Tariffs, Tensions, and Trump's Trade Trap

Yes, I know many of you might say that this article is old news but my main intention of writing this article is to sum up and simplify the key takeaways from this entire chaos that Donald Trump has created for the rest of the world.

Trump’s history with tariffs has been rather interesting and he is clearly no stranger to them. He launched a trade war during his first term, taking particular aim at China by putting taxes on most of its goods. Moreover, Trump also used the threat of more tariffs to force Canada and Mexico to renegotiate a North American trade pact, called the U.S.-Mexico-Canada Agreement, in 2020. Throughout this year, from the months of January to April, Trump has imposed a variety of tariffs and this article will examine the highlights in terms of shocking numbers and its impacts on respective stakeholders.

The American president has chosen to assign different tariff percentages for different countries. The least or the “base rate” is a 10% tariff from significant countries such as the UK, Singapore, New Zealand, UAE and Saudi Arabia. He has then allotted a set number of countries under the category of “worst offenders” that include approximately 60 countries such as the European Union, Japan, Thailand and even South Africa - all ranging from a 20% to 50% tariff.

However, the heavyweight clash is apparent between the States and China who have engaged in a “trade war” as US duties on Chinese goods now stand at 145 percent, while China’s retaliatory levies on US imports have reached 125 percent. The trade in goods between the two economic powers added up to around $585bn (£429bn) last year, with the US imported far more from China ($440bn) than China imported from America ($145bn) thus leaving the US running a trade deficit with China of approximately $295bn. That's a significant trade deficit, equivalent to around 1% of the US economy. Conversations are currently ongoing amongst the two countries while China recently sent back Boeing planes it ordered from the US in its latest retaliation over tariffs. In one of China's strongest statements yet over the tariff war, Commerce Ministry spokesman He Yadong said the US should remove all "unilateral tariff measures" against China "if it truly wanted" to solve the issue. Trump, on the other hand, commented on his Truth Social media platform mentioning that "Boeing should default China for not taking the beautifully finished planes that China committed to purchase". 

Impacts of the tariffs on the rest of the world

For the US and China in particular, there could be several consequences of this trade war. For instance, China has the central role in refining many vital metals for industry, from copper and lithium to rare earths and Beijing could place obstacles in the way of these metals reaching the US and this is something that is already being done in the case of two materials named germanium and gallium which are used by the military in thermal imaging and radar. For the US, it can actually attempt to tighten the technological blockade by making it harder for China to import microchips it can’t produce itself. Trump can apply pressure to countries such as Cambodia, Vietnam and Mexico to not trade with China if they want to continue to export to the United States. 

It is clear that the rest of the world would also be impacted and these major impacts include a dampening in trade volumes, increased business costs and reduced investment confidence across several regions. Emerging economics especially those in Asia who rely greatly on exports to America. Specifically, sectors such as textiles, electronics and machinery are expected to take a big hit because U.S buyers are more hesitant to purchase these products due to their increased prices. Furthermore, multinational corporations such as Nike, Apple and Samsung are re-evaluating where they want to manufacture in order to avoid these tariffs creating further uncertainty in terms of investments - leading to slower job openings in the market and reduced economic growth.  

When talking in terms of currencies, investors will potentially move their money out of more risky emerging markets and into more safe haven assets and these safe haven currencies could include the Japanese Yen, the Swiss Franc and even the US dollar and will weaken emerging market currencies such as the Indonesian Rupiah, Mexican Peso and the Chinese Yuan because investors would try and avoid these countries as they heavily rely on exporting manufactured goods to the U.S and these slower exports can lead to lower GDP in these countries leading to reduced economic profits for companies there. The US dollar can have varied effects. The general understanding after applying a tariff would be that the dollar’s exchange rate would strengthen but if this is a supply shock then it could increase the price level in the United States, leading to the country seeming as a less attractive place to set up, making the dollar seem as a more unattractive currency to purchase, hence making this entire scenario a very tricky thing to actually predict. Even if investments and production facilities were to be set up in the states due to these high tariffs, it would be considered a short-term sacrifice for an uncertain long term gain because it is not only a long term and tedious process to plan a factory, its location, obtain necessary permits and a reliable workforce but these tariffs also have to act for surety and permanence because it is not guaranteed that these policies are going to remain, considering that the entire field of politics is extremely shaky and unpredictable. 

To sum up, Trump has definitely taken the world by surprise by his tariffs and that is quite literally how I want to end this article, nothing too long and boring like regular conclusions. 

Written by Raj Shah