Tag Archives: Tariffs

Trump: Tariffs first, negotiate later

The direct impact of the US-China trade war has yet to materialise. The global economic slowdown started long before the opening shots were fired in this bitter battle. Central banks are getting ready to cut interest rates, if they haven’t already started, to support growth.

All this to mitigate the fallout from US President Donald Trump’s doctrine of tariffs first, negotiate later. Trade talks with China have broken down; Huawei can’t buy US goods; Trump has threatened tariffs on imported cars from Europe and Japan. Sanctions against Cuba, Iran and Venezuela have yet to yield any benefits. And in his latest move, he has decided Mexico needs to do more to stop immigration. If it doesn’t, there will be tariffs for Mexico as well – a move that’s rattled global markets.

Mexico is the US’s biggest trading partner, exporting $347bn to the US in 2018. A 25 percent tariff would cost about $86bn a year. With many US and international car makers located south of the US border, the auto industry would be the hardest hit. Deutsche Bank estimates vehicle prices could rise on average $1,300 – if tariffs hit 25 percent.

While Trump wants automakers to move back to the US – which is highly unlikely – this could have a devastating impact in Mexico where 839,571 people are employed in the car industry. According to economic consultancy Perryman Group, more than 400,000 US jobs could be lost if the US imposed the 5 percent levy; the net loss to the economy could be $41bn; and the state that’s most dependent on Mexico, Texas, stands to lose more than 100,000 jobs and $7bn in income. If Trump’s trade war with China is anything to go by – the damage to the economy has already been done. The president has signed a $16bn bailout for farmers. Source: Al Jazeera – 9th June 2019

US – China trade war. Who has the power?

Another PBS video from Paul Solmon about the trade war between the US and China. The trade war hits China more for two reasons:

  1. Trade makes up a much higher proportion of China’s GDP than that of the USA
  2. With the Chinese economy slowing there is a big reliance on the export sector as an employer

The Chinese have certain options (see below) open to them which are discussed in the video below.

  1. Bond dump
  2. Squeezing US firms in China
  3. Pull back on the number of Chinese coming to US for education
  4. Devalue their currency
  5. China might make sweetheart trade deals with other countries leaving out the US

Trump – why is he really putting tariffs on steel and aluminum?

Donald Trump announced on 2nd March that the US will impose a 25% tariff on steel imports and a 10% tariff and aluminum imports. A tariff protects domestic firms against overseas competition and raises revenue for the government. A tariff is a tax placed (or levied) on imports that raises the price of imported goods thereby making locally-made products relatively more price competitive. This may protect jobs and/or improve the balance of payments but it can cause resentment overseas. High tariffs on imports may cause a country’s trading partners to retaliate and follow suit by placing tariffs on exports of foreign made goods. Notice on the graph below how a tariff reduces the quantity of imports from 6m bottles to 2m bottles and the domestic supply increases from 2m to 4m bottles.


For many years US producers have found it hard to compete with cheap imports and this has led to many steel plants closing down with thousands of workers losing their jobs. Two main factors have caused this:

  1. Global steel and aluminum production has increased significantly over the last 15 years which has created excess capacity.
  2. Chinese firms have been widely accused of pricing below the cost of production in order to get rid of excess stock

Previous Tariffs – nothing new here.

The US is not the only country or group to impose tariffs on foreign products. The EU has done the following:

  • Put a tariff of 28.5% on certain types of steel pipes and tubes made in China after it was found that the prices were artificially low.
  • Imposed 43 anti-dumping and anti-subsidy measures, 20 of which are on products originating from China

The Obama Administration also was active in counteracting alleged Chinese dumping.

  • March 2016 – they put a 265.79% on imports of cold-rolled steel, used to make auto parts, appliances and shipping containers, from seven countries including China.
  • May 2016 – to clampdown on the glut of steel imports the US imposed anti-dumping and anti-subsidy duties of up to 450% on corrosion-resistant steel form China.

What is the difference between previous tariffs and Trumps announcement?

The difference here is that Trump’s tariffs would apply to all products rather than targeting particular areas of steel and aluminum production. Trump seems to be threatening action against any nation that runs trade surpluses with the United States. He tweeted last week:

“When a country (USA) is losing many billions of dollars on trade with virtually every country it does business with, trade wars are good, and easy to win,”

“Example, when we are down $100 billion with a certain country and they get cute, don’t trade anymore—we win big. It’s easy!”

The EU maintain that the key problem is as mentioned above is global over capacity caused by non-market production – producing the output even though there is no demand for it. They are of the belief that this can be dealt with at the source – i.e. those countries over producing. The oil industry seems to work in a similar way with OPEC where production can change with negotiations between oil producing countries. However if a trade war does eventuate Europe has warned the US to expect imports tariffs on American icons like Harley-Davidson, Levi’s jeans and Kentucky bourbon.

China is not the big importer into the US

It seems that in a lot of his communication he singles out China as being the problem especially with the trade deficit the US has with that country. However China only supplies 2.9% of US steel imports – see below:

Top steel exporters to the United States with their corresponding percentage of total U.S. steel imports:

 

Canadian steel producers, like their U.S. counterparts, have been complaining about Chinese firms dumping products in the domestic market. Sensitive to these complaints, the Canadian government has long imposed protective duties on some Chinese exports, such as hot-rolled steel plate. On Thursday, the Canadian International Trade Tribunal indicated that these duties would remain in place. On this issue, at least, the United States and Canada should have been able to find common ground. Instead, Canada, like the E.U., is threatening to retaliate against Trump’s plan.

 

 

Source: Wood Mackenzie

Why is Trump really doing this?

As with any politician it is all about popularity. Part of his rhetoric on the election campaign was to make America great again and to revive the heavy industry in areas such as Pennsylvania (steel production) a normally very safe seat for the Republicans – in fact the Democrats didn’t even field a candidate in the last election. However, Trump voters are disappointed with his presidency and, with the Democrats fielding a candidate, the forthcoming special election in western Pennsylvania is too close to call. An upset victory by the Democrats, or even a narrow loss, would make the midterm elections a very close contest as the Democrats try to retake control of the House of Representatives.

The big question is will Trump go ahead with the tariffs or back down as he has done with immigration etc.

Source: New Yorker – Will Trump Really Start a Broad Trade War? by John Cassidy

AS Revision – Tariffs and Protectionism

Here is another worthwhile video from Phil Holden. This time he is talking about Tariffs and Protectionism which is in Unit 4 of the AS course. However you will be expected to know this at A2 level also. Remember the following reasons for barriers to trade:

Why Protectionism?
a) Safeguard home country employment
b) Correct balance of payments disequilibria
c) Prevent labour exploitation in developing countries (or other political – not economic – goals)
d) Prevent Dumping
e) Safeguard infant industries