The much-feared global trade tariff tussle 2.0 is here and real.
As US President Donald Trump completes one month in office, economies are grudgingly settling into battle stance, with some like China even throwing in a game-on sign along with retaliatory levies.
Put simply, a tariff is a tax. It's a crucial source of revenue for governments, but there's no single precedent where consumers got richer due to tariffs. If anything, these mind-numbing levies make consumers worse off, either due to a rise in prices or supply shortages, or both.
In Trump's worldview, however, tariffs can do magical things to make everyone's lives better. In just the past few weeks, he qualified it with repeated remarks. Sample some.
Tariff is the most beautiful word in the dictionary, next only to God, religion and love, Trump quipped during his recent press briefing. Further, he reasoned that, "When you're the pot of gold, the tariffs are very good, they're very powerful, and they're going to make our country very rich again." A few days later, he stressed again: "Tariffs are going to makes us rich as hell... and bring back businesses that left us."
But economists and policy wonks disagree and insist that tariffs aren't a magic wand, but can make living expensive and difficult. So they appeal for less sacrifice and more practicality.
Punching numbers, they estimate that if the 10% additional tariffs on Chinese goods along with the proposed 25% tariffs on all Mexican and Canadian goods announced on February 1 were to come into effect, they would cost the average American household $800 more this year alone. Alarmingly, estimates also peg that the series of sweeping tariffs targeting all major US trading partners could spark a geopolitical bloc-based trade war, potentially costing the global economy up to $6.75 trillion. Holy moly!
But Trump and his team of trade warriors justify that when applied surgically, tariffs are a justifiable way to nurture domestic industries and jobs.
Trump, the tariff fan
As Stephen Mirran, chief of Trump's Council of Economic Advisers, argued in a recent paper, tariffs can correct the effects of cheap products being dumped from abroad to undercut local firms, or provide a way for governments to prop up parts of an economy deemed vital for stability, security or both. In short-term, tariffs can even serve as an ample source of government revenue.
For now, tariff hikes are somewhat formless and shapeless, like water, but some believe that if the incoming onslaught of tariffs materialise, they can tear apart the prevailing multilateral trading system, could reshape global trade, even at the risk of creating significant uncertainty in the global economy, and result in generational change in the international trade and financial systems.
In short, globalisation, as we know it and as we've seen, will undergo a dramatic change with proponents even hanging a 'darling, dearest, dead' sign. Their dislike towards globalisation is understandable given that Americans, instead of getting wealthier suffered job losses as millions of low-skilled jobs moved overseas. So, the way forward, from their perspective, is to forge one-to-one free trade agreements, encourage and incentivize domestic production and attract foreign manufacturers to create jobs.
According to the World Economic Forum, the current trade system is based on the most-favoured nation (MFN) principle, where tariffs lowered for one WTO member apply to everyone else. Nations can lower or increase tariffs below and above MFN levels for specific partners when they enter into a free trade deal or to contain anti-dumping or other special measures.
But who actually pays for tariffs?
Importers generally pay tariffs at border crossings, ports and airports where customs officials audit goods. Though importing companies pay at border crossings, these costs are often passed on to consumers. Which is why, economists argue that the latest round of tariff proposals would, if implemented in full, trigger a rebound in US inflation later this year.
Moreover, tariffs might allow local producers to remain inefficient and maintain their prices, while domestic consumers are left paying more. Above all, they could cause currency shocks to the rest of the world, which witnessed a momentary tailspin over the past few weeks.
But Trump's team insists that tariffs will neither be inflationary, nor cause currency shocks. How?
As Mirran noted in his paper, from a trade perspective, the dollar is persistently overvalued, in large part because dollar assets function as the world's reserve currency. This overvaluation has weighed heavily on the American manufacturing sector, while benefiting financialized sectors of the economy. Such overvaluation makes US exports less competitive, US imports cheaper and handicaps American manufacturing.
Taking the 2018-19 tariffs as a precedent, he argued that Trump's tariffs during his first term saw no material increase in effective rates, and were passed with little discernible macroeconomic consequence. The dollar rose by almost the same amount as the effective tariff rate, nullifying much of the macroeconomic impact but resulting in significant revenue. Thus, he reasoned that sweeping tariffs and a shift away from strong dollar policy can have some of the broadest ramifications of any policies in decades, fundamentally the global trade and financial systems.
Perhaps that's why, an emboldened Trump, with added urgency and spontaneity, took quite a few tariff decisions within weeks after taking charge.
First, he announced a blanket 25% tariff on all products coming from Mexico and Canada. The same day, he also imposed an additional 10% tariff on Chinese goods. Next, he imposed a 25% tariff on all steel and aluminum imports. A few days later, he announced reciprocal tariffs on all trading partners, besides announcing a tentative 10% across the board tariff on imports from the EU. More recently, he announced a 25% tax on auto, chips, and pharmaceutical imports, which will come into effect from April, 2.
But how real are these tariff threats, with some accusing Trump of leveraging tariffs to force countries into obedience. For instance, the first set of tariffs announced on February 1, against Mexico and Canada were supposed to take effect from February, 3. But they didn't. As both Mexico and Canada agreed to Trump's terms to increase border troops to arrest illegal border crossings, besides others, the tariffs were postponed by a month and are now expected to take effect from March 3.
India impact
India runs a trade surplus with the US, but the value of trade is insignificant unlike Canada, Mexico and China, which are its three largest trading partners. Canada and Mexico together account from about 30% of all US' goods imports.
Still, Trump's decision is significant for India, and can have a far-reaching impact on food products, textiles, electrical machinery, gems and jewelry, pharma products, auto, iron and steel. Understandably, markets are jittery, with traders are breathing a quick prayer in every trading session.
Notwithstanding the bonhomie between Trump and Prime Minister Narendra Modi, the former has often accused India of being the tariff king. In fact, just ahead of his meeting with Modi last week, Trump said that India was a hard place to do business. "But again, whatever they charge us, we're charging them. So, it works out very well. It's a beautiful, simple system, and we don't have to worry about charging too much or too little," he said.
On its part, the Indian government is attempting to water down its high tariff image. In its latest union budget, the government reduced basic duties on high-end vehicles like Harley Davidson from 125% to 40%, on bourbon whisky from 150% to 100%, besides reducing custom duties on 40 items.
While acknowledging Modi as a tough negotiator, Trump though renewed his focus on imposing reciprocal tariffs, or tit-for-tat levies even on Indian products.
Opinion is divided whether reciprocal tariffs will have a significant affect. If some believe countries like India, Japan and EU will be among the hardest hit, others argue that it won't be a big disaster for US-bound shipments, as about 75% of our exports comprising garments, leather and textiles have an average 5% levy.
If tariffs are indeed being used as a negotiating tool, India has conveyed its willingness to cooperate as can be seen with the recent round of trade deals including expanded US military sales to India, such as the F-35 jets, along with increased oil and gas exports, besides crafting a comprehensive trade deal, along with a new defence framework to boot.
Will that be enough is what remains to be seen given the mercurial nature of President Trump.
