Donald Trump shows himself ready to use tariffs not only in a traditional way to win economic concessions, but also to force policy change. Businesses worldwide should therefore brace for an even more uncertain and fast-changing situation than during Trump’s first term. But the very uncertainty risks becoming a serious stumbling block for his “tariff first” policy.
Donald Trump made it clear early on that his return to the White House would swiftly be followed by the imposition of tariffs, his favorite trade weapon. Importantly, though, the new US administration appears ready to use them not only in a traditional way to win economic concessions, but also to force policy change. Businesses worldwide should therefore brace for an even more uncertain and fast-changing situation than during Trump’s first term.
“Tariffs are very powerful, both economically and in getting everything else you want,” Trump said last week after Mexico and Canada caved in to his tariff blackmail and agreed to beef up border controls to crack down on drug smuggling and illegal migration.
In return, Trump suspended for at least 30 days entry into force of a 25 percent tariff on all Mexican and Canadian goods — except for Canadian oil, natural gas and electricity, which were subject to a 10 percent import levy.
All this happened within the space of around 72 hours, raising concerns that traditional US diplomacy could soon be redundant, replaced by tariff blackmail for all sorts of policy considerations.
Last Friday, Trump said he would go ahead with his plan to impose additional reciprocal tariffs on countries that he feels are taxing US imports too much, but he didn’t mention their names.
"I'll be talking about reciprocal trade sometime next week, we'll have a news conference, and we'll lay it out pretty simple," Trump said on Feb. 7 at the White House press conference with Japanese Prime Minister Shigeru Ishiba.
He also said he would seek reciprocal market access for US cars — a move that is likely to target the EU, for which the US is the biggest car-exporting market. "We have cases where we don't supply autos, and other countries do. And you know, we have to equalize it. We have to stabilize it and equalize it," Trump said.
And then last night, he said that today he would impose tariffs of 25 percent on all imports of steel and aluminum (see here).
— Pushback —
But could the very uncertainty that the showdown with Canada and Mexico created for the US businesses — including a high risk of retaliation — become a serious stumbling block for Trump’s “tariff first” policy?
His chaotic approach to trade policy, including a plan to impose universal tariffs on global imports to address a trade deficit of more than $1 trillion, is seen by US companies as a threat to their exports and supply chains for critical inputs. Canada and Mexico are the US’s two largest trading partners, followed by China and the EU.
Those concerns were echoed last week by US lawmakers during the confirmation hearing of US trade representative Jamieson Greer (see here).
“Trump governs by whim, and in trade that hurts American families,” said Ron Wyden, Senator for the state of Oregon, the top Democrat on the Senate Finance Committee. “His tariff bluff created huge uncertainty that is costing American businesses and putting the global economy on a month-to-month lease.”
Many lawmakers, including Republican Senators, also emphasized the need for the US administration to open new foreign markets for US exports.
“Expanding market access for American-made goods is critical to our economic strength. Frankly, in our competitiveness, 95 percent of our customers are outside of our nation as we represent about 5 percent of the world's population,” said Tim Scott, Republican Senator for the state of South Carolina.
But improving market access for US goods, services and investments might prove difficult if Trump instigates a global tariff war.
There has been also confusion around Trump’s decision last week to remove the “de minimis” exemption for China and replace it with a tariff of 10 percent on all Chinese goods, because “[its] government had not taken decisive actions to address China’s role in [the] fentanyl and synthetic opioid trade.”
The exemption allows shipments entering the US valued at $800 or less to be exempt from taxes and rigorous customs checks. Trump decided to close this loophole that allows Chinese retailers, including big e-commerce platforms such as Temu and Shein to sell directly to consumers, bypassing domestic warehouses, at a lower price.
But a week later, the US administration temporarily suspended this decision over the turmoil it had caused with millions of packages piling up at customs. The US Customs and Border Protection estimates that it processes more than 4 million low-value shipments daily.
— Retaliation —
The other key consideration that US businesses need to factor in to their future operations is a threat of retaliation. Immediately after Trump signed off on new tariffs on imports from Canada, Mexico and China, the three countries announced their retaliatory plans.
Although Canada and Mexico reached last-minute deals with Trump that allowed for a 30-day suspension of the eye-for-eye trade war, the tariff spat has sent large shockwaves through both economies.
Catherine Cortez Masto, Democrat Senator for the state of Nevada, said at Greer’s confirmation hearing: “I received a call yesterday from a small business [in the city of Reno] that one of their customers in Canada has canceled their project due to uncertainty, costing them tens of thousands of dollars. These are threats that are real. They're impacting our small businesses. There's uncertainty.”
China also hit back at the US with a package of retaliatory measures, including a tariff of 15 percent on US coal and liquefied natural gas, and a 10 percent tariff on crude oil, agricultural machinery, large-displacement cars and pickup trucks (see here). The measures on US exports, worth some $14 billion, are due to take effect today.
Beijing also imposed new export controls, with an immediate effect, on metals critical for production of electronics and defense equipment, filed a lawsuit at the World Trade Organization, and opened antitrust probes into search giant Google and chipmaker Nvidia.
— EU bracing for trade war —
A swift and firm European response is also likely to come if the EU is targeted with US tariffs. It took Brussels some time to recover from the shock of tariffs that Trump imposed on its steel and aluminum during his first term. He also threatened steep import levies on EU cars, as well as a retaliatory tariff against France’s Digital Services Tax.
But this time round, EU policymakers say the bloc is fully armed and well prepared for a fresh battle with Trump. The European Commission, which oversees the EU trade policy, has a list of retaliatory measures that it can quickly impose if the bloc is targeted with tariffs.
Among those, there is also the “nuclear option” — the anti-coercion tool — that can be deployed against tariff blackmail that Trump might want to use against EU tech regulations such as the Digital Services Act (see here).
The policymakers also have a bunch of bargaining chips, including increased imports of US LNG and weapons, lower tariffs on cars, and tighter cooperation against China, to use to dissuade Trump from imposing extra tariffs.
The tariff reprieves won by Canada and Mexico suggest that a trade war can be at least temporarily averted, even if relatively small concessions are offered to Trump. It might be also a good tactic for the EU to avoid escalation and earn some time in what's likely to be a hard and draining four-year battle.
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