What comes in the next chapter?
This year’s elections in the United States determined how the US and global landscape will look in the next presidential chapter. Trump’s victory will mean a governmental transition characterised by a drastic change in the country’s domestic and international affairs. From a government with a traditional American Democratic policy line, which continued with Obama politics, Trump signalled the return of a conservative Republican government, characterised by the protectionism of American markets through tariffs throughout history.
Trump’s arrival in the White House threatens free trade agreements such as the USMCA and a rising trade war with China. Therefore, it is vital to understand what is driving this leader to follow this foreign and monetary policy strategy and how rising tensions with China in terms of trade will affect the international economic landscape. Not to mention the threats to renegotiate the USMCA, set a general tariff baseline on all imported products to combat the 173.4 Billion trade deficit, and impose tariffs on crucial export-based industrial sectors in Canada and Mexico.
To understand Trump’s logic (if there is any), it is critical to analyse what is the thought process behind Mr Trump’s chaotic agenda. While his efforts can seem all over the place trying to address contradicting promises in his presidential campaign, he has been very clear in one thing: he will raise tariffs the moment he steps into the White House. Not only that, but he will try to set up an already proposed 10%-20% tariff on all imported goods to combat trade deficits, an economic weakness from his point of view. There is no logic behind it; these are simply populist economics.
It is all a political strategy with populist undertones, advocating for disregard for international institutions such as the WTO (World Trade Organization), an institution that, from his point of view, was “set up to benefit everyone but us”. WTO’s real purpose is to promote free trade as a strategy to create jobs, increase living standards, improve people’s lives, and promote a model of international economic integration through rules that make a fair and inclusive trading system. Trump’s strategy of protectionism is about satisfying a dissatisfied electorate by focusing primarily on the emotional grievances of society, especially the working class. It is all about using nationalism to persuade voters affected by high consumer prices, high rates of inflation, and unemployment.
MAGA-nomics!
Was the economy that great in its Hamiltonian protectionist pre-20th-century trade era?
Trump’s proposed tariffs only contradict the foundational DNA of the liberal American open economy. One of the reasons why the United States positioned itself as a global economic powerhouse was thanks to free trade efforts. The post-WWII era, followed by the Cold War, was a period in history in which the US benefited from free trade as an essential tool in positioning the country at the top of the hegemonic pyramid. The United States has been instrumental in promoting and expanding the free trade economic model worldwide, starting with its post-WWII strategy through the creation of GATT and later the WTO, institutionalising multilateral economic relations and setting up a dispute settlement mechanism on trade. During the Cold War, free trade was one of the strategies to create strategic relationships through interdependence and the liberalisation of economic systems. This geopolitical strategy allowed the United States to place itself in its ‘great’ chapter.
Trade Deficits = “Bad Deals.”
But will tariffs actually lower consumer prices, reduce inflation and unemployment rates, and increase salaries? Research has proved this argument wrong. “The non-partisan Peterson Institute for International Economics has estimated Trump’s new proposed tariffs would lower the incomes of Americans, with the impact ranging from around 4% for the poorest fifth to around 2% for the wealthiest fifth.” The left-of-centre think tank, the Centre for American Progress, estimates that a 10% tariff on imports could imply a yearly loss of $2,500- $ 3,900 dollars in income for an average middle-income American family. Moreover, Trump’s argument that tariffs are a key determinant for the size of the trade deficit in the United States has also been proven wrong. An article published in The Economist argues that the fundamental driver of the trade balance is “America’s low national saving rate, which in part reflects its consumer-led economic model.”
Not only that, but the validity that running in a trade deficit is a sign of economic weakness is far-fetched, both in theory and in practice. Instead, it only reflects the strength of the American economy and the high consumption power of its society. Dollars spent on imports return to the US in many forms of assets such as stocks, bonds, and business opportunities. Running a trade deficit reflects the access to other markets through free trade where consumers benefit from lower prices and higher purchasing power. Trade deficits are not a straightforward indicator of weakness, instead it reflects periods of strong economic growth, and higher demand for imported products determined by high consumer spending.
