This is a commentary, and comments are welcome by email to: info@eaa.co.ke
TARIFF WARS AND OTHER STORIES
Tariffs here, there, and everywhere
“A tariff is a tax levied by Governments on the value including freight and insurance of imported products. Different tariffs applied on different products by different countries”. International Trade Commission
The current US regime, under the Presidency of Donald J Trump, has moved to try and balance their trade deficits with other parts of the world by the introduction of tariffs on virtually every country in the world. The intention appears to have been to bring other countries in the world into a negotiation on trade deals, even though this has perhaps not been as successful as was hoped. The effect of the imposition of tariffs has probably isolated the US from its allies and foes alike.
So why does a country impose tariffs? According to Oxford Economics, there are three reasons: raise Government revenues; protect domestic industries and correct trade imbalances; and/or a political tool for negotiations. The Trump Administration seems to be using tariffs for all three in varying degrees.
But how were the tariffs imposed computed? And, do they have any scientific basis? The Administration originally released a complex mathematical equation that was apparently used. The BBC, and many others, have delved further into this and it seems apparent that what it boils down to is “take the trade deficit for the US in goods with a particular country, divide that by the total goods imports from that country and then divide that number by two”. One could argue that this is far from being scientific.
China, a country that President Trump targeted in his previous term, is an interesting case in point. The trade deficit on goods with China is estimated to be USD 295 billion with the US buying goods valued at USD 440 million. The system used initially to determine tariffs to be imposed was dividing 295 by 440 and the result by 2 giving tariffs of 34%. Note that subsequently tariffs in China were increased significantly – there does not seem to be any calculation basis – and indeed China, as would perhaps be expected, reciprocated. And there started a trade war! In the case of the EU, the original formula resulted in 20% tariffs being imposed.
China-USA
Yahoo Finance reported that the tariff war began on 1st February with the US imposing 10% tariffs on Chinese imports with China countering this with 15% on US imports of coal and liquified natural gas and 10% on crude oil, agricultural machinery and large cars, on 4th February. A month later, 3rd March, the US tariffs were doubled to 20% and the following day, 4th March China introduced 15% tariffs on chicken, wheat, corn, and cotton and 10% on sorghum, soybeans, pork, beef, aquatic products, fruits, vegetables, and dairy products.
2nd April, which was named Liberation Day by President Trump, saw US tariffs increased to 54% and two days later China imposed a 34% tariff on all US imports. It did not stop there, however, and on 7th April the US tariffs were increased to 104%. Not to be outdone, China raised its tariffs to 84%. On 9th April, the US announced a 90-day pause but this was clearly not applicable to Chinese imports where the tariffs were increased to 145%. Again, two days later, China raised its tariffs to 125%. The US did however announce an exemption for certain electronic goods imported from China.
Clearly, China has no hesitation whatsoever in matching tariff raises by the US but the question must be what does this mean for both economies? Well China has decided to stop importing many goods from the US including, but possibly not limited to, beef (importing from Australia instead), soybeans and corn (from Brazil), and perhaps more significantly, aircraft from Boeing – China being one of their largest importers could well be a problem for the giant aircraft manufacturer coming of the back of its 737 Max issues – and indeed has reportedly flown some of the new acquisitions back to Seattle.
“The United States has abused tariffs on all trading partners under the banner of so-called ‘equivalence’, while also forcing all parties to start so-called ‘reciprocal tariffs’ negotiations with them”. China’s Commerce Ministry
There may still be hope that a trade war could be avoided, but perhaps unlikely, when President Trump said tariffs on Chinese imports would be reduced. This appears to have followed a meeting with the CEOs of leading American retailers who apparently told the President that their shelves would be empty in the next two or three months.
As we said above, a full-blown trade war is underway between the two countries. Other parts of the world have indicated that they are prepared to negotiate with the US, but once again China has an answer – saying they would take “resolute and reciprocal” measures against countries negotiating with the US if this was against China’s interests. A number of reports have emerged that indicate that the US will use their negotiations with other countries to pressurise them to reduce trading with China. This may well be difficult for the US to implement, and, indeed, the UK has already said that it would not agree to this.
According to Coface (Compagnie Française d’Assurance pour le Commerce Extérieur) a global leader in credit insurance and risk management, the impact of the trade war between the US and China could have severe repercussions for the global economy with increased costs of manufactured goods and supply chain disruptions.
The World Trade Organisation (WTO) says it is likely that global trade will fall 0.2% in 2025. The impact on the US could be greater as 81% of China’s manufactured output is taken up by domestic consumption with only 2.7% going to the US. As it is, the US is already experiencing higher inflation, which is expected to be at 4% by the end of the year, and unemployment could be as high as 6%. The S&P 500 and Nasdaq have also been falling as has the Dow Jones Industrial Average.
The US Dollar has been weakening against major currencies and US bond yields are on an upward trend signalling higher interest rates – although it is possible that the Federal Reserve will opt to lower rates which is being propagated by the US Government. The US economy is very likely to end up in recession which will not bode well for the rest of the world. But perhaps more serious is the loss of confidence that the world could have in US policies and governance which appear to be moving in no particular or indeed, possibly in the wrong direction.
