Tariff world war: US policies threaten global trade

The latest flurry of tariffs imposed on Canada, Mexico and now the United Kingdom (UK) by the US continue to put the globe in a tailspin.

Between March 11-12, the tariff war continued to escalate as US president Donald Trump’s 25 per cent tariff on metals took effect.

The measure raises a flat duty on steel and aluminium entering the US and ends all country exemptions to the levies.

Some of the countries that were exempted included Canada, the UK and the European Union (EU).

The move prompted an immediate response from the EU, which promised counter tariffs of billions of Euros on US goods.

The latest exchange in the tariff world war sparked by the US government has already had a significant effect, with uncertainty shaking Wall Street.

But local economists speaking to Business Day said the effects could trickle down to the Caribbean and to TT, which is something of a net importer itself.

What are tariffs

and why is Trump using it?

Before we get into the effects of Trump’s tariffs, it is important to understand what tariffs are and how they work.

Tariffs are taxes charged on goods imported from other countries.

For example, if TT had a 20 per cent tariff on a particular US-made item costing US$10, when it is imported it will have an additional US$2 charge.

Businesses that import these items can decide whether to absorb the cost or pass some or all on to customers.

The US International Trade Administration in TT says customs duty is imposed on products coming into TT based on the fair market value of imported goods at the time it lands in the country.

Import prices for products are generally based on cost, insurance, freight and duty along with VAT, which is reduced to zero per cent for certain goods.

TT has also implemented Caricom’s common external tariff (CET) for goods from countries outside Caricom, with import tariffs going as high as 30 per cent for auto parts, DVD players and jewellery, and 20 per cent for other products.

TT’s tariff system fits in seamlessly with its foreign trade policy which also has bilateral investment agreements with the US, Canada, China, several countries in the EU, the UK and Mexico.

TT also has a preferential tariff arrangement with the US under the Caribbean Basin Economic Recovery Act, implemented in 1984 to allow products from beneficiary countries such as TT to export to the US without having to pay any duties.

Economist Dr Marlene Attz explained tariffs are one way to protect developing industries in any country, including the US.

"That is normally the economic argument for the implementation of tariffs, because you want to protect some fledgling industry and you want to nurture that industry."

These tariffs implemented by the Trump administration are a central part of his economic plans.

During his campaign trail, Trump promised a resurgence of US industry with more jobs and lower prices.

He said tariffs will boost US manufacturing, protect jobs, lower prices, raise tax revenue and ultimately grow the economy.

"One cannot fault president Trump for wanting to boost domestic production. I think any responsible leader would want to see domestically-produced goods and services increase so it could contribute to greater economic growth and employment," Attz said.

Trump is also using the tariffs as a bargaining chip to persuade other countries such as Canada and Mexico to collaborate on beating the US fentanyl crisis.

The White House has said fentanyl – a potent synthetic opioid drug used for pain relief and anaesthesia – is crossing US borders, coming from China and passing through Mexico and Canada with the help of Mexican drug cartels.

Canada has since debunked the claims, saying less than one per cent of fentanyl crosses the Canadian border.

At a press conference on March 7, members of the Political Bureau of the Chinese Communist Party (CPC) Central Committee and foreign minister Wang Yi also said China takes resolute measures against drug trafficking and manufacturing.

"China has put in place the toughest and most comprehensive counter-narcotics policies in today’s world.

"As early as 2019 China has scheduled all fentanyl-related substances upon the request of the US… but the abuse of fentanyl in the US is a problem that must be confronted and resolved by the US itself," Yi said.

Regardless, Trump is using these tariffs as an economic tool, but are they having the effect he wants?

Economist Indera Sagewan explained that traditionally, products are outsourced to countries such as China, India and other developing countries because of its easier tax regimes and cheaper labour and infrastructure costs.

"We can’t ignore the fact that the US is a high-cost producer," Sagewan said.

"Vehicles produced in the US are high-cost vehicles. For those who need cheaper vehicles, it will have to come from China, Japan and so on in order to meet the demand for middle-income families in the US.

"Most of the brand names that you wear are not produced in the US, they are produced in China. Iphones are also assembled in China and their parts come from several countries.

"Trump wants to shift this dynamic, but how do US companies who have diversified globally to such an extent, come back to the US to face high labour costs?"

The effects of Trump’s tariffs

Attz and Sagewan said the tariffs will have a deleterious effect on the world, the Caribbean and TT in the short term, but it will affect the US economy first as tariffs are not taxes paid by an exporting country.

When tariffs are imposed, businesses and people of the importing country cover the cost.

"So it really begs the question: To what extent in the short to medium term will this have an impact on US businesses and consumers?" Sagewan asked.

"The immediate consequence is that it will result in higher prices in the US, which could be passed on to the consumer," Attz added. "These tariffs are therefore having a negative impact on growth in the US, certainly in the short-term."

The stock market gives an example of US business reactions to the tariffs.

Associated Press said on March 12 the S&P market went up by 1.3 per cent in the morning, slipped back down to zero, and then went back up to 0.6 per cent in the afternoon.

The Dow Jones Industrial Average also swung back and forth between a gain of 287 points and a loss of 423. As of 1.10 pm on March 12, it was down 36 points.

The Nasdaq market held up better thanks to gains in AI-related companies, going up by 1.3 per cent.

The on-again-off-again announcements on tariffs have resulted in a reduction in confidence among US consumers and businesses because of the elevated uncertainty in the market.

