Does Donald Trump mean business on tariffs? The question has loomed over world markets and the entire world of economics.
The conventional wisdom had crystallized that he wasn’t serious about a trade war. The telling piece of evidence was his nomination of hedge fund investor Scott Bessent as Treasury Secretary. Bessent was viewed as moderate on tariffs compared to others who had been floated for the position.
The overnight answer, however, was pretty brutal. Yes, he’s serious and in the most unexpected way. By targeting not just China but also Mexico and Canada, he is vindicating the most fanciful threats made on the campaign trail.
First, he is prepared to blow up the Mexico, Canada, and America trade pact he signed during his first term on the first day of his second.
What is a Trump-free trade deal even worth if the new White House is willing to whack tariffs on your country of origin, no questions asked?
Moreover, the justification for these moves isn’t mostly or even predominantly about trade or economic policy. These tariffs are intended to pressure Mexico, Canada, and China to change their crackdowns on immigration and illegal drugs.
Trump is deploying tariffs as a tool of diplomacy, even blackmail, on issues that have nothing to do with world trade.
Self-interested leaders of G20 nations with domestic audiences aren’t going to roll over to give the new president a victory.
They could wait for the inevitable effect on American consumers and inflation of Trump slapping a 25 percent increase in the cost of two-fifths of US imports.
The price of washing machines in the US increased 12 percent or about $86 after Trump slapped foreign-made machines with a 50 percent tariff during his initial term. Such increases, however small, contradict Trump’s pledges made during the campaign to lower the cost of living.
However, while a price increase might cut more deeply with American consumers than it did in 2018, the political willingness to impose tariffs should not be underrated.
Joe Biden criticized Trump’s tariffs on Chinese imports during his first term. However, once in office, President Biden kept the measures in place, even expanding them in some cases in a targeted fashion.
One thing that is also clear is that Trump’s choice of Bessent as Treasury Secretary will not dampen the tariff push.
During a gruelling battle for his nomination, he went out of his way to acknowledge tariffs as a policy lever (one that had been pioneered by none other than Alexander Hamilton, the first even US Treasury Secretary.
However, earlier this year, he also argued that while tariffs could play a tactical role, a cheaper dollar would be the central instrument of US manufacturing resuscitation.
So far, it has spared Europe and the UK. But it’s worth repeating that these moves aren’t even the real bulk of the tariff policy that Trump has governed.
He is out to vastly reshape the world’s economic map, shrinking China and Europe’s trade surplus with the US, which he sees as “robbing America”.
But today, the world is much messier than these simple economic interactions encased in black and white. The US is certainly powerful enough to begin rebalancing world trade.
But if we push things too far, especially with allies in the G7 and G20, the US risks becoming too isolated.