Trump takes his protectionist approach even further this time

Donald Trump went to the polls on November 5 with tariffs as his main recipe for economic success. Although he promised to impose taxes of all kinds on exports, curiously the first ones he approved ― although he has put them on hold ― did not appear in his campaign pledges. How many of Trump’s threats will be carried out and how much of it will remain a negotiating ploy to extract concessions is something that remains to be seen. In any case, the tariffs are of a much higher order of magnitude than those he approved in his first term and which were left in place by his successor, Joe Biden.

With Mexico and Canada, he has pushed the pressure to the limit, decreeing the tariffs on Saturday and suspending their entry into force on Monday. This is not the first time, however, that Trump has resorted to this strategy. In May 2019, the White House announced that Trump would use the powers of the International Emergency Economic Powers Act (IEEPA) to introduce tariffs on Mexican exports in response to the national security threat of illegal immigration from Mexico. In addition, in August of that year, he tweeted that he was ordering American companies to begin looking for alternatives to China with the powers of the IEEPA, but without ever formally declaring an emergency as required by that law.

In January 2018, Trump imposed tariffs of 20% to 50% on solar panels and washing machines, primarily targeting China and South Korea. In March of that year, he imposed tariffs of 25% on steel and 10% on aluminum on most countries under Section 232 of the Trade Expansion Act of 1962. That act allows the president to raise tariffs on imports that pose a threat to national security without congressional approval following an investigation by the Commerce Department. “Trade wars are good, and easy to win,” the president tweeted at the time. In June, he extended those tariffs on aluminum and steel to the European Union, Canada, and Mexico.

In April and June of that year, China and the EU respectively responded with retaliatory actions against U.S. exports, especially agricultural products. In the European case, the tariffs affected some €6.4 billion of steel and aluminum exports. In response, the EU introduced adjustment tariffs on €2.8 billion worth of U.S. exports to the EU.

Mexico and Canada also responded, but negotiations between the United States and its neighbors allowed the lifting of tariffs on steel and aluminum on May 20, 2019 for both, which joined Australia and Argentina as exempt countries.

Spain had already been hit before, in November 2017 and January 2018, with a very specific tariff on black olive producers. It applied rates of 17% following an investigation that the Department of Commerce launched in the summer of 2017 in response to complaints from several California producers against Spanish black olives for unfair competition by benefiting from allegedly unfair subsidies.

In June 2018, Trump announced tariffs on a list of goods imported from China worth about $50 billion — a fraction of the trade between the two countries, but enough to spark a trade war between the two superpowers. An escalation ensued, with the products affected by tariffs being expanded in both directions. China quickly responded with significant retaliatory tariffs on American exports. In the summer and fall of 2019, the United States expanded Chinese imports subject to tariffs, raising the levies from 10% to 25%. China responded again. In less than two years, the average U.S. tariff on Chinese goods jumped from 3.1% to 21.0%, while the average Chinese tariff on American goods rose from 8.0% to 21.8%, according to a report published by the National Bureau of Economic Research this year.

The escalating trade war ended in January 2020, when the United States and China reached an agreement that maintained most tariffs but set targets for Chinese imports of American products. Shortly afterward, the outbreak of the Covid pandemic severely disrupted international trade and those targets were never met.

Joe Biden imposed protectionist measures on Chinese electric cars and semiconductors. He also raised tariffs on steel and aluminum from China, but negotiated a deal with the EU. The U.S. replaced tariffs with a quota system based on historical transaction volumes, resulting in EU steel and aluminum above the quota still being subject to tariffs. Brussels, for its part, put its retaliation on hold.

Job cuts

Trump’s tariffs benefited the steel industry but hurt the broader economy, according to subsequent analysis. General Motors announced plant closures in Maryland, Michigan, Ohio, and the Canadian province of Ontario and more than 14,000 job losses, citing steel tariffs as one explanation. The CBER report concludes that Trump’s trade war had a negative effect on employment but a positive effect on his electoral support. Possible explanations for this paradoxical popularity of tariffs include the fact that voters were insufficiently informed about the effects and were carried away by Trump’s triumphalist rhetoric, which linked any investment or job creation to the tariffs even if it had nothing to do with them. It is also possible that even those who were not convinced that it had worked appreciated Trump’s efforts to stand up to China and try to protect American jobs.

Trump's first wave of tariffs also had inflationary effects, according to the vast majority of studies, but these were limited, as they were also limited in scope. There were price increases in the affected sectors, and inflation long exceeded the price stability target of 2%, but never exceeded 3% during Trump's term. Moreover, with the pandemic, inflation fell sharply and was at just 1.4% when Biden took office.

The impact of the tariffs that Trump is planning (or announcing as a negotiating tool) would be much greater, according to experts, both because they would affect a much larger amount of goods and because the latest inflationary episode is so recent. Their application could have effects on inflation, the labor market and interest rates, causing distortions in the production and supply chain, and also forcing companies to bring forward purchases, renegotiate contracts, or look for alternative suppliers.

This time, Trump proposed during the campaign to impose reciprocal tariffs on American imports equal to the rates that trading partners impose on American exports (usually higher). This would be coupled (or overlapped) with a universal basic tariff of 10% to 20% on all imports. For China, Trump promised a 60% tariff on all imports. He also promised to impose 100% tariffs on cars imported from Mexico, although that proposal seems to have been forgotten.

However, he has begun to implement other measures that he had not mentioned during his campaign, but which he brandished as a threat for the first time as president-elect. These are the 25% tariffs on Mexico and Canada (with the exception of 10% for Canadian energy products) and 10% on China. Those on Mexico and Canada have been put on hold.

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