In a speech to the World Economic Forum last month, president Donald Trump said: “My message to every business in the world is very simple: Come make your product in America, and we will give you among the lowest taxes of any nation on Earth. But if you don’t make your product in America, which is your prerogative, then, very simply, you will have to pay a tariff”. Here, in other words, is a carrot and here is a stick.
The same month, Trump imposed tariffs on three major trading partners. This included an additional 25% tariff on imports from Canada and Mexico, and an additional 10% tariff on Chinese goods, before Trump agreed to postpone the imposition of tariffs on Canada and Mexico until March in exchange for concessions on border security. Then, last week, Trump announced a new tariff plan, the so-called “fair and reciprocal” plan for trade. The president’s ambition is to retaliate against taxes and regulations that harm US interests. The president explained his policy as such: “I’ve decided, for purposes of fairness, that I will charge a reciprocal tariff… meaning whatever countries charge the United States of America, we will charge them. No more, no less”.
This is one of the president’s long-standing gripes. The US runs a large trading deficit with the rest of the world, meaning it imports far more than it exports. For instance, the US trade deficit with the EU stood at $158 billion in 2023. There are good reasons for this. The dollar – the global reserve currency – is used in most trade, which boosts the US economy, with countries investing earned dollars back into the US. But for Trump this is also a question of basic fairness. As a recent White House Fact Sheet pointed out, India imposes a tariff of 100% on American-made motorcycles, while the US imposes a tariff of 2.4% on Indian-made motorcycles. The flood of cheaper, foreign goods into the US makes it difficult for US farmers and manufacturers to compete. The comparative decline of US manufacturing in the so-called Rust Belt post-industrial states of the US was one of the biggest reasons Trump was propelled to the White House in 2016.
The US has always used tariffs and export bans to protect its interests. But Trump’s approach is novel. His team calls it “an eye for an eye, a tariff for a tariff” approach. Officials will apply tariffs on a country-by-country basis. Trump’s hawkish trade adviser, Peter Navarro, for instance, called the European Union’s Value-added-Tax (VAT) regime, a “poster-child” for the kind of measure the plan would address. In essence, this shows that the remit of the plan is likely to go beyond basic fairness. According to Alan Beattie, Senior Trade Writer at the Financial Times, “the ad hoc assembly of such tariff weaponry appears largely designed to create negotiating leverage for concessions”.
This might-is-right approach has already had an effect. India, for instance, promised to cut its tariffs on US motorcycles, a gesture of goodwill before it begins re-negotiating its trading relationship with the US. Thailand has promised to import 1 million tonnes of US ethane in the second quarter of this year to balance its trade deficit. The EU, meanwhile, said it is willing to cut its tariffs on US cars and purchase more liquefied natural gas, though it will otherwise hold firm on its VAT regime, and will also retaliate against Trump’s decision to impose a blanket tariff of 25% on foreign steel imports.
Economists are uncertain about the consequences. The Wall Street Journal labelled Trump’s spat with Mexico and Canada the “dumbest trade war in history”. It points out that a vehicle made in North America is likely to cross the borders between Canada, the US and Mexico half a dozen times or so times as it is assembled, which adds value in a cost-effective way and brings down prices for US customers. The tariffs, in other words, neglect the complex, interconnectedness of global trade, a regime that has been in place since the Second World War, and one from which the US has enormously benefited.
Tariffs could also have an inflationary effect in the US as countries retaliate against them. Paul Ashworth, chief North American Economist at Capital Economics, predicts that the average tariff on US imports would rise from less than 3% to 20%, which would add 2 percentage points to inflation later this year. However, Randal Quarles, former head of the independent US Federal Reserve dismissed this. And Fed governor Christopher Waller believes tariffs would “only modestly increase prices”.
The impact on the global economy is harder to predict. According to Lael Brainard, director of the White House National Economic Council, “US manufacturers do rely on foreign imports for certain parts of their key inputs. So you could see a real, massive change in their cost structures, which would lead to massive increases in their prices”. The plan, then, is likely to win Trump concessions near-term, but if inflation comes back to bite later this year, global growth is likely to take another hit. A “tariff for a tariff” approach could – to paraphrase the old cliche – make the whole world poorer.
