industries may benefit, the potential for retaliatory tariffs, disrupted supply chains, and strained international relations highlights the complexities of protectionist policies. Careful consideration of these factors will be crucial for policymakers to balance national interests with global economic stability. Some experts suggest that Trump sees the threat of high tariffs primarily as a bargaining chip to use in future negotiations with other countries. Retaliatory moves by China, EU, and the other countries would likely worsen economic outcomes for the countries.
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