Trade tariff negotiations take many twists and turns
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Making good on a long-held campaign promise, President Donald Trump has instituted tariffs on trade with China and threatened the same with Canada and Mexico.
Citing unfair business trade practices and a failure to stem the tide of fentanyl and illegal immigration into the United States, Trump stated these factors constitute a national emergency under the International Emergency Economic Powers Act.
Last-minute negotiations with the leaders of America’s nearest neighbors have paused the levy of 25% duties on Canada and Mexico. However, a 10% tariff on China still stands.
Professor Doug Guthrie, director of China initiatives at the Thunderbird School of Global Management at Arizona State University, is an expert on international business and trade.
He sheds some light on how these tariffs might shake out and how it could impact Americans.
Note: Answers have been edited for length and/or clarity.
Question: Even though Trump has said in the past that he was going to slap extra tariffs on other countries, does the fact that he actually did it surprise you?
Answer: Yes, the tariff move with Canada and Mexico did surprise me. It was clear in the pre-election rhetoric that China was going to be targeted, but I did not foresee Canada and Mexico being targeted also. The continued targeting of China did not surprise me, as President Trump has consistently used rhetoric about “China stealing our jobs” as a rhetorical device for his election campaign. However, Mexico has recently surpassed China as the U.S.’s largest trading partner — due in part to Trump’s 2018 China tariffs, so I assumed that the new administration would be trying to build a trading partnership with the North American economies, U.S.-Canada-Mexico.
Trade policy and trade negotiations should be run through careful, respectful diplomacy, not bravado and brinksmanship.
Q: Traditionally, tariffs are used for what purpose?
A: Classically, tariffs have a very specific logic behind them. The core concept is that a given nation-state — in this case, the United States — poses a tariff to raise the price of an imported product. If the imported product price rises, local citizens may then purchase a locally manufactured product and thus support and increase production in the local economy — i.e., creating jobs in the local economy. So, for example, if light-industry goods are targeted, then the price of T-shirts will go up by 25% and people will buy T-shirts made in America. Or, if the price of iPhones goes up by 25%, then, in theory, consumers will buy smartphones made in America.
The problem with this logic today is that these manufacturing supply chains do not exist in America any longer. Many manufacturing supply chains have been dismantled in the United States and, in some industries, have been nonexistent for decades. These manufacturing supply chains have been outsourced to China and other emerging economies. It would take decades to rebuild these manufacturing supply chains.
Tariffs have become a very blunt instrument for a very complex manufacturing production and global trade set of problems.
Q: Canada and Mexico have vowed to come back with tariffs of their own. What would be the short- and long-term economic impacts of these tariffs?
A: The economic impacts for trade relations with Canada and Mexico will be different. With respect to Mexico, the impact is on the free flow of goods and market costs for the goods. For example, Walmart is the single largest exporter from China to the United States. When President Trump’s 25% tariffs on China were set in place in 2018, this increased prices at Walmart by 25%. So, increasingly goods were shipped to Mexico and then imported to the U.S. to avoid the tariffs. This is how Mexico recently supplanted China as the U.S.’s No. 1 trading partner. But the majority of the goods were still coming from China.
So now, with the pending Mexico tariffs, we are going to ensure that the U.S. consumer will pay the tax for all goods coming from China or Mexico. And make no mistake about it, tariffs are a tax on the American consumer. They are not a tax on the foreign country. They are a tax on the imported good, and these costs are always passed to the consumer.
With respect to Canada, the integrated manufacturing and trading lines that flow across the border between the United States and Canada allow the automobile industry in the United States to flourish. Thus, the success of the “Big Three” — GM, Ford and Stellantis (formerly Chrysler) — depends heavily on cross-border trade between the U.S. and Canada. The only outcome here is going to be increased prices for U.S. consumers buying automobiles. The one car company with a vertically integrated manufacturing production process in the United States is ... Tesla.
Q: What does all this mean for the global political economy? What are the hidden risks?
A: President Trump repeatedly claimed on the campaign trail and in debates that tariffs would not produce higher prices. This is simply false. The costs of tariffs are almost always passed on to consumers. So, tariffs at the American border raise prices for American consumers. However, there are other risks inherent in an escalating and protracted trade war with China, Mexico and Canada.
For example, Apple — one of the world’s most profitable companies — is deeply embedded in China, having relationships with over 1,500 Chinese suppliers. Tesla, with its Shanghai gigafactory, is also deeply embedded in and dependent on China. Walmart is the single largest exporter from China to the United States. If China chose to make business difficult for these important American companies, it could easily do so.
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