Trump and the Start of the Tariff Wars
Trump and the Start of the Tariff Wars
After returning to the White House, Donald Trump made implementing strict trade policies and increasing economic pressure on China, Europe, and other U.S. trade partners one of his priorities. These priorities have caused significant fluctuations in financial markets and placed the world on the brink of a trade war.
Trump’s tariff war has put the global economy on the verge of new shocks, a situation that could lead to slower economic growth, contracted trade, and higher inflation worldwide.
The President of the United States has initiated a unilateral tariff approach with the promise of protecting American industries, reducing dependency on imports, and strengthening the domestic economy. He hopes that competing countries will comply with his demands under tariff pressure.
Trump’s heavy tariffs have so far targeted imported goods from China, Canada, and Mexico, and are expected to extend to more countries.
Trump is also unhappy with Mexico’s trade situation with the U.S. and has imposed tariffs on some Mexican imports.
He has simultaneously threatened that if Mexico does not cooperate in preventing illegal immigration to the U.S., more tariffs will be imposed.
At the same time, the U.S.’s trade relations with one of its main allies, Canada, have also become tense due to disputes over tariffs. Donald Trump has even threatened European countries, which have always had close relations with the U.S., with heavy tariffs.
The rapid implementation of these policies has also affected the U.S. economy.
In recent days, the U.S. dollar has weakened against most currencies due to fears of reduced economic growth from increased tariffs.
On the other hand, with the improved economic growth outlook in Europe following Germany’s proposal for a 500 billion euro infrastructure fund to counter trade tensions, the euro’s value against the U.S. dollar has risen to its highest level in the past four months.
As the dollar’s value decreases, economists warn that these policies could increase inflation and slow global economic growth.
While economic analysts believe the new tariff war could raise prices for American consumers and weaken U.S. relations with its allies, the Trump administration claims these actions will strengthen domestic production and bring back industrial jobs to the U.S.
What is a Trade War?
A trade war, or tariff war, refers to the imposition of reciprocal trade tariffs between countries, where each country imposes heavy tariffs on imported goods to protect domestic production or pressure the opposing side, and the opposing country retaliates. Customs tariffs can be likened to a tax imposed on imported goods from other countries. These tariffs are usually a percentage of a product’s value, and with the increase in tariffs, the price for consumers also rises.
Historical experience shows that tariff wars usually do not have a real winner, as both sides face increased costs, reduced exports, and market turmoil.
Economists emphasize that trade barriers and retaliatory tariffs can shrink the overall economic pie and harm global growth.
In economic history, there have been famous examples of tariff wars, and in most cases, the goals of the countries imposing tariffs were not achieved.
One of the most famous examples is the British Corn Laws, which were in effect from 1815 to 1946.
During this period, Britain imposed heavy tariffs on imported grains to support domestic landowners, but ultimately, this policy led to increased food prices and public discontent. The tariffs were eventually repealed, and this event became one of the motivators for Britain to move towards free trade.
The United States also imposed widespread tariffs on imports during the 1930s, at the height of the Great Depression, to protect domestic industries, but eventually, other countries retaliated, and global trade sharply declined.
Many historians believe that this tariff war exacerbated the Great Depression and plunged the global economy into a deeper crisis.
Why Does Trump Use Tariffs?
Trump entered the White House with the slogan ‘America First’ and harsh criticism of the U.S. trade deficit with some countries. He believed that previous trade policies and the behavior of trade partners, especially China, had harmed American workers and industries.
The President of the United States has gone beyond economics to justify this policy, using Section 232 of the U.S. Trade Expansion Act of 1962 and his powers to declare imports of certain goods a threat to national security.
This law gives the President the authority to adjust imports to the United States in quantities or under conditions that threaten national security.
Regarding some countries like Mexico, Trump has raised motivations beyond economics. He has used the threat of tariffs on Mexico as a pressure factor in the issue of illegal immigration and preventing the entry of the drug fentanyl. Trump began imposing tariffs during his first term in January 2018 by placing tariffs on solar panels and washing machines, a policy that later expanded to other goods.
In September of the same year, he imposed a 10% tariff on two hundred billion dollars of Chinese imports, and in response, China imposed a 5 to 10% tariff on sixty billion dollars of American goods.
The meeting of the leaders of the two countries later on the sidelines of the G20 summit led to some tariffs being adjusted or further increases being prevented. Despite this, Trump recently increased tariffs on imported goods from China from 10% to 20%.
