US President Trump's "America First" trade policy has embroiled the country in a game of tariff chicken with major trade partners, including China, the world’s second-largest economy. But the US is not coming out of this unscathed.
Since Donald Trump came into office, "America First" has been his rallying cry, his base strategy and his justification behind many a decision. His "America First" economic foreign policy has not spared America's traditional allies or trade partners.
Over his tenure, Trump has criticised the World Trade Organization (WTO), called the North American Free Trade Agreement (NAFTA) a “disaster,” and threatened American companies with offshore operations — often on one of the world's most public forums: Twitter.
It came as no surprise when Trump went full steam with his “trade wars.”
Tariffs are working big time. Every country on earth wants to take wealth out of the U.S., always to our detriment. I say, as they come,Tax them. If they don’t want to be taxed, let them make or build the product in the U.S. In either event, it means jobs and great wealth.....— Donald J. Trump (@realDonaldTrump) August 5, 2018
Simply put, one way a trade war can play out is when countries respond to each other’s trade practices by attacking them with taxes and quotas. And one of these taxes — tariffs — is what the US has been employing liberally on imports. Tariffs are meant to protect homegrown businesses and put foreign competitors at a disadvantage.
As of July, the US had imposed tariffs on its top five trade partners: China, Canada, Mexico, the European Union and Japan.
But these taxes also exact a toll on domestic businesses and consumers as they pay more for imports. They also have the potential of limiting local firms’ access to foreign markets.
When a country (USA) is losing many billions of dollars on trade with virtually every country it does business with, trade wars are good, and easy to win. Example, when we are down $100 billion with a certain country and they get cute, don’t trade anymore-we win big. It’s easy!— Donald J. Trump (@realDonaldTrump) March 2, 2018
Steel and aluminium
Between March and May, Trump's administration imposed a 25 percent tariff on steel and 10 percent tariff on aluminium imports.
Canada is the biggest steel and aluminium supplier to the US, with 90 percent of its steel going to its neighbour.
Canadians have said they are concerned about resultant layoffs and the hike in prices of goods imported from the US, goods which use steel and aluminium such as canned goods and machines.
Brazil, South Korea and India are also some of the countries that have been hit by these duties and are struggling to find new destinations for their steel and aluminium.
As US-Turkey relations tanked in early August, Trump tweeted he was doubling tariffs on Turkish steel and aluminium imports to 50 percent and 20 percent, respectively.
These tariffs have hurt American manufacturers that require imported steel and aluminium to build goods, including vehicle manufacturing.
Whirl-ing in more tariffs
Tariffs have also been imposed on imported washing machines, to boost American brand Whirlpool, and solar panels.
The move came early in 2018 after US Trade Representative Robert Lighthizer announced results of a 2017 study into unfair trade practices by foreign manufacturers, particularly in East Asia.
The study said that South Korean appliance manufacturers LG and Samsung have flooded the US washing machine market over the past few years. And Chinese companies dominated the market for solar cells; China produces over 60 percent of the world's solar modules.
The new order imposes a 20 percent tariff on the first 1.2 million washing machines imported after the hike and a 50 percent tariff on all subsequently imported machines. Imported solar panels were hit by a 30 percent tax.
"You're going to have people getting good jobs again, and they'll be making more product again," Trump said as he was signing this order. "It's been a long time."
The solar panel tariff has been sharply criticised by many environmentalists as an attempt to stifle the quickly growing solar energy market.
The tariffs were critiqued by Republicans like Senators Ben Sasse and John McCain, who tweeted the tariffs amounted to “nothing more than a tax on consumers.”
We are not in a trade war with China, that war was lost many years ago by the foolish, or incompetent, people who represented the U.S. Now we have a Trade Deficit of $500 Billion a year, with Intellectual Property Theft of another $300 Billion. We cannot let this continue!— Donald J. Trump (@realDonaldTrump) April 4, 2018
Trump’s Chinese beef
China. China. China.
China has been on Trump's mind since before his inauguration.
From the theft of American technological know-how to interventionist policies, Trump has not held back in criticism of its top trade partner or in doling out punishment.
