Trump’s tariff threat signals no relief from US-China trade pain

Former US president Donald Trump’s promise to levy new tariffs in his free-form stump speeches – “an eye for an eye, a tariff for a tariff” – is unsettling to CEOs and government leaders as they envision how he could upend their ambitions if he returns to power next January.

They have good reason. Tariffs depress trade, investment and output by raising costs while reducing demand and provoking retaliation. Policy shocks heighten uncertainty, which causes businesses to rethink decisions on expansion plans, pricing and investment options. Supply chains are disrupted while innovation is stymied as untargeted industries are swept into the vortex of trade wars.

The combined effect harms consumer welfare and undermines growth. The severity depends on the affected industry’s size and the extent to which domestic or foreign alternatives can be readily substituted. Damages from trade wars typically exceed protectionism’s benefits in every area, from innovation to job creation to spillover effects on foreign relations.

True, virtually every country imposes some restrictions on imports and coddles domestic businesses with incentives. Further, trade blocs provide privileges to members that put outsiders at a disadvantage. Industrial policies are being refitted to support national security imperatives, while government procurement preferences support domestic industries and the jobs they create.

That said, world trade remains robust. The World Trade Organization (WTO) sees the US$35 trillion in trade flows increasing by 3.3 per cent this year. A rash of beggar-thy-neighbour policies would jeopardise this outlook.

Trump calls himself the “tariff man”. He sees tariffs as a good source of income and a weapon to protect US workers. He relishes escalating trade hostilities with Beijing. His call for an across-the-board tariff on all imports and reports that he is considering a 60 per cent levy on China fit into this “America First” agenda.

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An unwinnable conflict? The US-China trade war, 5 years on

An unwinnable conflict? The US-China trade war, 5 years on

His thinking invokes the name of Thomas Jefferson, who viewed retaliatory barriers as way for the new United States to achieve reciprocity, forcing Britain to end restrictions on US goods in its home and colonial markets. Trump’s rhetoric also reflects the position of Jefferson’s adversary, Alexander Hamilton, who wanted duties to raise revenues needed to pay off debts.

During Trump’s first term, he imposed tariffs on steel and washing machines and then escalated trade tensions by starting a 25 per cent levy across the board on roughly US$250 billion of Chinese imports. By September 2018, all these duties covered 12 per cent of US imports.

Trump bypassed Congressional approval, leveraging relatively unused powers. He imposed trade restraints under Section 232 of the Trade Expansion Act of 1962 to bolster national security, the rationale behind the steel and aluminium tariffs.

Presidents can also retaliate against a country’s discriminatory trade behaviour under Section 301 of the Trade Act of 1974. Trump used that basis for imposing tariffs on Chinese imports and restricting Chinese companies’ investments and acquisitions in the US.

In another move, Trump invoked the International Emergency Economic Powers Act in 2020 to try and ban new US downloads of the TikTok and WeChat apps.

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Stop offering ‘untrusted’ Chinese apps like TikTok and WeChat, Washington urges US tech companies

Stop offering ‘untrusted’ Chinese apps like TikTok and WeChat, Washington urges US tech companies

The tailspin that followed underpins fears today of what Trump’s trade policies would unleash. The European Union, China and others responded with countervailing tariffs and complaints to the WTO, and Sino-American relations were engulfed in a massive trade war. Even relations with allies suffered. European states questioned the reliability of the US and advocated self-reliance.

Meanwhile, bilateral trade deals proliferated, another Trump objective. “We’re going to have a lot of trade deals,” he said shortly after taking office. “But they’ll be one-on-one.” The WTO became rudderless as the US refused to approve appellate judges to handle trade disputes. The foundations of a rules-based world order crumbled.

Numerous studies have tallied the costs. The US Federal Reserve found that Trump’s tariffs had resulted in “relative reductions in manufacturing employment and relative increases in producer prices”. On jobs specifically, “a small boost from the import protection effect of tariffs is more than offset by larger drags from the effects of rising input costs and retaliatory tariffs”.

Why China hopes US won’t touch century-old trade rule for imports under US$800

Trump’s tariffs were almost entirely borne by US importers, but Chinese counterparts only paid 68 per cent of China’s retaliatory tariffs. If a 10 per cent tariff on all imports is levied next January, the Tax Foundation estimates that it could cost US consumers and businesses US$300 billion, shrink the US economy by 0.5 per cent and terminate more than a half-million jobs.

Meanwhile, US President Joe Biden has yet to fully roll back Trump’s trade policies or set out a comprehensive approach that tilts more decisively towards trade liberalisation. Domestic politics makes that unlikely as he prepares to face Trump in November. With tensions in the Middle East deepening and demands growing for US action to end Israeli attacks on Gaza, trade policy is a low priority.

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Attendees listen to a speech at the Take Back Our Border Convoy rally at Cornerstone Children’s Ranch near Quemado, Texas, on February 3. In trucks, vans and RVs, hundreds of people converged in southern Texas to rally against what they say is a migrant “invasion” and to demand tough new controls at the US border with Mexico. Photo: AFP

The economy narrowly trails immigration as a top concern among potential voters, according to a Harvard CAPS-Harris poll last month. High prices for the basics tainted public views of Biden’s handling of the economy, even though employment remains robust and inflation has fallen faster than expected.

Meanwhile, negative views of China have become more entrenched among the US public. These dynamics are part of what drives Trump’s trade policy.

We can expect Biden to be equally tough in his stance on trade but stop short of endorsing tariffs and undoing efforts to lower US-China tensions. A close election is likely. It’s wise to game out the scenarios and prepare for the consequences.

James David Spellman, a graduate of Oxford University, is principal of Strategic Communications LLC, a consulting firm based in Washington, DC

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