After solar panels and dish washers, steel and aluminum, President Trump now wants to increase tariffs on Chinese drugs and robots, among others, for over USD60bn worth of imports. Volatility surged as concerns about a trade war resurfaced. On the campaign trail, then-candidate Trump was clear about his intentions to renegotiate every disadvantageous free trade agreement. NAFTA was a prime target right from the start. In addition, the US has always been a protectionism champion. In 2017, they contributed 90 new protectionism measures out of 467 worldwide.
So, why the fuss ?
The March 8 announcement, a hike to a 25% tariff on steel and 10% on aluminum (up from the current 0.3% and 3.5% on average, respectively), rattled many. In reality potential losses may be very limited since many allies were granted exemptions. China was not. The March 22 announcement had a dramatic ring to it: China is singled out. Approximately 12% of total Chinese exports to the US could be submitted to 15-25% tariffs. According to our estimates, potential losses for Chinese exporters could be USD15bn. Besides, China was quick in announcing retaliation measures on US agrifood products: one of the few sectors for which the US runs a trade surplus with China (USD20bn). Exports at-risk for American exporters could be worth USD3bn and potential losses represent only USD700bn. The amounts are small but the stakes are high.
American households and companies will pay a high price for President Trump’s protectionist chutzpah.
Congress tries to hold back the protectionism bulldozer as more protectionist moves will hurt growth and raise inflation in the US. Future targeted industries, for which the US run a substantial trade deficit, include the chemicals sector, second in the number of protectionism investigations only to metals, the car industry, very visible ahead of the mid-term elections, and the electronics sector.
For now, the risk of a full-fledged trade war, characterized by a doubling or tripling of the average US tariffs, standing today at 3.5% on average, and severe retaliation from the EU and China, is very unlikely. Yet when unpredictability is high, the ghosts of the past may come for an unwelcome visit.
President Trump’s decision is often compared with President Bush’s, back in 2002. Same goods; same political and economic situations. Yet, the styles are different. When combining the profligate fiscal stimulus, the pressure on the dollar, and the protectionism bravura, President Trump’s trade policy resembles more the Reagan era. Back in the 1980's trade was a global bone of contention, The average tariff in the US was closer to 6%.
President Trump's gusto for old-fashion use of tariffs and bilateral deal making is disconcerting. All he wants is leverage.
His choice of raising import duties raises the specter of 30 year-old trade policies. This was an era before services represented the bulk of trade, before multilateralism leveled the playfield, before the World Trade Organization, before the advent of Europe and China as we know them today.
Since then, the world agreed to work together to a rules-based order, including the reduction of such tariffs. Countries had to find other ways to boost competitiveness from exchange rates and wage moderation, to non-tariff measures, to institutionalized subsidies and bilateral free trade agreements. And all the players accepted that the globalization game was rigged just enough for the greater good, through such means as free trade, to be safe and sound. Serendipitously, the G20 meeting in Argentina last week may have added fuel to the fire, instead of serving as a platform to find solutions between super powers.
Will the US manage to change the rules and forgoes 25 years of progress? Will other countries overreact and escalate? A good scare is worth more to a man than advice. Let’s avoid unchartered territories such as a trade war in a hyper dependent world, and take this as a wake-up call for stronger, better and more inclusive globalization efforts.