The US slapped a 25 percent tariff on $34 billion of Chinese goods in early July. Another round of duties on $16 billion went into effect on August 23, bringing the total amount of goods facing a 25 percent charge to $50 billion.
The administration has accused China of pressuring "foreign companies to transfer technology" if they want investment, of pursuing "policies aimed at limiting market access for foreign manufacturers," and not negotiating trade practices which will help cut down the trade deficit Trump has made his mission to pare down.
In the words of the USTR, China's approach is incompatible with the World Trade Organization's.
The US buys more from China than it sells to the country, a trade deficit of $375 billion and in order to reduce that deficit — a promise Trump made during his campaign trail — the US levied tariffs hoping consumers would turn to local products and to protect American jobs from what Trump calls “unfair trade practices,” according to a statement released by the White House.
Tariffs are working far better than anyone ever anticipated. China market has dropped 27% in last 4months, and they are talking to us. Our market is stronger than ever, and will go up dramatically when these horrible Trade Deals are successfully renegotiated. America First.......— Donald J. Trump (@realDonaldTrump) August 4, 2018
Tariffs are the greatest! Either a country which has treated the United States unfairly on Trade negotiates a fair deal, or it gets hit with Tariffs. It’s as simple as that - and everybody’s talking! Remember, we are the “piggy bank” that’s being robbed. All will be Great!— Donald J. Trump (@realDonaldTrump) July 24, 2018
How did China hit back?
China has fought back with matching tariffs of the same amount on US exports to China.
In a tit-for-tat tariff war, the Chinese Commerce Ministry announced a 25 percent surcharge on $16 billion worth of US goods after the US green-lighted the August 23 tariffs.
The duties imposed by the two countries will push up the prices of 1,300 goods altogether.
The 333 goods being targeted by China include vehicles, diesel, gasoline, propane, asphalt, fiber-optic cables, agricultural products and seafood.
Consequently, the American seafood industry is suffering. Alaskan fishermen who rely on China as their top seafood export market are challenged with Beijing’s 25 percent tariff on Pacific Northwest seafood.
Higher prices due to tariffs could nudge Chinese consumers to products from competing countries such as Russia and Norway, said Jeremy Woodrow of the Alaska Seafood Marketing Institute.
China, the largest market for US soybeans, imposed retaliatory tariffs on the US crop, causing sales to shrink. Duties on soybeans and pork are already affecting Midwest farmers in a region that supported Trump in his 2016 campaign.
Also the world’s biggest oil buyer, China had warned it may slap tariffs on US crude oil and liquefied natural gas exports, but later removed it as a target.
It says it is also prepared to impose new tariffs on $60 billion worth of US goods if Washington pulls the trigger on Trump's threat to raise the tariffs.
How are others responding?
Many US trade partners have zeroed in with retaliatory measures, often in equal proportions. Others, like India, have said they are formulating tariffs and such in kind.
America’s NAFTA ally Mexico released a list of products they would impose tariffs on, which includes pork, dairy, some agricultural produce and steel.
Canada announced 25 percent and 10 percent surcharges on two sets of American goods, worth the same value as Canadian goods facing steel and aluminium tariffs.
Some administration officials have suggested that Trump’s threats are a tactic to win concessions in trade talks with his NAFTA partners.
NAFTA, which was signed in 1992 ensures Mexico, Canada and the US have zero tariffs to create one of the largest free trade zones. Trump thinks it's the "worst deal ever" and wants to rewrite the terms to benefit the US.
US-Mexico talks resumed in July, without Canada, after negotiations involving all three members of the $1.2 trillion trade bloc stalled in June.
Brussels retaliated by imposing 25 to 50 percent taxes on more than $3 billion of US goods, including blue jeans, Harley-Davidson motorcycles, peanut butter, orange juice, rice and corn.
Turkey responded in June with commensurate tariffs, worth about $266.5 million. However, after Trump doubled surcharges on steel and aluminium from Turkey, Ankara hit back with increased tariffs on 22 types of produce and goods imported from the United States, amounting to $533 million of extra duties.
Turkish President Recep Tayyip Erdogan has said that Turkey will seek new alliances and has called for a boycott of American electronic products.
