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Donald Trump previously described tariff as his most favourite word and sees tariff to help grow the US economy, protect jobs and raise revenue. He even called tariff, 'the most beautiful word in the dictionary". Trump sees tariff to deal with myriad issues ranging from containing China, reducing budget deficits, even preventing immigration.
In the process Trump has made us to rethink the concept of comparative advantage when it comes to trade with the US. Comparative advantage is an economic concept introduced by David Ricardo in the 19th century. The concept suggests that countries may gain from trade by specialising in the production of goods they can produce most efficiently, while importing goods from other countries that are able to produce those items more efficiently. Ricardo showed that international trade is beneficial even when one country is more efficient at producing everything than another.
Comparative advantage encourages free trade and international specialisation. In summary, comparative advantage serves as the theoretical foundation for international trade, suggesting that free and open trade can lead to higher total output for participating nations.
For over 80 years, global trade has functioned under the "Most Favoured Nation" (MFN) clause. This principle in international trade ensures that a country grants identical trading terms, such as tariffs or other benefits, to all other countries with MFN status, as it does to its most favoured trading partner. This ensures non-discrimination and equal access to markets.
The MFN clause is a cornerstone of the World Trade Organisation (WTO) system. The first article of the GATT also applies to GATS and TRIPS. In fact, trade has been one of the engines of growth and prosperity during the post WWII period bringing close to a billion people out of poverty.
Trump has discarded MFN, creating uncertainty about the outcome of his tariffs. An import tariff is both a consumption tax on imported goods and a production subsidy for domestic suppliers at the same rate. Tariffs create barriers to market exchanges which in turn create economic inefficiency and result in consumer welfare loss.
Under the Trump administration's trade policy, access to the US market depends not solely on production efficiency but on the relative tariff rates applied to goods compared to competitors. In fact, his demands on tariff concessions from other countries are supposed to be in exchange for the privilege of selling goods in the US market.
Trump also considers himself as a deal maker on various issues, but in the case of trade he is missing the point that he is in a much weaker position than he thinks. Trump thinks countries benefit selling goods to the US, otherwise they would not do that, so that gives the US huge leverage to negotiate. However, it should also be noted that the United States may incur higher costs by producing these goods domestically or sourcing them from other, potentially more expensive, suppliers.
Therefore, countries that were not competitive when the average US tariff was about 3 per cent, will now suddenly become very competitive if their rate is 10 per cent and their competitors are slapped with many times more than 10 per cent. But Trump's indiscriminate use of trade threats of trade sanctions against friends and others alike have ignited drive to secure new markets or even to build new trade blocs.
It is suggested that Trump is using tariffs as a political device to signal his strong scepticism around globalisation broadly. Trump's tariffs will not only disrupt global trade, especially Chines exports but also could deal a death blow to the rule based global trading system and the World Trade Organization (WTO).
Trump's trade wars will create an environment of uncertainty and that is always bad for trade. His protectionist tariff policies would cause economic growth around the world to slow down. More alarmingly, this US tariff measures could rival those of Smoot-Hawley measures of the 1930s that led to a global trade war, thus creating the conditions for the WWII.
It is important to recognise as Fyodor Lukyanov, a prominent Russian expert in the field of international relations and foreign affairs pointed out, "Trump and Trumpists are not an accidental aberration, and they do not represent a temporary deviation from the course of history. They reflect the mood of most Americans. And we must proceed on that basis".
The US under Donald Trump has initiated a trade war that is paralysing the global economy. In a way Trump is nudging the world towards one classic form of world order, namely the sphere of influence that existed during most of the imperial era of the nineteenth century.
The world beyond the US is vast. Countries cannot instantly change their production or trade patterns, but they can adjust over a short period. Most US trading partners are doing exactly that. Therefore, there is a limit to how much a country is willing to undergo Trump's bullying to preserve it export market in the US.
Although Trump claims tariff revenue comes from exporting countries, in reality tariffs are a tax that domestic consumers pay, similar to taxes on local goods. Even if exporters or importers reduce their margins, most of the cost of Trump tariffs will still be borne by US consumers as a tax. Tariffs can also harm trading partners, but that does not change the fact that the main victims are generally consumers of the country imposing tariffs.
It is estimated that Trump Tariffs could raise $2 trillion over the next decade if they remain in place. According to the researchers at Yale University tariffs so far implemented amount to the overall effective tariff rate of 20.6 per cent, the highest since 1910. Prices are expected to rise by 2.1 per cent soon, with average household incomes dropping by $2,800.
Furthermore, differential tariff rates will create massive arbitrage opportunities where traders in commodities will simultaneously be buying and selling in order to take advantage of differences in tariff rates for the same product.
Currently, the application of Trump tariffs risks disrupting the global trading system and supply chains, regardless of threats to some countries or favourable treatment for others. It will also create a massive administrative burden for the US customs.
Trump has also foreshadowed to impose sectoral tariffs on pharmaceutical products, semiconductors, timber and copper. Any negotiated or upcoming deals will be affected by new sectoral tariffs. The EU exports significant amounts of pharmaceuticals to the US.
The political implications of Trump's global tariff regime are profound for the US. Tariffs on imports will drive up prices, increase inflation, weaken middle-class finances, boost billionaire wealth, and widen inequality.
In a period when the global economy is already on a downward trajectory, an article in Bloomberg noted that Trump tariffs will hit the global economy with $2 trillion loss by the end of 2027 relative to pre-trade war situation.