Trump, Tariffs, & Trade War! Economic Instability on the Horizon?
Tariffs, Deportation, Climate Regression, Foreign Military Retrenchment, Transactionalism in International Relations, Imperialism! These are but only few of the disruptions that U.S. President Donald Trump has unleashed on the world. Questions loom heavy about the future of trade, diplomacy, and global stability. Could another wave of economic upheaval be on the horizon?
Fractures are already starting to appear on the American economy in the form of mounting layoffs especially of federal employees, slowing hiring, eroding consumer confidence, return of inflation fears, labor disruptions in including agriculture, construction and healthcare as immigration crackdown tightens, and widespread confusion for businesses, consumers and investors coming from the on-again, off-again nature of tariff policy dictates.?
The first thing the Trump administration announced after resuming office was the imposition of tariffs including reciprocal tariffs on key trading partners like India, Mexico, Canada, China, and the European Union (EU). Canada and Mexico have attracted a 25% tariff, while China takes a 20%. Reciprocal tariffs are slapped on any country that levies duties on US goods. The move is part of the “Make America Rich Again” and “Make America Great Again” agenda. The impact of this decision is heightened discontent and volatility in global markets.
How are countries responding?
While India continues to closely assess the situation with no immediate decisions taken so far, China has been quick to impose a retaliatory 15% tariff on US agricultural imports in addition to voicing plans to initiate legal action against the U.S. at the World Trade Organization (WTO) for “wrongful trade practices. Canada has imposed a matching 25% tariff on over US$155 billion worth of US goods. Mexico is implementing tariff and non-tariff measures including a 25% tariff on American imports. ?EU has sent out a warning to the Trump administration pledging decisive action if the decision is not revoked.
So what should we be bracing for next? Higher Inflation? Very Likely! Recession? Possibly!
As countries retaliate in kind, fears of a full-blown trade war is growing stronger. The possible fallouts of a global trade war are return of inflation (0.5% to 0.85% spread over two years); higher production costs; reduction in real household income; supply chain disruptions and reorganizations; increased conflicts in North American nations; and establishment of new trade partnerships. Nervous businesses will likely reduce planned investments which can hurt economies worldwide. Consumer confidence is already shrinking in anticipation of inflation expectations. Businesses including U.S. companies are raising concerns over supply chain disruptions.? ??
But what are implications of higher tariffs back home in the U.S.??
Analysis suggests that inflationary tendencies will kick in pushing up additional costs for the average household to over US$1,200 per year. The Trump administration strongly believes that long term advantages of higher tariffs (i.e. rebuilding of domestic manufacturing) will far outweigh the immediate knee-jerk inflationary outcomes. Tariffs will also push up the value of the dollar thereby reducing competitiveness U.S. goods/exports in global markets. As the U.S. stock market loses over US$4 trillion, expectations of a risk of recession have risen to over 40%. Although American businesses and consumers will be impacted, the common consensus among the republicans is that the U.S. economy is strong enough to weather this temporary setback. ?
But will tariffs really bring back American manufacturing? Opinions among stakeholders appear split, but logic dictates a scenario that could backfire. ??
?Canada and Mexico play crucial roles in U.S. supply chains that cannot be easily dismantled. Tariffs will make imports from these countries expensive, drive up production costs and put manufacturing jobs at risk. The longer-term could see thousands of job losses in the U.S. equipment manufacturing industry. However, gauging an exact impact could be tricky because the terms of the tariffs keep changing.
?Unfortunately, bringing back manufacturing to the United States has always been and will continue to be just an American dream. The feat is easier put on paper than achieved. Reshoring is fraught with challenges ranging from high capital costs, expensive labor to heavily reliance on global supply chains. Automation, smart manufacturing and industry 4.0 can but only ease few of the operational challenges. In short reshoring is a complex economic proposition riddled with challenges and opportunities.?
What do these sweeping policy changes tell us? That the U.S. is ushering in a more transactional world? Perhaps!
Several of the foreign policy changes brought about by the Trump administration showcases a transactional approach to international relationships where opportunism is given precedence over values, alliances, treaties, and long-term relationships. It is increasingly clear that countries which rely heavily on U.S.-backed alliances will need to recalibrate and do so quickly.
A lot of questions are beginning to emerge about the feasibility of continuing with the tariff policy.? The U.S. trade deficit believed to be the result of discrimination by Trump has been the key reason for the imposition of tariffs on countries worldwide. But American economy consumes more goods than it produces domestically and isn’t that part of the country’s structural construct ever since the World War-II era?
Why?
Because the US dollar as an international reserve currency has helped America finance domestic consumption of imported goods, a comparative advantage that no other country in the world can boast of. As long as a country continues to consume more than it produces, it will have a deficit with a lot of countries and tariffs are unlikely to change this outcome.
What was the reason why tariffs fell out of favor as global trade grew after World War II and have we forgotten it? The argument that tariffs are paid for by foreign countries rings anything but true. Simply because companies don’t absorb the higher costs but pass it on to their customers in the form of higher retail prices and that answers the question why tariffs fell out of favor. Yes! tariffs do make foreign goods more expensive, but the higher costs are passed on to consumers in the country that imposed them. The bottom line - there is collateral damage on both sides.
U.S. tariffs and the retaliatory duties will ultimately impact two key clusters of Trump’s voter base - auto workers and farmers. Automotive supply chains are intricately integrated between U.S., Canada and Mexico. Some car parts are made in Canada, others in Mexico, and some in the U.S. Due to modular assembly lines and horizontal integration, these parts often move back and forth multiple times between the three countries before the final product is complete and each time thy move they are tariffed. The price for an F-150 pickup truck under this scenario will rise to US$12,000 for a car that currently retails at US$55,000.
The losers in this scenario are clear. Massively disadvantaged will be the North American car industry. Is this the reason why Trump has temporality rolled back tariffs on Canada and Mexico? Is it the pressure from worried financial markets and spooked businesses? ?
Finally will China’s stronghold be broken?
Trump’s tariffs will hurt China as it strikes at the heart of the manufacturing juggernaut. Tariffs will make Chinese products in the U.S. pricier, could weaken demand and shrink the export giant’s trade surplus which was a whooping US$1 trillion in the year 2024. While tariffs can definitely slow Chinese manufacturing, it will not break China’s stronghold nor topple its position as the market leader in exports, as not all Chinese products can be replaced easily and immediately given the heavy supply chain dependence. For example in case of solar panels, China is not just a big exporter but the only exporter.? ??
China has retaliated with counter tariffs of 10-15% on US agricultural goods, coal, liquefied natural gas, pick-up trucks, sports cars, along with slapping U.S companies in aviation, defense and technology with export restrictions.?Perhaps the most painful for China is the U.S. restrictions on supply of advanced chips. But this restriction has encouraged the country to focus on developing its domestic technology industry without reliance on the West and a direct positive fallout was the rise of China’s DeepSeek in direct competition to OpenAI’s CHATGPT. The country is also seeking to boost consumption which has been faring not too well amid slumping property market and lack of high-paying jobs.
While it is too early to make meaningful conclusions, the export-import market, manufacturing, outsourcing, the merchandizing/retail industry and supply chains are in a state of flux responding each day to each headline, making for a bumpy ride for all businesses and stakeholders.?? ???
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