Trump’s economic mission has been clear long before stepping into office—create American jobs, boost local manufacturing, and export more than import—and they seem like noble and serious policy focuses too. The way he approaches these issues however, is where he would lose much of the seriousness, and a slew of consumers, producers, allies and economic partners alike. That however does not deter the US President from making decisions in a vacuum without having to wonder about the ripple effects those would have on US and global economies. All the while knowing precious little about economics, and how international trade works. Ignorance really must be bliss in the House of Trump.
With 25 percent tariffs on steel and aluminum in full force, Trump targeted the trade deficit with China by proposing the first set of tariffs on Chinese goods—a 25 percent levy on over 800 product imports from China worth $34 billion. These come into effect on July 6. Beijing will hit back with its own retaliatory tariffs equivalent to $34 billion on US imports. The second phase of tariffs will be on another $16 billion on Chinese imports which Beijing will match in-kind.
But seeing China’s retaliation, Trump’s response was to announce a third set of tariffs—10 percent on a further $200 billion Chinese imports, but China cannot hit back in kind if this happens as the country simply does not import that much from the US. The country would have to take other drastic measures to fight back—depreciating its currency or selling off US debt both of which will be crippling for its own economy. When George Orwell said: “Wars are not meant to be won, they are meant to be continuous”, did he have this game of ping-pong in mind?
Research by Peterson Institute for International Economics argues that China supplies a smaller share of imports targeted by the tariffs than those that are not targeted by tariffs so imposing 25 percent levies would not affect that much of the Chinese exports as it is expected. Meanwhile, if tariffs force companies to buy inputs from costlier suppliers, other than China, goods will become automatically expensive but consumers of lower-quality products will take the biggest hit to their wallets. Trump’s tariffs in essence will impact the very base that he purports to represent and speak for—the American middle class. If SMEs are run out of business not being able to absorb the cost pressures, Trump’s promise to bring jobs will catapult on its own head. It is unequivocally unanimous that US tariffs will ricochet back to hurt America.
Back in the Orient, there is no doubt the damage will wreck more than a few businesses—especially the SME input industries both because of US tariffs on their exports, and Chinese tariffs on US imports. A Chinese media report laments: “…thousands of workers that represent a vulnerable segment of the Chinese economy will bear the brunt of Trump’s trade hostilities”. Some exporters are looking to raise prices for other US products to manage the impact, or ship products to another country and from there to the US. Big suppliers might be looking to relocate. Most expect to lose their competitiveness. Alternative plans are being made by US manufacturers too, much to their chagrin.
Meanwhile, Chinese government has already started preparing to redirect the country’s imports by agreeing to lower tariffs or giving exemptions to tariffs and border taxes on imports from India, South Korea, Sri Lanka, Bangladesh, and Laos. While China thought it smart to target American commodities exports in its tariffs—these could easily be problematic too.
For e.g. Soybean, possibly the biggest product China is targeting, a CNBC report explains that China was projected to import 103 million tons of soybeans next year. Outside of US, the rest of the world only exports about 100 million tons. By simple math, China will have to buy a few million tons of soybeans exported by the US. China will have to cut down imports if it wants to avoid US produce, but for that farmers will have to explore other feed options. Following the announcement, soybean futures saw a 6 percent slump.
If Trump imposed these tariffs to take China to task about intellectual property rights, this is not the medium to do it. If he went after China with tariffs in a misguided notion to curb the trade deficit, the only possible outcome is an overall reduction in international trade, commodity price shakes and higher cost of business for producers across the globe.
Trade is no longer a two-way street since countries are all linked together through global supply chains. If a US company manufactures in China, or if a US manufacturer is using Chinese inputs, the end product is not only used in the US but across the world—that affects global consumers. Commodity prices will affect producers. Most Chinese companies have foreign investors with global interests and while tariffs can be removed and levied, it’s the investments, networks and global value chains (GVCs) that have been created which cannot be as easily reversed, and likely will face the biggest carnage.
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