Trump’s Tariffs: Brace for Impact?

Tariffs had been fading into history and were measures of a bygone era. Most economists regard them as harmful to all nations involved. Last week, Trump imposed steel (25%) and aluminium (10%) tariffs on Canada, Mexico and the European Union. He has threatened tariffs on Chinese products of up to USD150 billion. Further tariffs on imported cars, trucks and auto parts are to be looked into. All these under the guise of national security.

Trade wars can have crippling effect on global economy. In the 1930s, U.S. imposed 900 tariffs and its imports declined 40% within two years. Major trading partners retaliated and global trade fell 66% and worsened the Great Depression. The international financial system reeled because free trade and free international capital flows go together. Countries that borrow must export in order to service debt. Hence defaults on foreign debts. In the current context, the saving grace is that we are not there yet.

So are tariffs a wise policy? Most economists, save for Peter Navarro (Trump’s trade adviser) say no! Tariffs drive up costs of imports and reduce competitive pressure for those domestic industries that benefit.  But why is Trump doing this? Because he is turning a campaign rhetoric into action. What’s his end-game? No one knows, not even Trump! In 2002, George W. Bush (the Harvard MBA graduate) slapped tariffs on imported steel. That cost 200,000 American jobs and Bush had to reverse his action after World Trade Organisation ruled it illegal. Then there are other drawbacks:

·       More expensive prices for consumers;

·       Higher costs of production;

·       Disruptions (in markets); and

·       Retaliation (by trade partners).

Paul Krugman, the economist who was formerly at Princeton, notes if you impose tariffs on imports when the economy is close to full capacity, domestic supply may not meet new demand and prices move up. Inflationary pressure ensues. The Fed may increase interest rates, which increases the value of the dollar and that increases U.S. export prices.

What’s the alternative? The U.S. has great comparative advantage on new technologies and applications. It has to promote these rather than protect an industry that has been in long-term decline since the 1960s. Tariffs cannot tackle fundamental issues of regional decline and technology related job losses.

What’s the impact for Malaysia? Many local economists say the impact is minimal, because steel and aluminium together make up only 0.1%-0.3% of all steel exports to the U.S. But when it impacts electrical and electronic products and retaliatory measures by others, that’s when a small, open economy has to brace for impact.