US products impacted include cars, tobacco and alcohol.
Others have acted quickly to work around Trump’s tariffs, turning to alternative trade agreements.
Japan and the EU signed a free trade deal that creates the world's largest open economic area, amid fears that a US-China trade war will diminish the role of free trade in the global economic order.
My opponent Mark Green may think pushing Tennessee’s farmers to the “breaking point”, as one Murfreesboro farmer puts it here, is an acceptable cost of this reckless trade war - but I don’t.— Justin Kanew (@Kanew) August 9, 2018
This needs to end. https://t.co/nBSrq8bCAh
Impact of Trump’s trade war on America
Trump’s import tariffs are hitting closer to home than desired.
According to the Tax Foundation, steel and aluminium tariffs could cost American firms nearly $9 billion.
The duties on imports have added thousands of dollars to the cost of building homes. The costs of Canadian imported lumber, drywall, nails and other key construction materials have all gone up.
This has compounded the challenges facing California wildfire victims who need to rebuild and might be pushed to the wall while doing so.
As the prices of goods increase for consumers, companies will be forced to cut costs and lay off workers; some already have.
One South Carolina television maker — Element TV Company — has laid off nearly all of its employees because of the increase in the price of components for its products imported from China and used for assembly operations in key television components.
The US’ largest nail producer Mid-Continental Nail, laid off 130 workers after the increase in steel prices.
Home appliance maker Electrolux said it was delaying a $250 million expansion of its plant in Tennessee as it was worried US steel prices would rise and make manufacturing there less competitive.
Automakers have warned tariffs would raise their costs — and their customers'.
Harley-Davidson announced it was moving production of hogs for the EU outside the US to avoid the tariffs, which could cost it $100 million annually, triggering a storm of tweets and threats from Trump.
Canadian automotive supplier Magna’s CFO Vince Galifi has said most of the tariff-related costs from steel imports from China will hit the company's US plants.
General Motors and Ford Motor Co are both facing a slump in share prices and slash in their earning outlook. German Daimler lowered its 2018 earnings outlook, due in part to increased import tariffs for US vehicles in China, Daimler produces vehicles in the US.
Almost all of the US trade partners hiked tariffs on US agricultural products or alcohol; China is one of the key importers of American pork and soya. US agriculture is going to be one of the key losers in this battle, experts said.
This has caused unease among Republican lawmakers facing re-election battles in November. Tennessee, which will see both Senate and gubernatorial elections is threatened with an estimated $1.4 billion loss in Tennessee exports.
The Trump administration, in a step away from the traditional small government mantra, announced a $12 billion farm aid package for farmers.
The oil industry has not been spared either.
Tariffs on European steel drive up costs of import used by US energy firms to strengthen domestic oil and gas pipelines. American sanctions are also still due to target oil exports from Iran starting in November.
An increase in prices could snuff-out growth in the booming solar panel industry, the Solar Energy Industries Association (SEIA) has suggested.
The SEIA said the tariff would result in the loss of some 23,000 American jobs in 2018 due to sluggish growth.
“While tariffs, in this case, will not create adequate cell or module manufacturing to meet US demand or keep foreign-owned Suniva and SolarWorld afloat, they will create a crisis in a part of our economy that has been thriving, which will ultimately cost tens of thousands of hard-working, blue-collar Americans their jobs,” SEIA President and CEO Abigail Ross Hopper said in a statement.
Economists have warned that the duties could undercut manufacturing through disruptions to supply chains and put a brake on economic growth.
Trump’s proposed tariffs would cause more harm to American multinational companies by imposing costs on their supply chains, according to the Peterson Institute for International Economics, rather than, say, hurting Chinese firms directly.
Earlier this year, Trump ordered the Department of Commerce to investigate whether auto imports pose a threat to US national security, which would justify tariffs or other trade restrictions – the same justification used for steel and aluminium tariffs.
Auto tariffs would escalate global trade tension dramatically. The US last year imported $192 billion in vehicles and $143 billion in auto parts — figures that dwarf last year's $29 billion in steel and $23 billion in aluminium imports.
