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A better alternative to Trump's tariffs
Even if Trump halved his proposed tariffs, they would still have devastating consequences.
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United States president-elect Donald Trump gestures as he meets with House of Representatives Republicans on Capitol Hill in Washington DC on Nov. 13, 2024. (Reuters/Brian Snyder)
O
ver the past 75 years, global prosperity, poverty reduction and economic growth rates have reached unprecedented levels, largely driven by the open multilateral trading system. By lowering tariffs and reducing transportation and communication costs, this system has enabled efficient producers to access new markets in a competitive global environment, thereby fostering innovation.
But the multilateral trading system, which came under threat when Donald Trump won the 2016 United States presidential election, is at risk of unraveling following Trump’s return to the White House. During his first term, Trump rejected the Trans-Pacific Partnership, renegotiated the North American Free Trade Agreement and launched a trade war with China, sharply raising tariffs on Chinese imports, as well as on steel, aluminum and other goods, often justifying these measures on national-security grounds.
Regrettably, President Joe Biden did not reverse Trump’s tariffs, jeopardizing a system that had long benefited both the US and the global economy. During his campaign, Trump pledged to impose a 10 percent tariff on all imported goods and a 60 percent tariff on all imports from China. He also threatened to keep raising tariffs until the US eliminates its trade deficit.
Even if Trump halved his proposed tariffs, they would still have devastating consequences. After all, the external current-account balance (of which trade comprises the largest part) reflects the gap between a country’s total consumption and its production. Addressing the US external deficit requires either higher incomes or lower domestic demand. While raising tariffs might reduce some imports, it would also increase the cost of imported parts and components for US firms, which would mean higher prices for consumers and a loss of competitiveness for exporters. If imports fell faster than exports, the dollar’s exchange rate would adjust to balance supply and demand in the currency market, with revaluation further undermining US competitiveness.
While Trump’s proposals are undeniably extreme, neither of America’s two major parties supports free trade as strongly as they once did. The most commonly cited reason for this is the economic dislocation and job losses caused by import competition. Even with the US unemployment rate at a historically low 4.1 percent, rising imports have inflicted significant pain on local communities.
But tariffs are not a solution to the problems of small-town America. Higher tariffs drive up the prices of imported goods, and Trump’s proposed tariffs would almost certainly curtail consumption. Although tariffs might temporarily slow layoffs and plant closures, the overall impact on the US economy, including the inevitable retaliation from other countries, would be profoundly damaging.
Trump’s first term offers a cautionary tale. His import tariffs, lower than those he is now proposing, are estimated to have cost the average American household more than US$1,000 annually, and the damage would have been even worse if US importers had not rerouted goods through countries like Vietnam, where Chinese parts and components were assembled and then exported to the US to avoid Trump’s punitive duties.
