Analysis/ Trump: Trade wars are easy to win! Is this true?
Donald Trump has dismissed trade wars, claiming they are easy to win. The US president imposed 10 per cent tariffs on China on Tuesday, while Mexico and Canada won last-minute stays of execution with 25 per cent tariffs. He is also threatening to hit the European Union, a major exporter of cars, medicines and food to the United States.
Trump says he wants to use the tariff weapon to stop the flow of fentanyl and illegal immigrants across the northern and southern borders of the United States. To do so, he has invoked emergency powers even as the U.S. economy is growing strongly and at full employment.
He also wants to close the US's $1 trillion trade deficit with the rest of the world. The Trump team argues that erecting a tariff wall will force companies to bring investment and jobs back to the US - think of all those silicon chips now made in Taiwan or iPhones made in China.
But critics warn that Trump's trade war will result in higher prices, lower growth, job losses and disruptions to supply chains at home and abroad. They also argue that tariffs are the wrong tool to fix a trade deficit caused by America's borrowing and spending habits.
Here's what Trump's trade war is all about:
What is a trade war?
First, a trade war is not an actual war: it is a conflict that results when one side believes a trading relationship is unfair. Let’s say you flood my market with cheap steel, priced below the cost of production. Companies in my country are going to the wall. They’re laying off workers. My voters. That’s dumping, and under global trade rules, I can retaliate by imposing tariffs on your steel.
For a trade conflict like this to turn into a trade war, things have to escalate. And that’s what’s happening here: Trump is still threatening to hit America’s closest trading partners with tariffs on just about everything. That means we could be about to start the biggest trade war since the 1930s.
How do the fees work?
Trump claims his new tariffs will make Americans rich, and he has even promised to create a new Foreign Revenue Service to collect all the revenue they throw away. He also says foreign companies will pay for them and that they won't hurt American consumers.
However, they don’t work that way. Tariffs are a tax paid by the importer at the border. If they rise, the importer faces a choice between passing the price increase on to the consumer, or accepting a squeeze on their profit margins. The price increases from Trump’s overall tariffs will show up immediately in consumer inflation, economists say. And although he has promised to offset their impact with tax cuts elsewhere, there is no sign yet of that happening.
As for potential revenue from tariffs, Trump likes to hark back to the late 19th century, when tariffs accounted for over half of U.S. federal revenue. But that was before the income tax that today supports a much larger government relative to the overall economy. There is no way that tariff revenue could pay for a modern state.
When was the last trade war?
In Trump's first term, he imposed 25 percent tariffs on steel and 10 percent on aluminum in 2018, while the European Union responded by imposing tariffs on $6 billion worth of Harley Davidson motorcycles, Levi's jeans and bourbon.
Trump threatened to escalate by hitting European car imports, but never got around to it. Eventually, the tariffs were suspended by both sides. The EU’s truce expires at the end of March, meaning that even if Trump doesn’t hit Europe with tariffs now, their trade dispute could still spiral out of control.
The clearest precedent is likely the so-called Nixon shock of 1971. The starting point was comparable to today: the costs of the Vietnam War and the Great Society policies of the 1960s had turned the United States from surplus to deficit.
In an effort to restore balance, President Richard Nixon removed the gold standard, forcing U.S. trading partners to revalue their currencies. He ordered a 90-day wage and price freeze. And he imposed a 10 percent import tax.
Nixon's actions are considered a political success but an economic failure. The import tax was lifted within months. And the U.S. economy struggled for years with stagflation, a combination of low growth and high inflation that was squeezed out of the system only in the 1980s by the tight monetary policies of Federal Reserve Chairman Paul Volcker.
Who is the real enemy?
China. Although Trump has only threatened to hit China with 10 percent tariffs, the tariffs still hanging over Canada and Mexico indirectly target Beijing. That's because, under the USMCA trade deal (the successor to NAFTA), Chinese companies such as electric vehicle manufacturers would normally enjoy duty-free access to the U.S. market if they set up production in North America.
In recent years, there has been a bipartisan consensus in Washington about the need to fight China and its economic model, which has created massive industrial overcapacity and flooded global markets with excess production. However, since taking office, Trump has scaled back the rhetoric, saying he simply wants a “fair” trading relationship with China.
One thing to watch: Will Trump lift tariffs against America's allies if they agree to join the United States in shutting out China? That's a straw that the European Union is clutching in hopes of preserving transatlantic peace.
How far can this escalate?
Trump, in his second incarnation as US president, has shown no qualms about questioning the territorial integrity of other nations, claiming that Canada should become the 51st US state or laying claim to Greenland, a protectorate of EU member Denmark.
A bigger concern is that by playing fast and loose with international law, Trump is playing into the hands of leaders like Russia’s Vladimir Putin who want to overturn the status quo. In a world where many fires are burning, Trump is freely pouring gasoline and throwing matches to start new ones.
Can Europe escape Trump's wrath?
The US president has stepped up his rhetoric, calling the EU an “atrocity” on Sunday night. Brussels is desperate to engage, offering to buy more liquefied natural gas or US weapons, while Trump presses European governments to spend more on defence. Last time, Brussels responded to Trump’s steel and aluminium tariffs with retaliatory measures on motorcycles, jeans and bourbon aimed at inflicting maximum pain in Republican strongholds.
The EU could do the same thing again or use its trade "bazooka," the anti-coercion instrument, which would put retaliation on a stronger legal footing. However, experts worry that the anti-coercion instrument could be too slow, because it requires a consultation period before action. The EU needs a new, bigger bazooka that can be fired in real time, they argue.
Can Trump be stopped?
Trump is, for the first time, invoking emergency powers under the International Emergency Economic Powers Act of 1977 (IEEPA), so far used only by Joe Biden to impose sanctions on Russia for Putin’s war on Ukraine. The IEEPA has not yet been used to justify tariffs, and it is possible that business groups suffering financial harm as a result could take legal action. However, it is unlikely that a judge will issue an immediate injunction against the tariffs. Any lawsuit is likely to be dismissed.
The U.S. Congress may also have the power to stop Trump’s trade war. On top of the dubious excuse that fentanyl and illegal immigration represent an economic emergency, the legislature has also delegated to the president broad responsibility for trade policy, which Franklin D. Roosevelt first did in 1934 and could take back.
But with the Senate and House of Representatives under Republican control, it would take a major trade rift to stop him in his tracks. And that seems unlikely at the moment. Then there’s the World Trade Organization, a global body created 30 years ago to act as an arbitrator in trade disputes. However, it is currently unable to fulfill that role, as both Trump and Biden blocked the appointment of judges to its Appellate Body, or highest court of appeals.
conclusion
For Trump there are no rules. It's the law of the jungle. So unless there is a strong political or judicial backlash in the United States against his trade war, he will be hard-pressed to stop it. Then again, he could just make a deal.
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