Trump's tariffs: the world will feel the pinch

Trump is shaking the world with threats of imposing tariffs on a general scale. According to him, they should serve two purposes: protect the US economy (and industry in particular) and provide revenue to the state (going so far as to say that they could replace the income tax, as in the days of the first Treasury Secretary, Alexander Hamilton). Based on the experience of his first term, they are also supposed to be a negotiating tactic to achieve other ends. For example, controlling illegal immigration and fentanyl trafficking from Mexico and Canada (!). The imposition of 25% tariffs in both countries and the one-month pause in implementing them, in exchange for concessions (which seem cosmetic), would indicate this. The tactic is based on the idea that the cost of imposing tariffs is much higher in a small country than in a large one like the US. The economy of Mexico or Canada is much more dependent on the US than the other way around, although the production chains are integrated between the three countries. In any case, tacticism can cause the victims not to take the threat seriously. And if they give in to Trump's demands and he reverses the tariffs, the objectives of protection and income will not be achieved. There is a contradiction in the objectives. On the other hand, no reasonable calculation allows for tariff revenues to replace direct taxes. The tariffs end up being largely paid by American consumers with higher prices.

Trump claims that tariff Trump has decided to reintroduce general tariffs of 25% on steel and aluminium, as he did during his first term in the White House, 10% on China, and reciprocal tariffs on all countries. He has announced that he will introduce 25% tariffs on vehicles, semiconductors and pharmaceuticals at the beginning of April. So far, the US has not introduced very high tariffs; the volume-weighted average tariff in 2023 was 2.2%, while in the EU it was 2.7% and in India 12%. Trump does not see Mexico and Canada as an economic threat, but the European Union (EU) and China are. Europe imposes 10% tariffs on US vehicles (which represent 8% of exports to the US) while the US imposes only 2.5%. There is room for negotiation, but the threat to German industry is clear. 80% of Volkswagen's sales in the US are imports and 63% by Mercedes Benz.

Can tariffs be justified? The imposition of tariffs on aluminium and steel makes the US industry that depends on them less competitive and raises domestic prices. Protection, in the US of Hamilton's time or China over a long period, was apparently successful. It is the theory of infant industry that is protected and subsidised until it gains scale and becomes competitive. Now China is in favour of free trade because its industry is extremely competitive, in sectors such as electric vehicles, batteries and solar panels. However, in South America, import substitution was a failure and the experience of the 1930s indicates that the imposition of tariffs contributed to the Great Depression. What is certain is that the unilateral imposition of tariffs generates retaliation and a protectionist spiral. This may end up harming the US. We think that S&P 500 companies now generate 42% of their revenue outside the US. Tariffs may increase foreign direct investment in a country, but they cause a distortion in the allocation of resources, since it is not produced where it is most efficient to do so. Growth of the global economy will suffer.

Moreover, tariffs will tend to increase the value of the dollar by reducing the demand for imports in the US and the supply of dollars to foreigners. They can also be inflationary and force the Federal Reserve to maintain higher interest rates, or to lower them less, although the appreciation of the dollar will go in the opposite direction. The greatest harm of imposing tariffs, bypassing the signed treaties (with Mexico and Canada, for example) and the rules of international trade, is that the US has destroyed its credibility as a partner, has underestimated multilateral institutions and has increased global uncertainty for making investments. Europe must know how to respond to this attack on the market economy, taking into account its economic weight, with calculated measure and firmness, seeking new commercial partners and opening new markets, more towards Asia and the Pacific. The US has ceased to be a reliable economic and political partner and has become an adversary. The EU must be autonomous and define its own strategy. If it does not do so, it will never do so.