Tit-for-tat, tariffs are not child's play.
Updated: Mar 27, 2018
Trump is by no means the first American president to place unilateral tariffs on imports such as steel and aluminium. Since Jimmy Carter, every inhabitant of the Oval Office has set some protectionist policy on trade, often on steel.
On the 1st of March, Trump tweeted "We want a fair and smart trade." After months of back-and-forth discussions between the protectionists and the globalists, Trump decided to impose tariffs: 25% on steel and 10% on aluminium. During this period, it was not enough that Trump was facing criticism left, right and centre but his chief economic adviser, Gary Cohn has resigned leaving the White House in the hands of the protectionists.
These tariffs are making the 'US made option' more attractive by raising the prices of imported steel which should cause companies to use the cheaper alternative with steel being relatively price elastic. Despite these tariffs lowering the prices of imports, the US produces an insufficient amount of tinplate steel. The bottom line is that firms will still need to import steel, further increasing the firm's cost of production reducing the profit received.Businesses are outraged by the tariffs; the Beer Institute said the 10% aluminium tariffs would increase costs by $347.7 million for American Brewers. Non-alcoholics, don't get too excited. Analysts at Credit Suisse estimated the new tariffs could increase the price of packaging for Campbell's Soup company by a substantial amount (adding to the 'nonexistent' inflation rate of 2.10%). The food and beverage industry is not an isolated example of how the tariffs have not been beneficial, the additional $175 for a cost of a car is "no big deal" according to Commerce Secretary Wilbur Ross.
Firms have three options: cut costs of production, absorb the costs and swallow the bitter pill of lower profit margins or pass on the incidence of the tax onto consumers. If the impact of the tax was passed onto consumers, this could eliminate specific benefits received from the tariffs. Firstly, the inflationary pressure could potentially reduce consumer spending, therefore, due to the reduced demand and since labour is a form of derived demand, there is a reduction in the need for a large workforce leading to unemployment. This is a repeat of history: in 2002, the tariffs imposed by President Bush resulted in as many as 200,000 job losses in industries related to steel.
Beyond America's borders, the tariffs will cause a bloodbath. The countries likely to be on the other end of the knife includes close allies such as Canada, Mexico, EU and South Korea, which could affect political relations.
Mr Trump has shone a light on the loopholes, the rules of the World Trade Organization (WTO) explicitly state that countries should not impose new tariffs. However, if national security is involved, then a different game is played.
If other nations start to sue America in the WTO, the outcomes are questionable. If the body of judges is in favour of America, this could encourage many countries to impose tariffs. Despite this, many countries including America have spent years trying to prevent China from doing the same. On the other hand, if the judges rule against America, Mr Trump is doubtful to abide by the judgement.
Meanwhile, countries are getting anxious and are not willing to wait for the ruling (due to the unacceptable 20-month wait before Mr Bush's tariffs were declared illegal). Instead, taking matters into their own hands is 'the way forward'. For instance: Canada's foreign minister, Chrystia Freeland has promised her country to take "responsive measures to defend its trade interests and workers".
There appears to be light at the end of the tunnel. Countries have found a solution to defend their country's economy while complying to the WTO laws: if the tariffs are considered as a safeguard action, nations are authorised to place retaliatory duties against a state that has introduced such tariffs (despite imports not having been increased). The European Commission has a potential list of products to be taxed. The European Commission had re-enacted this in 2002 when the thought of slapping tariffs on orange juice had crossed their minds.
Placing tariffs is entering a trade war- "bad and hard to win" ( according to the Senior U.K. minister). A significant risk being a tit-for-tat escalation: the EU had proposed sanctions on American goods such as bourbon and Harley-Davidson motorbikes as a response to the President threatening the export of European cars.
How should the world escape this tunnel? Although the President continues to make questionable actions, other nations need to remain sensible. Retaliating will need to be restricted, with an' eye for an eye' mentality America and world trade will become a bloodbath.
The world's economy has come a long way from the 1930's. Free traders mustn't lose hope and instead recognise the WTO as their most important weapon in the face of protectionism slowly creeping up. It is crucial that the WTO stresses rules-based trade. For the first time in forever, their biggest enemy is the gentleman in the White House.
Sources:
http://www.usinflationcalculator.com/inflation/current-inflation-rates/
http://uk.businessinsider.com/trump-tariffs-what-is-a-tariff-meaning-for-prices-consumer-2018-3
https://www.economist.com/node/17493390
https://www.ft.com/content/db687ebc-ff97-11e7-9e12-af73e8db3c71
https://dictionary.cambridge.org/dictionary/english/an-eye-for-an-eye-and-a-tooth-for-a-tooth
Khemlani, Anjalee. "Grapevine Analysis From 300 Million to a Reserve Cap." NJBIZ, July 2017.
By: Kareena Kamdar
