Is a World War (III) coming—of Tariff, Tariff and Tariff…?

Is a World War III on the radar, where tariff…tariff… and tariff will be shot at each another—through new type of ballistic missiles, the executive orders!  

If the American President, Mr. Trump, goes ahead with his promise, world is in for a renewed World War of trade.

The world is already reeling under two traditional wars—Russia-Ukraine and Israel-Palestine. But, with Trump back as the President of the United States of America, it may have to witness a new type of war, and possibly a new economic world order at the end of it. In any case, this phase in the human existential history, was expected to arrive at some point of time.

What is a Tariff?

With free market economic philosophy of Adam Smith, nations of the world want to practice free trade, in the sense that nations with their multinational companies are allowed to do business freely across the globe and the market forces will decide the prices of consumer goods, instead of the government of the country trying to adopt a protectionist economy.

But if a nation is importing more and exporting less—trade deficit—the nation has the right to dump the free market economic philosophy and adopt a protectionist economic philosophy.

And how does it do so?  

It is done best by collecting a heavy tax on the imported goods, which makes the price of the said good sky-rocket. This is what in other word is ‘tariff’.

Tariff is an economic weapon against a trade partner nation to protect one’s domestic market.

What is essential in the situation of tariff?

A tariff does not guarantee a safe domestic market. It only requires of the nation to manufacture the said good for its citizens who now are used to the said good, and enable them to purchase the good on a competitive price. In other words, the nation imposing the tariff, has to mobilize its own manufacturing in order to satisfy the domestic consumers on a competitive price.

Trump’s Davos World Economic Forum address

U.S. President Donald Trump addressed the members of the World Economic Forum, Davos (January 20-24) via a video link and said: “Come make your product in America”. He promised favourable production atmosphere and low taxes to those who accept his invitation to set up industries to produce consumer goods.  “But if you don’t make your product in America – which is your prerogative – then, very simply, you will have to pay a tariff.”

Trump’s statement at the world’s biggest economic forum shows his determination. He wants to set up industries and production units to increase domestic production so that his plan of tariff against the U.S. trade competitors, works. His slogans of “America First” and “Make America Great Again”was eventually to bring him to this position.

Tariff as Trump’s foreign policy

Trump wants to impose at least 10% tariff on all foreign imports—meaning whichever goods come from other nations, will have to bear a tariff of 10%.

The world today being a global village, no country is untouched imports-exports. And a large number of countries—Asian, European, and South American countries, export their goods for the domestic market of the United States. Likewise, the U.S. exports its goods to a large number of nations of the globe.

Thus, this 10% tariff applies to all the nations of the globe, if Trump goes ahead.

Upon Canada and Mexico, Trump has promised to impose 25% tariff.

And upon Chinese imports, Trump has set a record 60% tariff.

Trump’s tariff plan will send prices ‘through the roof’in the U.S. domestic market and customers will be hit hard by high price.

What will the trade-partner nations do?

Simple. They will respond to Trump’s tariff with tariff against the United States. In fact, most countries must already have drawn up list of U.S. imports on which tariff would have to be imposed.

Tariff war between the U.S. and European Union

According to reports, Brussel has already drawn up a list of U.S. imports on which to impose tariff. List of top three goods that European Union imports from the U.S. includes petroleum oils, medicinal and pharmaceutical products and natural gas.

One should not be surprised if European Union nations, which have been supporting Ukraine in the war, inch closer to Russia or to the Middle-east, including Iran, in future!

Tariff war between the U.S.-China

Trump’s biggest take-upon is China—tariff upto 60%, as he has often said, if he signs an executive order. China enjoys a trade surplus with the United States and surging Chinese economy is a threat to the U.S. economic supremacy in the world.

Imports from China include lithium battery, steel and aluminium, plastic, semi-conductors, computers, smart phones, syringe and needles, electric vehicles among other things.

U.S. list of exports to China includes oil seed, oleagic fruits, grain, seed, electrical, electronic equipment, machinery, nuclear reactors among other things.

No one, not even a naïve will think that China will happily welcome Trump tariff and not do any thing in response. If fact, China too must be ready with a list to respond the U.S. with.

The U.S. or China: who will win a tariff war?

China in recent decades has expanded its trade base, including in South American nations, apart from Asian nations like big market India. For China, its neighbour India is a huge market. Other Asian nations including European nations, are big markets.  

A Trump tariff will, therefore, very unlikely to impact China too negatively, as China already has a very diversified global export market.

Besides, labour in China is cheap and manufacturing is already on. If Chinese goods are restricted in the U.S., U.S. consumer will have to face price rise, but China will divert its exports to other global markets. If China imposes tariff on the U.S. goods, U.S. exporting firms may get negatively affected globally; because, with tariff in the background, the U.S. will then lose trade allies in the global open market.

Who Wins the Tariff War?

Some nations like China, pursue an aggressive trade expansion policy. The U.S. being the economic superpower is fighting a war to keep up its supremacy.

Mexico and Canada too are on the trade radar of Trump. Trump will have to deal with many nations, at the same time keep his domestic market stable by increasing domestic manufacturing.

Tariff-drive trade war, unlike a traditional war, does not end with a win or lose within a fixed duration. But a trade war changes the global market operations over the time. It holds the capacity to change the balance of power in the globe. It makes the global market more competitive.  

In a trade war, added to tariff is another weapon—sanctions.