Just a day ago, Donald Trump was threatening a multi-front trade war with Canada, Mexico and China that would take the global economy into uncharted territory.
Twenty-four hours later, we’re in a rather different place with the tariffs – or taxes – against America’s closest neighbours and trading partners on hold for 30 days.
But the 10% tariffs on all goods imports from China have gone ahead, and Beijing has responded in kind. So what are the potential economic consequences of these opening salvos and could this turn into a broader trade war?
China is subject to significant US tariffs already and has been since Trump’s first term. But the blanket nature of today’s new levies from the White House on every single goods import from China – from toys, to mobile phones, to clothes – is new and significant.
Beijing’s promised tariff retaliation – including new levies on imports from the US of oil, agricultural machinery and some cars – is far less sweeping. Yet the retaliation moves us into the arena of tit-for-tat action, where the country experiencing the tariffs feels it has no choice but to hit back to show its own citizens it can’t be pushed around by a foreign power.
This is the dictionary definition of a trade war – and economic historians warn they tend to generate their own momentum and can rapidly spiral out of control.
Trump has used just about every justification under the sun for tariffs, from raising more tax revenue to boosting American manufacturing and rebalancing trade. But one thing recent days confirm is the new president regards them as a powerful way to compel other nations to do what he wants.
He threatened massive and punitive tariffs on Colombia when it initially refused to accept US flights of its deported nationals, but he lifted the threat when Bogota acquiesced.
The White House might also point to the response of Mexico and Canada yesterday as evidence tariff threats yield results. He had threatened to ride roughshod over his own North American free trade deal unless those nations tightened up on border control. Although how much extra those two countries actually promised yesterday on border security relative to what they were already doing is open to question.
Yet the problem with the White House using tariff threats in this way is that if other countries don’t back down – or agreements are not reached – Trump might well feel he has no choice but to follow through or risk losing all credibility. And the targeted country might feel it has to respond with its prepared countermeasures, even if they would prefer not to.
That high-risk dynamic – where things could slip out of control in an atmosphere of distrust and political pressure – is why many analysts and economists are far from comforted by how things have played out with Mexico and Canada this week.
The other reason many economists fear Trump’s intimidatory tariff diplomacy is its potentially chilling impact on business investment and confidence. US car firms have a deeply integrated industrial base across America, Mexico and Canada. Automotive parts cross those borders multiple times in the vehicle assembly process.
The levying of 25% tariffs on each of those movements would be disastrous for these businesses. Those North American tariffs have been paused for now, but it’s very hard to see US or Canadian automotive executives committing to further investment in those cross-border supply chains any time soon – and perhaps for many years to come.
That will have negative implications for their productivity – and also for the wages of their employees in all three countries. The view of many economists is having cross-border supply chains makes these firms more productive than they would otherwise be and this raises US workers’ wages relative to where they would be if they only manufactured in America.
These same effects apply on a global scale. In light of Trump’s tariff threats against the European Union, how many US firms are likely to be going ahead with planned investments in Europe – and vice versa?
Countries such as Vietnam and Malaysia benefitted indirectly from the US tariffs imposed on China in Donald Trump’s first presidential term, as multinationals shifted manufacturing out of China and into their territories to avoid the taxes and to continue exporting to America. But what if Trump now threatens tariffs against them too?
The huge uncertainty Trump’s tariff threats have injected into the global economy – even if they don’t always translate into actual new taxes – will likely already be doing damage.
