It has gone both ways: US President Donald Trump’s tariffs against Mexico and Canada are on hold but the tariffs against China (already ranging from 7.5 to 25% since 2018) are officially in effect.
In the complex world of international trade, few figures have stirred as much controversy as Trump. As we reflect on his governance style, it is essential to examine both the intended benefits and their unintended consequences. Trump’s 2018 tariffs were designed to address what he characterised as unfair trade practices by China, and its substantial trade surplus. While actions and consequences are often unclear, it is a fact that inflation in the US has soared above 7% in the years following their implementation, compared to an average of below 2% in the decade prior.
Historically, the consequences of tariff wars have often – though not always – been detrimental. The Smoot-Hawley Tariff Act of 1930, enacted during the Great Depression, serves as a cautionary tale. Intended to protect American farmers, it led to retaliatory tariffs and a deepening of the Great Depression. On the other hand, President Reagan’s tariffs on Japanese automobiles in the 1980s initially raised prices for American consumers but ultimately pushed Japanese manufacturers to establish production facilities in the US. It also burst the Japanese economic bubble and reduced Japan’s growth from an average of 6-7% between 1960 and 1987 to around 2% for the following three decades.
The tariffs on America’s biggest three trading partners would wipe out 2.7% of the income of the bottom 20% of earners—compared to a loss of just 0.6% for the top 1% of earners. #PIIECharts
Learn more: https://t.co/hAgFwihcYw pic.twitter.com/mFLUTBfnL9— Peterson Institute (@PIIE) February 5, 2025
So, it appears that in a trade war, the stronger adversary, in terms of economic strength and relationships, will eventually prevail. Trump is betting on exactly that.
There is just one catch: economically, China today, like Europe in the 1930’s, is a near-peer of the US. The size of the US economy is $ 26T while China is either $18T or 37T, depending on whether we look at nominal or PPP rates.
Either way, China is a far larger competitor than any adversary that the US has faced recently.
Furthermore, China is a significant supplier of almost everything, from electronics to furniture to toys. The imposition of the previous tariffs has increased costs for Americans and led to deflationary pressures in China. The question remains: who will bear the brunt of these economic shifts? Possibly both, leading to a lose-lose scenario.
Trump’s approach to tariffs has been criticised for its broad strokes. There is an alternative: instead of imposing tariffs indiscriminately, a more targeted approach should focus on foreign-owned companies that are largely based abroad but sell to the US. This strategy would protect domestic industries while minimising the burden on consumers. By imposing tariffs on specific companies rather than entire countries, the US could encourage foreign firms to invest locally, fostering job creation and economic growth.
However, this targeted approach is not without its challenges. Determining the ownership structure of companies and enforcing tariffs based on these classifications could prove complex. Moreover, such a strategy could provoke retaliatory measures from affected countries. The risk of inflation remains, as foreign-owned companies may still be significant suppliers of goods to the US.
One thing is clear, though: Trump has not adopted such a thoughtful approach. Advantage: Neither.
How about alliances? There is no question that Trump is hell-bent on breaking existing alliances. China, while creating a ring of military adversaries in Asia including India, Japan, South Korea, Taiwan and the Philippines (not to mention Australia in part), has largely cooled down its bellicose rhetoric in recent months. While Trump is cutting off foreign aid, China has been dispensing it generously for decades. Advantage: China.
The wild card: in the broader context of global trade, climate change has now seen the emergence of new trade routes, such as those opening in the Arctic. Ships through the Arctic Ocean have been increasing sharply, growing by over a third in the last ten years, nations must navigate a rapidly changing landscape that could redefine international trade dynamics. Advantage: China.
Ultimately, the debate over Trump’s tariffs is emblematic of a larger conversation about the future of global trade. While the intention to protect American industries is commendable, the execution of such policies requires careful consideration of their broader implications. As the world becomes increasingly interconnected, the need for collaboration and strategic partnerships for a win-win will be paramount.
That said, all this rational discussion is fine but knowing Trump, is that what he will do? Will he follow such a thoughtful process? The Roman Emperor Caligula also showed signs of insanity and dominated his time but eventually, he went down as a footnote and a laughing stock. In Trump’s quest to make an already-great country great “again” Trump may find that he has only gotten it stuck in the mud.
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