Foreign manufacturers Volvo and BMW, with plants in the US, said they could be forced to make layoffs.
Canadian Deputy Ambassador to the US, Kirsten Hillman said America’s northern neighbour would respond in a “proportional manner” if auto tariffs were imposed.
However, for now, the US and Europe have agreed to avert a trade war over autos. Trump met Jean-Claude Juncker, president of the European Commission in late July when they promised to rework trade pacts.
Great meeting on Trade today with @JunckerEU and representatives of the European Union. We have come to a very strong understanding and are all believers in no tariffs, no barriers and no subsidies. Work on documents has already started and the process is moving...— Donald J. Trump (@realDonaldTrump) July 25, 2018
A wave of worry
Trump has said trade wars are easy to win, but most economists would argue they are easy to lose.
The International Monetary Fund (IMF) warned that the recent wave of trade tariffs could significantly harm global growth.
Mark Carney, Bank of England governor, warns that further escalation of Trump’s trade disputes has the potential to lower US economic growth by about five percent. The world economy would take a hit to GDP of just over one percent.
South African President Cyril Ramaphosa expressed concern that the US’ “unilateral measures are incompatible with WTO rules" and are especially damaging to developing countries.
A key objective of Trump's trade war is to pressure Beijing to "buy American," but China may simply take its business elsewhere.
China has shown a trend of targeting commodities that are easily replaced in the global market, said Julian Evans-Pritchard, a China economist with Capital Economics.
That's the idea of tariffs: you are trying to hurt the other side while not hurting yourself too much.
More tariffs and no sight of resolution
Trump defied warnings and escalated his trade confrontation with China on September 24, hitting the country with tariffs on another $200 billion in Chinese imports. The Trump administration claimed China refused to change the unfair practices that hurt US businesses and workers.
The new round of tariffs placed duties on roughly half of the products the US buys from China, on top of the $50 billion already subject to 25 percent duties.
The latest round of imports will face 10 percent tariffs through the end of the year when they will bump up to 25 percent. Trump has threatened even more should Beijing retaliate.
Beijing retaliated by imposing tariffs on $60 billion worth of US products.
In return, Trump threatened to pursue phase three — tariffs on approximately $267 billion of additional imports, which would mean imposing new taxes on virtually all the goods the US imports from China, raising the total tariffs to $517 billion.
Beijing has filed a complaint in the WTO against the US action and accused the US of "trade bullying," as they run out of targets.
Because China only imports $130 billion in US goods, its ability to hit back with matching tariffs is limited.
Although a dollar-for-dollar match on any new US tariffs is impossible, Beijing has warned of "qualitative" measures to retaliate, hinting at a hit at the US president's supporters in the US farm belt.
In the first two rounds of tariffs, the Trump administration took care to try to spare American consumers from the direct impact of the import taxes. The tariffs focused on industrial products, not on things Americans buy at the mall or via Amazon. This risks spreading costs to ordinary households by hitting widely used goods.
US officials said the initial lower tariff rate gives US businesses time to find new suppliers, softening the blow to US consumers and manufacturers ahead of the US congressional elections in November.
Eventually, US companies will be forced to scramble for suppliers outside China, absorb import taxes or pass along the cost to their customers.
Beijing cancelled the visit of a Chinese negotiating team expected September 27-28 in Washington, The Wall Street Journal reported.
Tariffs have put the U.S. in a very strong bargaining position, with Billions of Dollars, and Jobs, flowing into our Country - and yet cost increases have thus far been almost unnoticeable. If countries will not make fair deals with us, they will be “Tariffed!”— Donald J. Trump (@realDonaldTrump) September 17, 2018
Experts worry emerging markets will bear a greater brunt in the months to come as chain supplies face a pummeling.
Economists warn that a further protracted dispute will eventually stunt growth, not just in the US and China, but across the broader global economy.
Worries about the confrontation have already rattled financial markets.
"Politics continues to wreak short-term havoc in global FX markets ... where we’re questioning whether any currency is truly safe," said Viraj Patel, a currency strategist at Dutch bank ING.
So far there seem to be no great winners of this trade battle, which has framed itself as a new wave of protectionism.