During his campaign for the US Presidency Donald J. Trump promised the American people that if elected he would quickly act to correct the chronic imbalance in America’s external trade. He would do so, he said, by taking the US out of what he termed unfair trade agreements and by imposing tariff on the exports to the US of high-surplus US trade partners.
President Trump has already taken action with regard to the trade agreements to which the US is a party. Upon entering the White House he promptly took the US out of the Trans-Pacific-Partnership (TPP) that the administration of his immediate predecessor had strongly championed. Then he took aim at NAFTA (North American Free Trade Agreement), demanding that its terms be renegotiated, though he committed a big gaffe recently when he claimed that the US has been running deficits in its trade with Canada.
Now has come the turn of tariff on the exports of countries that continually run surpluses in their trade with the US. His opening salvo was the imposition of tariff on US imports of steel and aluminum products. This has been followed by planned tariff on Chinese products with a combined export value of approximately$60 billion. Mr. Trump has indicated that many more tariff increases are in the works.
It is possible that Mr.Trump’s campaign promises concerning tariffs and his recent tariff-altering actions have been the products of his apparently mercantilist personal philosophy; but, considering that tariff actions have geopolitical as well as economic implications it is more probable that they have been the results of Mr. Trump’s having sought expert advice.
Whoever has been advising Donald Trump on Tariff-related issues apparently has not but should have—warned him about three major negative repercussions of the raised-tariffs approach to the correction of chronic trade imbalances. Two of the repercussions are internal-economic in nature; the third is significant geopolitically.
The geopolitical repercussion of a tariff-increasing exercise can be summed up in one word—retaliation. Tariff increases are directed at countries; and countries do not take offensive moves lying down. They retaliate. Retaliation may take the form of increases in tariffs on the products of the offending country, or it could come in other ways. Tariff hikes lead to increases in the prices of goods and services, which in turn are bound to lead to reductions in the volumes of trade between the feuding countries. The tariff increases that the European Union has said it will impose on selected US exports in retaliation for the announced increases in US tariffs on EU steel and aluminum exports are going to hurt world trade; so are the retaliatory tariff increases that China has said it is readying for 3 US exports to China.
When they plan retaliating tariff increases, countries do not act in unthinking fashion. They plan with maximum impact in mind. The bad news for Donald Trump is that the EU and China are targetting for tariff increases products that are important for Mr. Trump’s political-base states, particularly the Midwest states that are leading exporters of agricultural products. Sensing this prospect, Senators and Representatives from those states have been urging the White House to exercise caution in its tariff-raising campaign.
A second major negative repercussion of the tariff-raising exercises relates to consumer welfare. When the tariffs on them are increased, the prices of foreign consumer products affected by Mr. Trump’s tariff increases are correspondingly raised—if the increases are totally passed on, as they usually are—reducing sales of such imported products where the demand for them is elastic. After the tariff increases; there will be no more affordable products bearing the tags “Made in Bangladesh” or Made in Guatemala.” In the end most everybody is hurt—the American consumer, the exporting country and the producers (usually medium-size or small) of that country.
The third major negative repercussion of a tariff-raising exercises is something that decision—makers like Donald Trump tend to not give enough thought to. I’m referring to the impact of a tariff increase on the cost structures of the companies that use the now-more-expensive foreign product in their manufacturing operations. The tariff increase may end up raising the costs of the products of some American industries, in the process making their outputs even more uncompetitive than they already were. That would be a truly unkind cut for those industries, whose leaders may have helped Donald Trump get elected.
Increasing tariff makes little sense from both the economic and the geopolitical standpoint. Not only does it create discord and enmity among nations but it almost always ends up causing all sorts of collateral damage in the tariff-increasing country as well as in the penalized countries.
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