Vidostream | News, sport and opinion from the Vidostream's US Edition

https://vidostream.com

Trump’s brutal tariffs far outstrip any he has imposed before

Canada, Mexico and China are going to be made to suffer

Photograph: GettyIimages

Photograph: GettyIimages

Less than two weeks into his new administration, Donald Trump has placed large tariffs on America’s three biggest trading partners—raising the spectre of a global trade war. With executive orders signed on February 1st, he initiated tariffs of 25% on imports from both Canada and Mexico, and added levies of 10% to imports from China. Although Mr Trump had vowed to do just this, his actions will still represent a shock to the global economy. They will drive up prices, weigh on growth and sow uncertainty for businesses. Moreover, they are likely to be just the first salvo for Mr Trump, who is itching to implement tariffs that are both more aggressive and more global.

Mr Trump’s announcement of the new duties ought to erase any doubts about his resolve to take a hard line on trade, heedless of warnings from businesses, diplomats and economists about the potential fallout. In a fact sheet explaining the orders, the White House said access to the American market is a privilege, and that tariffs are a “proven source of leverage for protecting the national interest”. In recent days there had been reports that he might delay the tariffs or opt for a more gradual approach. Canadian and Mexican officials shuttled back and forth to Washington, making the case that tariffs in North America, one of the world’s most tightly integrated trading zones, would be utterly counterproductive.

In the end Mr Trump paid them no heed, opting for harsh, wide-ranging levies, with only a partial carve-out for oil and gas from Canada, which will for now be limited to a 10% tariff rate. The 10% tariffs on China were milder than the 60% level that Mr Trump had threatened on the campaign trail, but they come on top of tariffs of 25% that already cover much of America’s trade with China, and they may well serve as just the opening barrage in a renewed trade clash between the two giants.

Given Mr Trump’s oft-declared love of tariffs as well as the trade disputes that marked his first term in the White House, his latest actions may seem to be par for the course. In fact, they are more extreme than any of his previous actions. During Mr Trump’s first term, China was the main target of his tariffs, which ended up applying to about $370bn-worth of Chinese imports. His new round of tariffs covers roughly $900bn-worth of imports from Canada and Mexico. The additional tariffs on China extend to products such as computers, toys and smartphones, which Mr Trump had excluded from extra duties in his first term in order to protect consumers.

This time the tariffs will also hit the economy much more suddenly. In his first term Mr Trump built up tariffs over a couple of years, using statutes that provided months-long notice periods to affected businesses. The tariffs announced on February 1st will go into effect on February 4th. Mr Trump invoked the International Emergency Economic Powers Act, a law that gives the White House broad authority to impose tariffs so long as it declares there to be a national emergency. Mr Trump said the flow of illegal migrants and drugs, especially fentanyl, across America’s borders constituted an extraordinary threat, and that the tariffs would be maintained until the crisis is alleviated. But a trade war is no solution to such complex problems. Harming Mexico’s economy may make the country less, not more, stable. And just 1% or so of America’s seizures of fentanyl and encounters with illegal migrants are on its northern border, making a mockery of Mr Trump’s complaints about Canada.

The reality is far grubbier and also more foolish: Mr Trump has long believed that tariffs benefit the American economy. First, he thinks they will generate enormous revenues for the federal government, letting it cut taxes. But the new tariffs on Mexico, Canada and China may bring in just $110bn for the federal government, or about 2% of its overall tax income, according to the Tax Foundation, a think-tank. At the same time, much of the cost of the tariffs will be borne by American consumers and businesses. From avocados to tomatoes and cars to crude oil, Mexico and Canada are major suppliers to America. The prices of these products, and many more, are likely to rise in the coming months.

Second, Mr Trump believes that tariffs will encourage firms to make more stuff in American factories. Yet America alone will never be as efficient as the regionally integrated production networks that have grown up through three-plus decades of free trade between America, Canada and Mexico. Together they are home to 500m people, 50% bigger than America by itself. The countries each bring different strengths to the relationship: Canada has vast mineral wealth; Mexico offers lower-cost labour. The auto industry exemplifies the dense flow of goods: about 50% of auto-part imports in America come from Canada and Mexico, and some 75% of auto-part exports from America go to Canada and Mexico. Shares in the big three Detroit-based automakers—General Motors, Ford and Stellantis—all jerked downwards on January 31st when Mr Trump’s press secretary said tariffs were imminent. The coming days could well bring more turmoil in financial markets.

Mr Trump is undoubtedly correct that America does have leverage in trade clashes. That is especially true in any kind of tariff war with its neighbours. Exports to America are worth roughly 20% of Canadian gdp and 30% of Mexican gdp. By contrast, American exports to Canada and Mexico combined are worth just 3% or so of American gdp. The Peterson Institute of International Economics, another think-tank, estimates that tariffs of 25% could shrink the Mexican and Canadian economies by 1-2% over the next few years. With just the current measures, the growth drag in America will be closer to 0.2%.

How much worse will things get? Although Mexico and Canada have said that they are preparing retaliation, they face a dilemma: if they hit America with tariffs, they will compound the damage to their own economies and invite retaliation. If they do nothing, they will look weak. Meanwhile, Mr Trump is already planning his next moves. Europe is in his crosshairs. He has also talked of general levies on oil and gas. Ultimately, he wants to slap a universal tariff on all imports into America. Although the new tariffs on Mexico, Canada and China are bad enough by themselves, they may only be a preview of the havoc that Mr Trump intends to wreak on the international trading system in the months to come.

 

Author: Editors Desk

Source: The Economist

We are using cookies to give you the best experience on our website. By continuing to browse, you are agreeing to our Cookie Policy.
You did not use the site, Click here to remain logged. Timeout: 60 second