The United States has been running a trade deficit since the 1970s and ever since it has maintained its position as the world’s largest economy. In 2023, the US achieved a GDP of 27.3 Trillion,compared to 1.7 Trillion in 1975 when the country started running on a trade deficit balance account. Alone the state of Texas doubled the GDP of the entire country in the early 70s reflecting the advantage the country has taken from free trade.
Impact on International Affairs
Mr. Trump has not only threatened China but other leading trade partners and members of the USMCA. He has put pressure on Mexico with a possible 25% increase in tariffs on specific industrial sectors such as the automotive industry, one of the most important growing industrial sectors based on foreign investment for Mexican industry. This 25% percent will be used as a threat if Mexico does not comply with the interests of the US, such as entirely stopping the flow of immigrants to the United States, addressing security and drug-dealing issues. Although the flow of illegal immigrants has been reduced in recent years primarily through Trump’s pressure on Obrador’s administration, in the eyes of Trump, Mexico has not been cooperative and compliant enough, so a 25% will act as a pressure strategy on Mexico’s new administration.
In a retaliatory manner, Marcelo Ebrard, Mexico’s secretary of the economy, stated that if this is going to be the case, Mexico will react immediately with retaliatory measures, “If you apply 25 per cent tariffs on me, I have to react with tariffs, and I am your main importer, along with Canada.” He added that such a decision would imply a tremendous cost for American businesses and investors by increasing their costs of production, limiting their competency in global markets and thus causing consumer prices in America to increase.
Don’t do to others what you don’t want them to do to you – as silly as it may sound, this applies to the case of tariffs at the international political and economic level. Raising tariffs will only cause retaliation from the world community; countries cannot afford being imposed with tariffs without imposing one back. The increase of tariffs towards Chinese products during Trump’s last administration has proven that retaliation will always be part of the equation where a retaliation level will increase proportionally with the tariff rate. Consumer prices have also been proven to be proportionally tied to every percentage increase “in the effective tariff rate”. Ronnie Walker, Goldman Sachs economist, projected a 0.1% consumer price increase for every tariff percentage increase, not only on imported goods but on domestically produced goods, as manufacturers would conveniently raise their prices, taking advantage of the less competitive marketplace. Protectionism may help protect certain industries from international competition and cheaper production prices abroad, but at what cost?
Who will pay ?
The cost of implementing tariffs to protect the American worker will not be paid by China, nor by Canada or Mexico; it will be paid by American consumers themselves through higher inflation rates, higher prices, and lower purchasing power. It will be paid by American businesses which benefit from foreign production to import goods into the United States, as it will be paid by those industries which make use of imported products. Finally, Trump is not going to improve the employment of workers in the United States. He did not do it during his last term, and it will not happen in the next 4 years.
Blaming free markets and foreign production for unemployment in American manufacturing ignores the technological advances that have taken place in the last four decades, during which unemployment in these industries is imminent due to growing implementation of automated and robotic assembly lines. Mr. Trump is missing a long-term vision for the American marketplace and labour force. Through investment in human capital and capacity building, unemployment in this type of industry could be substituted by employment opportunities in other more advanced emerging markets. It is a question of training the American labour force to make sure that the unemployed can be integrated into the workforce in other, more advanced, industrial areas.
Once again, it’s all about Mr. Trump’s populist economics, the rise of national identity, and the belief that Mr. Trump’s Billionaires’ Boys Club at Mar-a-Lago will come up with a scheme to make Americans richer—quickly. For those who already are, good for you. And for those who think they will be, good luck.
Trump’s new economic plan will continue to harm Americans daily; some in Trump’s club will benefit, but at what cost? Low-income families will become poorer due to a tremendous increase in consumer prices. There is no doubt that tariffs will be inflationary, and the average consumer will ultimately foot the bill.
Trump’s policies are clear, and it’s only a matter of time before they show up as accounts payable on consumers’ balance sheets.
Featured image by Iskandar Zulkarnaen, Getty Images.
