Indranil Banerjie | Trump’s US ‘weaponising’ tariffs: All set to be losers

Trade, tariffs and taxes have always been huge issues in history. The 1773 Boston Tea Party, where protesting Americans forcibly dumped 342 chests full of precious tea from an English merchant ship into the city’s harbour, is one of those iconic historical events that shaped the United States’ economic and political landscape. The event, a protest against English Mercantilist policies favouring the East India Company, was the precursor of the American War of Independence. It was all about fair trade.

Some two and a half centuries after that event, another trade war is in progress. This time, it is America that is firing the Mercantilist salvos. Newly-elected President Donald Trump has weaponised tariffs aimed at sinking economies that are considered to be flooding the United States with cheap or harmful imports and accumulating massive trade surpluses in the process.

The first three targets were China, Canada and Mexico. The first of the three was slapped with a blanket 10 per cent import tariff while the other two were each hit by 25 per cent hikes. Not surprisingly, the instant effect of the announcements was a sharp drop in the currencies of the three countries, stock market jitters across the world, a sharp hike in the value of the US dollar and a spike in 2-year US Treasury yields. Concurrently, Asian currencies across the board slumped -- the Indian rupee falling below 87 to the dollar -- as did most stock markets.

US President Donald Trump’s tariff threat was tantamount to a hammer thrown in the global trading system, prompting world leaders to gird up their nationalistic loins and declare themselves capable of taking on the challenge of American trade belligerence. Some called it the beginning of a destructive global trade war that would wreck world trade and supply chains and take down many economies with it.

But just when the outlook was beginning to darken further, President Trump sprang another surprise by “pausing” the tariff hits against Mexico and Canada, which happen to be the two largest suppliers to the US economy. The decision came after Mexico and Canada both declared they would comply with Mr Trump’s demand to crack down on immigration and drug smuggling.

Canada said it would fund a multi-million-dollar initiative to deploy new technology and personnel at its borders and cooperate with Washington in combating organised crime, fentanyl smuggling and money laundering, while Mexico pledged to deploy an additional 10,000 soldiers on its US borders to plug illegal migration and drug flows. But no such deal with China was forthcoming till the time of writing.

It was a swift and spectacular first victory for President Trump. He had demonstrated that his coercive trade policies could compel nations to fall in line with US policy goals, which in the case of Mexico and Canada were primarily to do with immigration and national security. In fact, in hindsight, President Trump perhaps did not intend to permanently damage Mexico and Canada, which are his country’s two largest trading partners and who have become larger exporters to the US than China in recent years.

President Trump’s imposition of steep tariffs against Canada in particular had been greeted with disbelief among Canadians, who have always considered their country to be the closest US ally and largest importer of goods and services. Canadian Prime Minister Justin Trudeau termed the tariff blow a great betrayal, pointing out that his country had built the most successful economic, military and security partnership the world has ever seen, and one that has been the envy of the world.

This sense of betrayal is reported to be widely shared by Mr Trudeau’s countrymen, and while the tariff threat has receded for now, the distrust in the relationship has not.

Even within the US, and particularly in business circles, the tariff attack on Mexico and Canada was entirely unexpected, even though President Trump even before taking office had time and again threatened to use tariffs to boost local manufacturing in the US, stop the flow of migrants and prevent the entry of illicit drugs, particularly the deadly China-made fentanyl.

All the same, Mexico and Canada were unlikely targets given the extent of their economic integration with the United States. In fact, the economic importance of these two countries had grown since Mr Trump’s first stint in office. His tough stance on curbing Chinese imports had prompted hundreds of companies, mostly American, to shift their operations from China to neighbouring Mexico and Canada.

As a result, manufacturing supply chains today are inextricably intertwined in North America and Mexico. Damaging this complex web of interlinked business processes would not just harm Mexico and Canada but also the United States. Moreover, these two countries have also grown into two of the largest importers of American products, ranging from orange juice to motorcycles. According to one estimate, Canada buys more American goods than China, Japan and Germany combined.

While President Trump might have used tariffs in the case of Mexico and Canada more as an instrument of coercion than a long-term punishment, the same does not appear to be the case with China, which responded coldly to the tariff announcement that were anticipated and did not in the event prove as steep as it had been feared.

The Chinese are in no mood to fall and roll over as did the Mexican and Canadians. Rather, Beijing made it clear it would give back as good as it got. For starters, it has imposed tariffs ranging between 10 and 15 per cent on selected US imports and threatened sanctions on Google for monopolistic practices. However, Beijing’s tariffs were muted, prompting analysts to suggest that China is indicating it is willing to negotiate. Washington might just do that and cut back on the 10 per cent across the board tariff.

However, it is unlikely that President Trump’s larger, avowed aim of using trade, tariff and tax threats to further US national interests is going to be scrapped any time in the near future. If anything, the world is waiting to see what kind of tariffs he might impose on Europe and the Brics nations he has already threatened to punish.

Mercantilism, a notion according to which governments use their economies -- particularly trade -- to augment state power at the expense of others, has long proved to be a false proposition even if today its lessons have been forgotten. The world can only grow poorer if this zero-sum game is pursued with Trumpian fervour.