Trump, the self-proclaimed “Tariff Man,” has made it clear that he wants tariffs – he believes trade deficits are an indication that America is being ripped off by its trade partners – and the revenue that they generate. He rejects the economic orthodoxy that tariffs are a form of tax on the companies that import the goods and consumers rather than a tax on the exporters.
“I will immediately begin the overhaul of our trade system to protect American workers and families,” he said in his inauguration speech.
Chinese President Xi Jinping and Trump’s other targets are better prepared for a trade war this time around. Credit: AP
“Instead of taxing our citizens to enrich other countries, we will tariff and tax foreign countries to enrich our citizens,” he said.
It is, of course, possible that Trump’s threatened universal tariff and the punitive tariff on China’s exports are a bluff.
Trump, and others in the administration, believe that the threat of tariffs creates leverage in negotiations over individual trade deals and non-trade issues, like Mexico’s co-operation in closing the southern border or China’s co-operation in ending the fentanyl trade or opening its markets to US exporters.
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That’s a view of tariffs that would appeal to Trump, who fancies himself the consummate dealmaker.
Trump did two major trade deals in his first term. One was a modest re-working of the free trade agreement with Mexico and Canada and the other involved tariffs on about $US380 billion ($600 billion) of imports from China.
The trade war with China ended with a deal in early 2020 under which China promised to significantly increase its purchases of US products.
That “Phase One” agreement, however, ended with China buying less than 60 per cent of the US products it had pledged to buy and, indeed, its imports from the US were actually lower than they were before Trump imposed the tariffs, which was supposed to be the baseline for an additional $US200 billion of purchases from the US.
Most analyses of Trump’s more recently threatened tariffs have concluded that, while they would damage the target economies more than America’s, they would do significant damage to the US. That damage would be exacerbated if the targeted countries retaliated, as would be almost inevitable.
Trump, the self-proclaimed “Tariff Man,” has made it clear that he wants tariffs – he believes trade deficits are an indication that America is being ripped off by its trade partners – and the revenue that they generate.
The Peterson Institute for International Economics has, for instance, estimated that a 25 per cent tariff on imports from Canada would lop $US100 billion off Canada’s GDP – but $US200 billion from America’s, albeit that the US economy is vastly larger than Canada’s and therefore in relative terms Canada would be hurt more than the US.
China, the European Union, Canada and Mexico, among others, have all drawn up plans for how to respond if Trump follows through on his threats, generally targeting the most politically sensitive products. China’s dominance of critical minerals supply chains ought to particularly concern the US trade and defence hawks.
Trump’s expectations of the revenue that might flow from his universal tariff and the out-sized tariff on imports from China and his assumption that the US economy wouldn’t be materially adversely affected by a trade war are both unrealistic.
Total US imports are around $US3.2 trillion a year, of which more than $US500 billion are from China. A 20 per cent tax on all imports and 60 per cent on those from China could, at most, raise close to $US800 billion a year – assuming that the tariffs didn’t, as they almost certainly would, significantly shrink the volume of the imports and the revenue that could be collected from them.
While that number is not insignificant, within a $US30 trillion economy with a $US5 trillion a year revenue base it isn’t as material as it might appear. It could, however, if it were passed onto US consumers via higher prices, have an impact on US inflation and subsequently interest rates.
The US Federal Reserve Board already appears inclined to pause its reductions in US rates (the bond market has been pushing them up in anticipation of Trump’s trade, immigration and tax agendas) while it waits to see the size and shape of Trump’s tariffs because of their likely impact on inflation.
The impact on inflation, the economy and government finances would be magnified should the targeted economies respond with tariffs and trade barriers of their own, as China did during Trump’s first term. His administration gave more than $US28 billion of taxpayer funding to American farmers to compensate them for lost income as a result of China’s response to his tariffs.
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That experience of the trade war with China in his first term illustrated that trade wars aren’t as painless, or as easy to win, as Trump appears to believe. This time, if he starts another, his targets are far better prepared, with their retaliation plans already drawn up, than they were during that first term.
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