Trump’s threats extinguish hopes of revitalizing free trade

Donald Trump can be accused of many things, but not of being unclear. “To me, the most beautiful word in the dictionary is tariff,” he declared during his campaign, faithful to his usual grandiloquence. He then proposed a universal fee of between 10% and 20% on all products coming into the United States from any corner of the world, without distinction. And that is only the beginning of the protectionist proposals by the president-elect: on top of that he wants to add ad hoc tariffs for specific products or countries of origin, with China foremost in mind but also with the European Union, Canada and Mexico in the crosshairs.

On Monday, Trump announced plans to slap a 25% tariff on all products entering the country from USMCA partners Canada and Mexico, and an additional 10% on China. These plans ― if they indeed become reality, which remains to be seen ― would put tariffs at levels not seen since the 1930s, the years of the Great Depression. The last embers of free trade would thus be extinguished.

There is no precedent for a universal surcharge. Even less so in a country with the size and influence of the United States. The world’s leading power and undisputed champion of free trade for much of the last century would become, in short, a gigantic laboratory of real-time economic policy. In a way it would a more intense version of Trump’s first term in office, when he adopted an unmistakably protectionist attitude that has not been reversed by his successor, the Democrat Joe Biden.

And all this comes at a time when international trade is not exactly at its most buoyant moment, with tariffs once again dominating media headlines, with the European Union and the South American trade bloc Mercosur giving each other the cold shoulder again, and the appeals body of the World Trade Organization (WTO, one of Trump’s favorite targets in his first term) immersed in an endless crisis that has already lasted more than five years. It began, of course, with the Republican’s first term in the White House.

The precedents are clear. Trump began his first term with a comprehensive challenge to multilateralism: he withdrew his country from the Trans-Pacific Partnership (TPP) and began renegotiating the NAFTA agreement that had tied the U.S. with Mexico and Canada since the mid-1990s. He did not stop until he achieved a review that was, on paper, beneficial for Americans. That would be the first of many mercantilist winks to voters: soon later would come the tariffs on steel and aluminum, two products with clear historical reminiscences and of vital importance in the so-called Rust Belt ― one of the regions where Trump has cemented his second electoral victory.

Free rein

Unlike in Trump’s first term, Republicans will now have a comfortable majority in the Senate and the House of Representatives, which must ultimately approve any major changes to U.S. trade policy. This will give a free rein to a president who is returning with renewed strength and a clear mandate from voters. Barring a last-minute change, he will once again appoint Robert Lighthizer, a hawk among hawks, as the top U.S. authority on trade matters, a position he already held between 2017 and 2021.

As then, the plans of the New York magnate arouse considerable suspicion among experts who follow the day-to-day of international trade. There are reasons for it: if eight years ago Trump’s invectives had a clear, almost sole recipient (Mexico), today they are indiscriminate. “The magnitude of the proposed tariffs goes beyond what most economists consider a prudent trade policy,” underlines Aurélien Saussay, of the London School of Economics (LSE), in a recent monograph on the subject. On Monday, Trump gave further indication of his intentions by announcing a 25% tariff on Mexico and Canada from day one of his administration. A threat with an unequivocal intention: to force them to negotiate, as he did eight years ago.

“Unilateral solutions can generate quick fixes for a country, but also significant disruptions in the long term,” warns the head of the United Nations branch for trade and development (UNCTAD), Rebeca Grynspan. “The new U.S. administration could generate significant changes in international trade policy and in the multilateral trade regime. Economies with surpluses, which have historically depended on the U.S. market to absorb their exports, would face much more complex adjustment challenges.” World trade, adds Leopoldo Torralba, deputy chief economist at Arcano Research, “would deteriorate significantly and there would be a redirection of flows.”

Warnings are also coming from the world’s main institutions of economic power. On November 6, a few hours after Trump’s return to the White House was confirmed, the European Central Bank (ECB) warned of the “enormous” impact of his proposed tariffs. “I can assure you that the direct effects and the indirect effects and the deviations of commerce will be huge,” said ECB vice president Luis de Guindos, expressing a feeling shared in many European capitals.

Just days before the election, the International Monetary Fund (IMF) warned about the consequences of a new contraction in international trade. Perhaps aware of this scenario, the future Secretary of the Treasury, Scott Bessent — the most moderate voice in the next U.S. administration — has already hinted that the implementation of tariffs must be “gradual” if shocks in the market are to be avoided.

This new surge in protectionism and mercantilism in the United States comes, paradoxically, on the 30th anniversary of the General Agreement on Tariffs and Trade (GATT), which definitively established free trade as the great global economic paradigm. Much has changed since then: the failure to fulfill the promise of trade without barriers — it generated prosperity, and not just a little either, but it was distributed poorly — has been the perfect breeding ground for the triumph of those who defend barriers between countries.

“Things may be different if tariffs are universal and at levels never seen before, but the recent history of tariffs in 2018 and 2019 — which marked the most significant return to protectionism in the U.S. since the 1930s — is the closest reference,” says Pablo Fajgelbaum, a professor of economics at the University of California, Los Angeles (UCLA) specializing in international trade. That is, he says, the best guide to what may be to come. “There were strong responses from its main trading partners: China, the European Union, Canada and Mexico. And even though trade between the U.S. and China fell sharply in goods subject to tariffs, it increased in others,” he notes by email. Result: “Overall, it remained firm.”

Domestic key

A universal 20% tariff would have an 8% impact on the final price Americans pay for imported goods, according to calculations by Paul Donovan, chief economist at Swiss investment bank UBS. “Some impact may be absorbed by squeezing profits along supply chains [...] Tariffs may end up raising inflation with less impact on the politically important perception of inflation,” he wrote in a recent email to clients. Here Trump has largely won the battle of the narrative: in the collective imagination, the inflationary crisis will be unequivocally linked to the Biden era.

Beyond tariffs, the potential inflationary cocktail has several other ingredients that could increase its flammability. The biggest of them all is immigration, one of the main issues that drove Trump’s return to the White House. If he strictly applies his program, the decrease in migrant arrivals would substantially reduce the available human capital, raising wages and feeding what economists call “second-round” forces.

Trade protectionism will also have an impact on growth. A recent study by the Tax Foundation estimates that, even if it remains capped at 10%, a universal tariff would reduce the growth of the U.S. economy by 0.75% in the long term, and have an impact on the labor market equivalent to 600,000 full-time jobs. And that is without taking into account the more than likely retaliation from its trading partners: history shows that no one sits back when their exports are taxed. This time will be no exception.

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