It turns out that Donald Trump still loves tariffs. In his re-election campaign, he promised a 10 percent increase in tariffs on all U.S. partners** and a tariff of at least 60 percent on Chinese imports. All of this may sound similar to his first term, but observers should quell any nostalgia. His return could be completely different.
To recap, Trump's first term began when his critics dismissed his threats as a bluff. He took to Twitter to slam the bilateral deficit for sending experts into a frenzy because they didn't think the numbers mattered. Next up are tariffs on imported steel and aluminum, as well as hundreds of billions of dollars worth of Chinese imports. Some countries have been granted exemptions; Others negotiate agreements.
Trump's second term will echo his first. Some old disputes are still brewing: the subsidy dispute between Airbus and Boeing; the dispute over the digital services tax; Steel and aluminum** strained. As Biden maintains Trump's tariffs and tightens restrictions on advanced chips, concerns about China's economic behavior will only get stronger.
But the second term will differ in at least three ways, starting with the scope of threatening measures. During Trump's first term, the imposition of tariffs on China recalibrated economic activity, creating winners and losers, but with minimal macroeconomic impact. One study found that while importers bear most of the costs, retailers, rather than consumers, bear most of the costs, limiting the impact on inflation.
Imposing a 10% tariff on imports from around the world and a 60% tariff on goods from China would have a more pronounced macroeconomic impact. (They will almost certainly face a legal challenge, but I will leave it to the lawyer to argue.) ）
Capital Economics, a consultancy, estimates that a 10% tariff, as a cap, could raise inflation to 3% to 4% by the end of 2025. It seems likely that the exchange rate will be more volatile. Reprisals seem inevitable, especially now that the European Commission has new powers to strike back outside the world's troubled dispute settlement system.
The second difference is the nature of the debate. Now, complaints about the U.S. bilateral ** deficit with China can be inspired by the experience of the first tariffs. This slightly reduced the bilateral deficit with China, but was offset by an increase in deficits with other countries, including Mexico, some of which are closely tied to China's chain.
Despite the controversy, the discussion around the 10% tariff should be more interesting. Robert Lighthizer, the former representative of the United States who seems likely to serve in the next term, argues that America's problem does not have to be a bilateral deficit (there is no unfair practice), nor even a deficit in any given year. Instead, broader import tariffs should be a solution to the pattern of the U.S. running a persistent deficit year after year.
The third difference between Trump's first and second terms reflects China's changing position. In addition to heightened concerns about China's chip production, Biden** recently publicly warned China not to address the country's weak economy by exporting manufactured goods overseas.
Official data shows that China's current account surplus is not much different from that of 2016. But Brad Setser of the Council on Foreign Relations said the numbers were somewhat suspicious. Other indicators point to a sharp increase in China's manufacturing exports. Setser's partnership with asset manager Union Investment's Volkmar Baur shows that by 2022, China's surplus in manufactured goods will rise to a record high, accounting for almost 2% of world GDP.
During Trump's first term, the European Commission did not take broad measures to stop the transfer of steel from the United States. Between 2018 and 2020, there was no significant change in the trend of its total imports from China. However, since the outbreak of the epidemic, the EU's ** deficit with China has risen sharply, and has even become a source of political tension.
If Trump imposes new restrictions on U.S. partners, especially China, the pressure on European producers will increase. Their access to the U.S. market will be limited. They will also face stiffer competition in other markets, including their own, due to the transfer of others** from the United States. Against this backdrop, it seems easier to imagine that Trump's preference for tariffs would catch on.