Trump’s tariff turmoil

Last Wednesday, President Donald Trump imposed 25% tariffs on all steel and aluminium imported to the US, sending shockwaves across the globe and potentially setting the foundation for a damaging global trade war. In response, the EU will impose counter tariffs on $ 28 billion worth of US goods from next month. Meanwhile, Canada announced $ 20.7 billion in reciprocal duties to counter the US action, and the North American State is the largest foreign supplier of steel and aluminium to its southern neighbour.

Early this month, Trump slapped 25% tariffs on imports from Canada and Mexico apart from further hiking the already enforced duties on goods from China on the basis that the top 3 trade partners of America had not taken sufficient action to stem the flow of fentanyl and dangerous drugs into the US soil. He later postponed the intended tariffs on many imports from Mexico and some imports from Canada for one month while showing no respite on China. The Wall Street Journal Editorial had termed the North American trade war triggered by the incumbent US President as the dumbest trade war in history.

Steel and aluminium are critical materials and used in the production of medical devices, cars, cans, and electrical appliances. Observers in the US have expressed alarm that ill-advised tariffs could cause unwarranted hardships on American consumers while hurting the export income of US businesses from the retaliatory actions of its important trade partners. Unlike in the past, the global economy today is highly interconnected and supply chains have become integrated across different countries, hence, upending the established trade networks would be a nightmare for the businesses affected by the trade protectionism of the White House. According to the respected economist Paul Krugman, there is no US manufacturing sector anymore and what prevails is the North-American manufacturing sector which is tightly connected across the US, Mexico, and Canada with parts and components going back and forth across the borders.

Republican Presidents like Ronald Reagan were known for championing free trade and ironically the real estate developer-turned politician is reshaping the political playbook with his controversial and disruptive actions. The trade-related tensions are occurring at a time when the Trump administration finds itself at loggerheads with the traditional foreign allies of the global superpower such as the UK, EU, and NATO over the war in Ukraine with Washington showing reluctance to extend continued support to the war-ravaged country unlike the Biden administration in the course of Russian aggression. The septuagenarian’s unilateral actions on cross border trade have the potential to damage the longstanding affinity between the US and the leading rich democracies in the world which could undermine the global unity.

The former reality TV host draws inspiration for his tariffs from the 25th US President William McKinley, who was in office from 1897 until his assassination in 1901. As chair of the House Ways and Means Committee, McKinley championed the Tariff Act of 1890, which set the then-highest import tax in US history, raising taxes to 49.5% on 1,500-plus items. Some of Trump’s backers opine that income generated from import duties could replace the Federal Income Tax altogether – a scenario which would be cherished by Trump’s core support base.

The historians recall how the Smoot-Hawley Tariff Act of 1930 - which raised US import duties with the goal of protecting American farmers as well as businesses from foreign competition – was responsible for the worsening the severity of the Great Depression in the US and around the world. In response to the increase of import duties by the US, 25 countries retaliated by increasing their own tariffs. As a result, international trade declined drastically, resulting in a worldwide decline of 66% between 1929 and 1934, with both US exports and imports dropping substantially. 

Last week, the US stock market lost $ 4 trillion in value driven by the fears of a possible recession due to Trump tariffs. Trade wars only bring misery as empirical evidence proves.