US President Donald Trump declared a trade war by slapping 25 per cent duty on all items from Canada and Mexico and a 10 per cent tariff on Chinese imports. “Tariff” is “the most beautiful word in the dictionary,” Trump said. To collect all the money America loses, he even pledged to establish a new External Revenue Service.
Trump is also threatening to attack the European Union, a significant supplier of food, medicine, and automobiles to the US. And, during his campaign in 2024, Trump referred to India as a “very big [trade] abuser.” In his latest move, Trump announced a new 25 per cent tariff on all steel and aluminium imports. And India is one of the countries to be impacted by it.
Canada, Mexico, and China all threatened to retaliate. Both Canada and Mexico, however, agreed to tighter border security and more aggressive measures to combat fentanyl trafficking, something Trump had been calling for.
Trump loves to refer to the late 19th century, when tariffs generated more than half of US federal revenues. However, that was prior to the income tax regime. Trump’s imposed tariffs during his first term were unprecedented since the 1930s. However, the EU retaliated by targeting American goods, including Harley-Davidson motorcycles, Levi’s denim, and Kentucky bourbon. China enacted tariffs on American products, including soybeans and pork, to hurt Trump’s supporters in the farm country.
Hit by stagflation
There were other American-brewed trade wars in the post-World War II period. The costs of the Vietnam War and the Great Society policies of the 1960s had caused the US to go from surplus to deficit. In an effort to rebalance the economy, in 1971, President Richard Nixon implemented a 10 per cent import tax and other policies, which are well-known as the Nixon shock. The US economy struggled for years with stagflation — a confluence of low growth and high inflation.
President George W Bush imposed tariffs on a large number of steel imports in March 2002. According to Andrew H “Andy” Card Jr, Bush’s chief of staff from 2001 to 2006, “the results were not what we anticipated in terms of its impact on the economy or jobs.” The EU threatened to impose tariffs on Florida oranges and Carolina textiles and fabrics. In December 2003, Bush was forced to terminate the tariffs.
Many economists believe that tariffs are mostly useless for the government to collect taxes. If, for example, the costs of Alberta oil, Saskatchewan uranium, and Quebec aluminium were excessively expensive, many analysts wonder how America could compete with China. What would happen to the tens of millions of American jobs involved in the US trade with Mexico, Canada, and China combined?
Supply chain impact
Critics caution that Trump’s trade war will cause disrupted supply chains, lost jobs, lower growth, and higher prices both domestically and internationally. Many economists contend that tariffs are an inappropriate means of addressing a trade deficit brought on by American borrowing and spending patterns. Economist Joseph Stiglitz, for example, predicted that they would almost certainly cause inflation.
However, why is Trump enforcing these tariffs? Just for pressuring Mexico and Canada to enforce more stringent border controls? For compelling China to take further action against the trafficking of fentanyl? To reduce the trade imbalance in the US? To create more American jobs? Or to reduce imports and eventually make America more self-reliant?
Perhaps there’s something more deeply rooted in Trump’s thinking . In her biography, Freedom, former German chancellor Angela Merkel wrote about her first meeting with Trump. Trump “looked at everything like the real estate developer he was before he entered politics,” Merkel remarked. Trump held that all countries were competitors and that the success of one entailed the failure of another. Trump has made an effort to implement the zero-sum negotiating techniques he developed in the New York real estate. William C Freund, a retired chief economist for the New York Stock Exchange, wrote in 2017 that “by adhering to the false notion of trade as a zero-sum deal, Mr Trump becomes a job killer rather than a job creator.” And the trade war during Trump’s second term, which perhaps no one will win, may have been sparked by Trump’s zero-sum mentality. But it’s a lose-lose game, unfortunately.
The writer is Professor of Statistics, Indian Statistical Institute, Kolkata