Politicians make a lot of promises when they are on the campaign trail and Donald Trump was no exception. One of his most prominent pledges during campaigning was to make international trade fairer for the US, stating that “We (the US) don’t win anymore.”
Since the beginning of the year the Trump administration has taken measures to impose tariffs on washing machines and solar panels and announced that it is investigating tariffs on imported steel and aluminium too.
The case for and against tariffs
Tariffs are seen by some as a way of protecting jobs in industries that have been hurt by ‘unfair’ trade practices; the theory is that it is a ‘good’ tax in that it drives more people to buy home grown – or in this case, homemade – products.
This is the argument that the Trump administration is using however critics argue that the real impact is to hurt the US consumer as the producers of the goods don’t pay the tariffs, consumers of those goods do. And in the case of steel or aluminium, consumers are often US businesses.
Another issue with the plan is that steel and aluminium will become more expensive regardless of whether it is subjected to those tariffs or not because domestic producers will take the opportunity this competitive advantage affords to raise prices in a bid to make up for years of margin compression. Essentially, if all of your competitors suddenly become 15% more expensive you can raise your prices by 10% and still retain your advantage.
Reverberations along the supply chain and in markets
The global economic impact of a new tariff on washing machines is, in truth, minimal but, more importantly, it does have the potential to act as a gateway drug to other tariffs. Global tariffs on steel effects a huge number of countries along the supply chain: Brazil, Canada, Mexico and South Korea were the largest suppliers of imported steel into the US economy and so would be the most likely to oppose such a move and the most likely to retaliate with tariffs of their own.
Currencies are vehicles of both speculation and international trade and, therefore, the foreign exchange market has already become the place to express unhappiness with Trump’s plans. The Japanese yen has rallied in its position as the global safe haven currency with the Canadian dollar and Mexican peso slipping. GBP is down against the euro following the announcement of the EU’s proposed trade plans for the UK following Brexit.
Global Trade, Global Pain
Of course it is not just the West that will feel the pain. Economies such as Thailand, Singapore, Malaysia, and Brazil are all examples of countries whose growth correlates strongly with the path of international trade.
How much of these plans are bluff and bluster and how much are concrete measures is still up for debate. In the meantime, experience shows us that markets often despair and distrust some of the White House’s more controversial overtures and these plans are likely to solidify fears that global growth may be in for a rockier ride than some currently expect.
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