U.S. and Europe Trade Dispute
Trump’s tariff war is not limited to China.
He has simultaneously initiated trade challenges with Europe and America’s neighbors. Although the United States and the European Union have close economic and political cooperation, trade disputes between the two have a history.
The dispute between Europe and the U.S. in the aircraft manufacturing industry is one of the longest and most complex cases of the World Trade Organization, which took years and ultimately led to reciprocal tariffs between the two sides.
In this dispute, which occurred between the two aircraft manufacturing giants, Boeing and Airbus, both sides claimed that the other had started unfair competition through low-interest loans and government financial aid.
This dispute ultimately led to tariffs being imposed on aircraft imports and became part of Trump’s overall approach in the trade war with Europe during his first term. However, after Joe Biden took office, the U.S. and the European Union announced a temporary five-year agreement to suspend these tariffs.
During his first term, Trump threatened to impose more tariffs on European cars, a decision that, if implemented in his second term, would impact Germany’s recession-prone economy more than any other country. While the U.S. imposes a 25% tariff on European passenger cars, the European Union imposes a 10% tariff on U.S. car imports.
Despite this, the U.S. imposes a 25% tariff on European pickup trucks, which is much higher than Europe’s tariffs. The reason for U.S. support for these types of vehicles is their popularity and high demand among American consumers.
In this situation, Trump has called for tariff equalization and has threatened Europe with increased tariffs. Some analysts believe that reciprocal tariffs between the U.S. and Europe will cause significant harm to the U.S., as about 20% of U.S. car exports in 2023 were produced by European automakers based in the United States.
Therefore, by starting a trade war, the United States will lose a significant portion of its revenue from car exports.
Based on this, some see Trump’s threat to impose tariffs on European automakers as a negotiation tactic to persuade the European Union regarding Trump’s political and security demands.
He has previously criticized NATO and Europe’s defense policies multiple times and used tariffs as a tool to pressure Europeans to increase their defense spending.
Disorder in the Global Economic Order
Trade tariffs ultimately form part of the final cost of goods, and the end consumer will pay for it. Based on this, analysts predict that trade tensions will lead to increased inflation and higher prices in the countries involved. Although imposing tariffs on Chinese imports during Trump’s first term reduced part of the U.S. trade deficit with this country, it exacerbated the trade deficit with other countries, as American companies replaced Chinese imports with partners from other countries, leading to an increased trade deficit with Europe.
U.S. economic indicators have also reacted negatively to Trump’s tariff decisions in recent weeks. The dollar index fell about 37% from February 28 to March 10, marking one of the fastest declines in recent years.
U.S. stock indices have also reacted negatively to trade risks. The decline in the dollar’s value was not an unexpected phenomenon for Trump, as a decrease in currency value strengthens exports. However, during the first round of tariffs in 2018, contrary to Trump’s initial expectations, the U.S. dollar’s value strengthened during the trade war because trade tensions worried investors about the global economic outlook, and in such conditions, many investors turned to the dollar as a safe asset.
According to Bloomberg Economics calculations, by the end of 2020, the U.S.-China trade war cost the U.S. economy about 316 billion dollars.
The Federal Reserve Bank of New York and Columbia University have also reported that American companies lost at least 17 trillion dollars in stock value due to tariffs the U.S. imposed on imports from China.
The Trade War Will Have Winners
Some analysts believe that Trump’s tariff war was one of the factors behind the slowdown in global trade growth in 2019.
Joseph Stiglitz, a Nobel Prize-winning economist, is one of the most famous opponents of imposing tariffs in the U.S. economy.
He considers these actions ineffective and believes that the impact of tariffs will be very bad for the U.S. and the world.
Other critics also say that while tariffs may support a few specific industries like steel and create jobs, the cost of increased prices for raw materials and intermediate goods falls much more heavily on downstream industries and consumers.
Imposing tariffs has had similar effects on China’s economy.
After tariffs were imposed during Trump’s first term, the country experienced lower economic growth.
Some other countries will also be indirectly affected by the U.S. tariffs on Chinese products.
For example, Germany, as an economy dependent on industrial exports, will be harmed by reduced demand from China and the U.S.
Despite all the potential losses from tariffs on the global economy, investors predict that trade tensions will hurt China’s and Europe’s economies more than the U.S., ultimately leading capital flows towards the safe asset, the dollar.
In contrast, mainstream economists have opposed the start of a trade war, warning that tariffs will ultimately harm the U.S. and global economy.
