President Trump’s ‘Liberation Day’ tariff onslaught could inflict the most significant shock to international trade of all time. Markets have already collapsed and recessions around the world, including in the US, are feared. Economists are in near-unanimous agreement that the sudden 20% (on average) charge on trade with the world’s largest economy, plus 25% on automobiles, are a strategic error on the part of the White House. President Trump’s own economic advisors struggle to justify them. Some in the Republic party are even breaking ranks, pleading with the president that American consumers will be worse off by thousands of dollars a year, languishing under inflation and a drop in GDP by up to 3%. While it has attracted limited attention from the media, the tariffs are almost certainly illegal, breaching the US’s commitments under the General Agreement on Tariffs and Trade (GATT) and various bilateral trade agreements, including the United States Mexico Canada Agreement (USMCA) although Mexico and Canada were omitted from Liberation Day measures.
As harmful as the US’s sweeping tariffs are on their own, worse damage could be inflicted via retaliation, even if Trump were not to escalate with further counter-tariffs, which is unlikely. The EU, China and others are already planning a suite of measures. But a tariff is a tariff, whether or not it is morally justified. It will only raise costs of US imports more, forcing consumers to switch to alternatives which will in turn become dearer in their scarcity. Countries with large trade surpluses with the US (like the EU and China) will find retaliation unhelpful as a weapon of persuasion – we are not in the 1930s. Another danger is the looming spectre of dumping. A glut of goods that would have been shipped to the US, especially from mega-manufacturer China will now end up elsewhere. Anti-dumping duties, yet again tariffs, may end up being levied to head-off this surge.
The UK, seemingly wisely, is holding off on tariff retaliation against the US. Having been hit with ‘only’ a 10% tariff by the Americans (notwithstanding the car, steel and aluminium tariffs at 25%), the UK has fared better than the EU, which faces a 20% Trump tariff. Many have been quick to present this as a ‘Brexit dividend’ – but while a lower tariff is always better than a higher one, it is unlikely that the cross-Channel differential will spur a manufacturing boom in the UK as European firms rush to locate production here as a way of lowering the costs of entry to the US. Supply chains do not re-orient overnight and White House policy can turn on a dime – the UK could just as easily get thumped in the next round.
It is obvious that President has little interest in the economic welfare of the world, let alone the EU and China both of which he resents, but it is hard to envisage why the President would have intentionally exacted so much destruction onto his own people. His objectives are spelled out on the White House website and it looks like he is playing a long game: “President Donald J. Trump Declares National Emergency to Increase our Competitive Edge, Protect our Sovereignty, and Strengthen our National and Economic Security.” These justifications are as sweeping as the tariffs themselves. They are also illusory. Much as economists are (nearly) united in their opposition to the tariffs, there is almost universal acknowledgement that US manufacturing can never return to its heyday, and even if it could (through tariffs, subsidies or other protectionist interventions) this would be a fool’s errand because the global economy, ironically led by the US, has moved towards higher-value, better paid services. Were America to re-orient its domestic economy around purposefully labour-intensive manufacturing, it would see itself fall behind in productivity and living standards.
All of which suggests that something else is going on and that President Trump, despite what he has said, is merely using the tariffs as leverage to extract concessions from US trading partners via his infamous ‘transactional’ approach to relationships. The chaos unfolding in stock markets and growing dissent within his own country suggest that a major climb-down from Liberation Day’s reign of terror will unfold, and probably soon. Expect a flurry of tariff-lowering mini-deals with US trading partners over the next few months if not weeks.
Far from killing the global economy as he appears to be doing today, Trump might end up breathing life into it by forcing protectionist blocs like the EU to drop their tariffs, ideally on a Most Favoured Nation (worldwide) basis. The UK, too, should lower its levies, especially on the products that it does not produce, and start importing US chicken. These gestures, along with abandoning the Digital Services Tax, could yield a UK-US trade deal with low or zero tariffs. The USMCA will be renegotiated, hopefully opening up Canada’s dairy market and eliminating lumber subsidies, both of which have justifiably attracted the president’s ire. The Australians are no doubt preparing a package to offer the US as well; this could help them reduce their dependency on China. The short-term aftermath of Trump’s tariff massacre could be tough going, but by later this year we could well see a re-invigorated global economy with freer trade than ever before. In this sense, President Trump was right to call out ‘the world’ for not playing fair in trade and he should be commended for the boldness in taking action against it.
But while the economic damage wrought by this round of US tariffs can be undone and gains from freer trade unlocked, there may be other lasting harms that will be harder to unwind, notably the US president’s disdain for international law. He might be excused for ignoring GATT since he had no hand in drafting it and because deeper trade liberalization has been difficult to achieve through the World Trade Organization, the rules of which are poorly adapted to non-market economies like China. But the USMCA is a trade treaty which Trump took credit for negotiating during his first term. If he is prepared to walk away from his own promises, it will be difficult to do business with America while he is in office.
This piece was first published on Politeia.
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