A President and customs duties: is a major trade conflict imminent? edit

Economic issues played an important role in the narrative that led to Donald Trump's victory. Among other things, a significant part of the electorate believed in the virtues that he ascribes to the imposition of tariffs: reduction of the trade deficit, promotion of domestic employment, repatriation of delocalised factories, tax receipts raised on foreign countries, etc. However, the imposition of additional tariffs under Trump's first term (from 2018), mainly on Chinese products, but also on steel and aluminium from all sources, did not lead to any net creation of jobs or reduction in the trade deficit. The manoeuvre has, by contrast, yielded undeniable political dividends[1]. People in protected regions have become more likely to vote for Donald Trump in 2020 and to elect Republicans to Congress.

Persevering along this path, candidate Trump promised during the 2024 campaign to increase tariffs by 60% on all Chinese products and by 10 to 20% on all products from the rest of the world. Ten times as many American imports would be affected as in 2018. He also said that on the day of his inauguration (20 January 2025), he would impose customs duties of 25% on Canadian and Mexican imports until the flow of drugs and illegal immigrants into the United States has been halted. A few days later, he demanded that the members of the BRICS (including China, Russia, Brazil, India and South Africa) undertake not to create a new currency to challenge the hegemony of the dollar as a means of international exchange. If they did, they would face 100% customs duties.

The stage is set, and it would not be surprising to see further announcements in the same vein. Should we expect major commercial conflicts? Or is the social networking fuss just tactical positioning? The potential consequences of the proposed policy provide some useful clues.

Most macroeconomic studies conclude that a significant increase in tariffs would reduce American GDP and employment[2]. By way of illustration, more than half of all imports are components or raw materials incorporated into products manufactured in the United States. This is the case, for example, for most critical minerals and around 90% of active pharmaceutical ingredients. None of this will change overnight. Higher prices for these goods would weaken the competitiveness of the many companies that buy foreign inputs, particularly when they sell abroad. Here, tariffs would amount to a kind of tax on exports.

The North American automotive industry operates highly integrated production lines where intermediate products are constantly crossing borders to circulate within a ‘Large Factory’ comprising production sites in Mexico, Canada and the United States. Imposing a 25% tariff on goods moving from one site to another would cripple the Factory and lead to serious disruption, with the US suffering as much as the other two partners.

Contrary to the assertions of the next President, most of the tariffs introduced in 2018 have been passed on to consumers. Low-income households have been hit harder because they buy a higher proportion of imported goods than wealthier buyers[3]. Now, after three years of sustained price rises, voters will be more sensitive than before to measures that erode their purchasing power. The room for manoeuvre is all the more limited as other elements of Donald Trump's economic programme, including copious tax cuts against the backdrop of a massive federal budget deficit, will also generate inflationary pressures.

Moreover, the measures applied have often prompted a riposte from the countries adversely affected, notably China. The same is likely to happen this time. Canada and Mexico have hinted that they will retaliate, fuelling a tariff escalation that would damage the North American industry. The EU has also sharpened its possible retaliations. But its response is likely to be blunted by Europe's dependence on the US for its defence in the context of high tensions arising from the conflict in Ukraine.

Finally, the invective directed at the projects imputed to the BRICS is astonishing. According to most experts, a BRICS currency is a long way off because the latter simply do not have the institutions and political coherence needed to earn the confidence of economic agents. The primacy of the dollar, which accounts for some 58% of the world's foreign exchange reserves according to the IMF, is well assured. Shortly after Donald Trump's warning was published, the South African government denied that the BRICS were planning to create their own currency. Overplaying a highly hypothetical danger is counter-productive and suggests a lack of confidence in the dollar.

The above considerations will provide food for thoughts for the incoming administration, which is also keen to calm markets. Decision-makers will have to deal with the divergent interests of lobbies and conflicting economic objectives. However, the President-elect's announcements must be taken seriously, even if we assume that they may be implemented in a more nuanced way. The choice of countries and products is likely to be refined. China, the strategic rival par excellence, will remain a prime target, as will steel. On the other hand, threats could be carried out or simply used as a means of exerting pressure.

Under the transactional approach so dear to the President-designate, the tariff bludgeon would be wielded with a view to negotiating from a position of strength. To avoid tariffs, the target countries would undertake to buy specific quantities of American products or restrict certain exports to the United States. In addition, under the first Trump administration, numerous exemptions were granted to importing companies. A similar system should be put in place when new tariffs are imposed. Such an outcome would be the lesser evil. But this power policy would still be in breach of World Trade Organisation (WTO) agreements and would further erode an international order based on fair rules.

The tariff weapon would also be used to obtain concessions in other areas. For example, countries would be required to join in restrictions on the transfer of sensitive technologies to strategic rivals of the United States, or to take measures in other areas.

There are many arguments against a full-scale trade war. Will they be heard? Many unknowns remain, and any prediction is highly speculative at this stage. A more differentiated and moderate approach could prevail, provided that the resolutely protectionist faction does not hold the upper hand in Washington. For the latter, the negative effects of high tariffs on the US economy are only a temporary hardship, the effort needed for the United States to regain its industrial greatness.

[1] Cf. Autor, David, Anne Beck, David Dorn, and Gordon Hanson (2024), Help for the Heartland? The Employment and Electoral Effects of the Trump Tariffs in the United States, NBER Working Paper Series No. 32082, National Bureau of Economic Research, Cambridge, MA.

[2] The Tax Foundation, a non-partisan think tank, has estimated that a 10% across-the-board tariff increase and a 60% tariff on all imports from China would raise taxes by $524 billion a year, reduce GDP by at least 0.8% and cut employment by 684,000 full-time equivalents. And this is without taking into account the retaliatory measures that these tariffs would inevitably trigger. Cf. Trump Tariffs & Biden Tariffs: Economic Impact of the Trade War (taxfoundation.org).

[3] Cf. Fajgelbaum, Pablo, and Amit Khandelwal (2022), ‘The Economic Impacts of the US–China Trade War’, Annual Review of Economics, Volume 14