Countries subject to the US tariffs have also begun responding in kind.

With regard to the 25 per cent tariff on importing steel and aluminium, the EU said it will impose counter measures on €26 billion worth of US goods, from boats to bourbon to motorbikes.

The Canadian high commissioner to the UK said Canada will target "particularly sensitive" products to the US in response.

China’s foreign ministry spokesperson said it will take "all necessary measures" to protect itself and suggested that the US violated the World Trade Organisation rules with the imposition of the tariff on metal products.

On March 9, Trump, while speaking to CNN said amid the tariff turmoil, there could be a "period of transition" and refused to rule out the possibility of a recession.

However, when a White House news correspondent asked Trump if there would be a recession on March 11, he said he believed the country will eventually see a boom.

Attz noted that the changes in the tariff regime will definitely have short-term effects but will eventually settle.

"As businesses become accustomed to a new way of life and a new wave of tariffs they can then settle and you will find the economy adjusting to these changes,” she said.

Attz added that the effect on the US economy will eventually have an effect on the Caribbean region and TT, which is a net importer of goods from the US, Canada and Mexico.

"There could be the unintended consequence of there being supply chain challenges.

"When you think about all the shopping that takes place in all the online stores, where many of the goods are actually made in China and these prices could also be passed on to us if the US is a shipment port in terms of access."

The High Commissioner of Canada to TT Michael Callan said TT and Canada share a great relationship, with TT importing a long list of products from Canada.

"Canada is a stable and reliable partner for TT and the rest of Caricom

"This is not going to change," Callan said. "Through Caribcan, a non-reciprocal economic and trade development assistance program, 98 per cent of TT’s exports to Canada enter our country duty-free. This is good for both of our countries as we seek to diversify our trading partnerships."

However, he noted that many of the products that come to TT from Canada pass through the US, because many TT importers buy from affiliates in the US.

"While the ever-changing tariff landscape remains difficult to predict, tariffs on Canadian goods would likely mean higher prices for these goods in TT," Callan said.

"Products purchased through consolidators in the US would mean the importer would have to pay US tariffs on Canadian goods. This scenario would see tariffs being charged on goods that simply pass through US territory on their way to TT, hurting TT consumers and Canadian suppliers alike."

The world has to adjust

Attz said the world has to find a way to adjust to the new way of doing business with the US as it addresses its issues through the implementation of tariffs.

"(Trump) is signalling a new way of doing business and his concern with the trade deficit that the US has with China," she said.

"There are a lot of things mixed in with his measures, but the rest of the world is going to have to adjust."

She said TT, though a relatively small country, is part of a global market.

She suggested that TT and the rest of Caricom unite and have a conversation at the regional level to deal with the effects of this tariff war.

"The conversation has to be at the regional and Caricom level," she said.

"I don’t think TT ought to attempt to navigate this space on our own, but TT will have to be part and parcel of those conversations. We are better at a regional level."

She suggested Caricom look at all of the issues and have the relevant conversations with the rest of the world on behalf of the Caribbean people.

Sagewan added the country already has the means to diversify its trade relations in the hemisphere, it simply needs the political will to implement policies already in train.

"The region fully knows how it needs to respond if you look at policy documents," she said.

"For example, we had 25 x 25 (a plan to reduce food imports by 25 per cent by 2025). That has shifted to 25 x 30. That tells you that we are good at coming up with ideas, we are just really poor at implementing.

"We have the capacity to feed ourselves when you consider land masses in Guyana, Suriname and Belize."

As for countries directly involved in the tariff war such as Canada and China, there seems to be no backing down from either country.

"As (former) prime minister Trudeau said, Canadians are polite people, but we won’t back down from a fight," Callan said.

"The moment tariffs are off the table, all of our retaliatory actions will cease.

"The government of Canada will always defend the best interests of Canadians. We remain ready to work with the US to advance our shared economic prosperity and security, but we will not stand by as the US takes these actions."

Callan said Canada plans to consider additional responses as the situation evolves while redoubling its efforts to broaden and deepen its trade relations with TT.

"In addition to the Canada-US-Mexico Agreement (CUSMA), Canada has a network of 15 other free trade agreements (FTAs) that give us preferred access to 50 countries and over 1.5 billion consumers worldwide.

"These agreements include the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), the Canada-European Union Comprehensive Economic and Trade Agreement (CETA) and others.

"Making the most of these agreements and expanding our trade with TT and other markets in the hemisphere is going to make us all stronger."

Callan said the office of the High Commissioner of Canada to TT can suggest a list of top-tier Canadian exporters and products for anyone interested in working directly with Canada.

In the March 7 press conference, Yi said China will "definitely" take countermeasures in response to the US’ arbitrary pressure.

"As the Chinese saying goes, ‘If one’s actions fail, look for the reason within oneself.’ The US should first go over what has actually happened.

"What has it achieved from tariff and trade wars these years? Has its trade deficit widened or narrowed? Has US inflation gone up or down? Has the life of its people gotten better or worse?"

With regard to the Caribbean and Latin America, Yi said China maintains a position of mutual support, not geopolitical calculations.

"In its engagement with Latin America and the Caribbean (LAC) countries, China follows the principles of equality and mutual benefit," Yi said.

"What people in LAC countries want is to build their own homes, not to become someone’s backyard. Co-operation between China and LAC countries has won popular support because it respects the will of the people, meets the needs of regional countries and provides reliable options and broad prospects for the revitalisation of the region."