Tariffs and Retaliatory Tariffs: Are We Heading for another Great Economic Depression?

The U.S. has been firing series of tariffs on exporting nations, causing fear and concern across the globe. In the changing situation, a few questions have been popping.

First, is the globe heading for an Economic Depression as many countries are making so much hue and cry out of the U.S. tariff?

Second, if not an Economic Depression of the 1933 size and intensity, at least an economic downturn that the world witnessed in 2007-08?

Third, are the countries so much U.S.-dependent for their economy that they should have to feel so much fear and concern at the U.S. tariff?

Fourth, the U.S. tariff is a reality now. United States President Donald Trump has already imposed series of tariffs on different nations and group of nations. What are the possible impacts of the tariffs and how companies and nations are responding or preparing to respond to the new situation?

Now, going back to the first point, i.e.; the Economic Depression. The Great Economic Depression of 1933 was, for sure now, not an outcome of any tariff. A series of events caused by executive orders of the then President of the United States caused massive upheaval in the economy, which led to huge unemployment, collapse of banks and business—the worst in the economic history of America. According to information available from various sources, a large as 12,830,000 persons in the U.S. alone went out of work in 1933 alone.

The U.S. tariff, as nations express fear, is all set to create upheaval in the global manufacturing and market. As Trump’s “America First” policy is clear that it has to safeguard its domestic economy first, many exporting nations and the companies operating in the U.S. market, will not be able to make as much business with the U.S. as they used to do before-Trump. So, job losses are definitely on the plate.

Similar would be the case for the U.S. as well. The U.S. also does a huge business with other nations by exporting. Imposition of tariff by partner nations on the U.S. imports, will create a mess in the U.S. manufacturing too—the U.S. companies and groups which are engaged with manufacturing and exporting their goods to other countries, are being affected. Naturally, unemployment in these companies and groups in the U.S. are on the plate.

Thus, going by the signs and historical economic signals, Economic Depression of the size of 1933 is not so much on the table now.

But a global economic downturn cannot be ruled out. It maybe of the type of 2007-08. The fact is that it will vary in degree, and won’t vary in its type.

The 2007-2008 global economic downturn, also known as the Great Recession, originated in the collapse of the US housing market. Subsequently, it caused the failure of mortgage-backed securities, leading to a global financial crisis.

Today’s man takes pride in using a consumer good whose one part is manufactured at, say, country A, another at country B, and C… and lastly, the item was assembled at a country D. Any development in any of the countries in the manufacturing chain will affect the economy of the other countries—thus global impact is all too palpable.

What are the U.S. Tariffs, and Counter-Tariffs on the U.S.?

The most impactful of the tariffs probably is Trump’s tariff on metals—steel and aluminium, which is 25%.

Trump’s tariffs of 25 percent hit metal imports from every country that sells steel and aluminium to the United States. Countries that are major suppliers of metals to the United States include Canada, Brazil, Mexico, European Union, South Korea and China. Canada, Brazil, and Mexico are the top three suppliers of steel to the US, collectively account for about 49 percent of the total steel imports by the United States.

As a retaliation, Canada has vowed to impose counter-tariff on American imports with $ 20 billion, which will include metals, computers and sporting goods.

The European Union likewise has announced tariffs on up to $28 billion worth of American goods, including bourbon American whiskey—50 per cent.

U.S. President Trump termed Europe as “one of the most hostile and abusive taxing and tariffing authorities in the World”, and wrote on his social media platform, Truth Social: “If this Tariff is not removed immediately, the U.S. will shortly place a 200% Tariff on all WINES, CHAMPAGNES, & ALCOHOLIC PRODUCTS COMING OUT OF FRANCE AND OTHER E.U. REPRESENTED COUNTRIES”.

Europe’s, especially France’s, vast vineyards and a large number of distilleries are one of the major pillars of European economy, and Europe may have to risk it, if it wants to go head-on with tariff on alcohol.

France quickly responded and said that it will fight back. “It is important for us Europeans to show who we are and that we will not yield to these kinds of threats,” said French Prime Minister Francois Bayrou on Thursday.

Thus, what is flowing out are not just the tariffs out of executive orders, but verbal bullets too.

Coming to the Third Point:

Are the countries so much U.S.-dependent for their economy that they would have to feel so much fear and concern at the U.S. tariff?

Looks like the U.S. is a big consumer of foreign goods and these exporting countries do enjoy balance of trade on their side. This is what Trump wants to correct as per his “America First” policy, in order to safeguard domestic manufacturing. In fact, Trump has already said: “No tariff if companies relocate to the United States”, to which some nations like Canada have already said “not possible”.

A slightly different case could also be true: That the nations are not entirely U.S.-dependent for their export economy, but hugely U.S.-centric; an they do not want to give up the surplus balance of trade. Naturally, no country would be willing to.

So, the fact remains that these nations which now hugely enjoy surplus trade balance with the United States, will have to witness impact on their manufacturing after the prices of their exported good rise in U.S. market. This will further impact the employment scenario within the exporting nations.

Coming to the Fourth Point, how are the nations responding apart from counter-tariffs?

Medium level companies which do not have to spend huge in setting up manufacturing plants, can think of re-locating their production base to a nation which may not attract Trump tariffs. Or, manufacturing companies may even think of exporting their goods to the U.S. after sending them to another country—which in any case will increase cost and hassle.

Some Chinese companies have already started relocating themselves to Cambodia’s Special Economic Zone.

Tariff on Chinese goods has been increased from 10 per cent to 20 per cent by the United States. In fact, China is the biggest trade rival of the U.S. as its economy is only next to that of the United States. And for year, China has been desperate to surpass the U.S. economy.

To conclude, another Great Economic Depression may not be on sight as of now, but this emerging global trade war has raised concerns that consumers will bear the brunt. Price rise of goods of every-day use is very real.