China’s move to find alternative sources of supply for its imports and increase its export market to countries other than the US could also spell doom and gloom for the US economy. Indeed, the last time the US experienced this sort of economic environment was probably in the Great Depression almost a century ago. The similarities today could not be starker.
The IMF in their latest World Economic Outlook have said that global economic growth is expected to slow significantly with the current tariff wars. The latest forecast for 2025 is 2.8% and for 2026 is 3% which represents a drop of 0.8% from the January forecast. The Fund predicts a 30% chance of the world going into recession. Global Trade is projected to fall to 1.7% in 2025 compared to 3.8% in 2024. However, the IMF Chief Economist does acknowledge that “Growth prospects could immediately improve if countries ease from their current trade policy stance, and promote a new, clear, and stable trade environment”.
A new world order?
In a past issue of this newsletter, we discussed a changing world order from the one that started after World War 2, the US and Russia as the perceived leaders, and perhaps started to change with the coming down of the Berlin Wall and the disintegration of the USSR, which saw the US become the world’s “police force”.
Following the war, several new institutions were established such as the UN, NATO and the IMF, to ensure that the world did not enter another world war and in essence to ensure peace and prosperity, and indeed, the start of what has often been referred to as the Global Village. That era saw the establishment of a “rules based international order” which the immediate past US Secretary of State Antony Blinken, described as a “system of laws, agreements, principles and institutions that the world came together to build after two world wars to manage relations between states, to prevent conflict, to uphold the rights of all people”.
But global geopolitics is perhaps changing this and while many claim the current US regime is at the forefront of this, the reality that the move away from the concept of a Global Village and a rules based international order has been on the cards for a while. The emergence of countries such as China and India as economic superpowers, has probably upended a system that has been in existence for 80 years. The current tariff wars are simply a part of this change as countries begin, once again, to look more inwards and enforce protectionist policies.
When the country that has led the world for that long suddenly has a President that is perceived to be highly transactional, it should not come as a surprise that the world as we know it is set for change, although it is difficult to say if for the better or not. President Trump, perhaps, sees every deal as a transaction that has a monetary outcome. Many of his policies seem to trend towards the financial side – how much is the US contributing against everyone else. Clearly, a very new approach that is making the rest of the world somewhat nervous.
The US support to Ukraine has now become conditional upon Ukraine allowing the US access to its minerals, which is a far cry from the previous Administration’s stance. The consequence has been Europe, who are probably the most affected by the ongoing conflict, increasing defence spending and agreeing to assist Ukraine. This sort of approach, without US support, was probably unheard of a few months, and indeed years ago.
The point now seems to be that the US is taking on the rest of the world, whether friend or foe, in the same way and this could result in it being isolated. There are many signs that the rest of the world is talking of teaming up, while not necessarily in an anti-US stance, but to protect themselves from an environment that most thought would never exist. The “America First” slogan, which cannot be challenged as many countries do think the same of their own, is perhaps what has driven the tariff war. Interestingly, the US Secretary of the Treasury, Scott Bessent, on 23rd April said: “America First does not mean America Alone”. However, currently it does seem that America is content to go it alone! Whether this war will achieve what is intended, is perhaps a more difficult question to answer.
Fareed Zakaria of CNN pointed out that in the lead-up to the Great Depression, agriculture was the mainstay of the US economy but with the advent of industrialisation, that contribution has declined. Today the US economy is very much service driven and to rebuild its original manufacturing capacity is no mean feat. Meanwhile, China is moving forward rapidly in technology and possibly outstripping the rest of the world. Different questions, and perhaps ones we would never have thought possible, seem to be emerging as the world questions whether the US can be relied upon for support in the future. Therein lies the potential change to the world order.
Aid cutbacks
“At the close of the Trump administration’s 90-day review of foreign aid, we have already seen deadly consequences for women, children and communities across the world. People living through unthinkable circumstances have now been deprived of lifesaving food, water, and health and hygiene support”. Oxfam America President & CEO
Oxfam has said that US funding for humanitarian purposes accounted for as much as 50% of the total aid provided globally. President Donald Trump has set his eyes on the US funding to the rest of the world and in a bid to reduce his country’s expenditure, has stopped it. While one can appreciate why President Trump has taken this approach, the abrupt stop has indeed created a huge gap in aid funding to the less developed and poorer countries of the world.
It is important to note that the US Government policy in this area in the last 90 days has been like a roller coaster with funding being switched on and off regularly. However, not all funding has been slashed and some programmes remain in place. Nonetheless the impact on lives could be significant.
The US Secretary of State, Marco Rubio recently said: “We’re not the government of the world. No, we’ll provide humanitarian assistance, just like everybody else does, and we will do it the best we can. But we also have other needs we have to balance that against”. Again, perhaps understandable, but another indication that the US is moving away from leading the World Order.
The US State Department issued a statement on the aid cuts and quoted the Secretary of State as saying: “Every dollar we spend, every program we fund, and every policy we pursue must be justified with the answer to three simple questions: Does it make America safer? Does it make America stronger? Does it make America more prosperous?”. It is abundantly clear that the US is moving towards becoming more inward looking, and while we cannot fault them for this, a more phased approach may have been better.
As far as Africa, and other less developed areas of the world, are concerned, the cut in funding by the world’s largest donor will have significant impact on their monetary requirements. Many countries are already struggling with high expenditure and seeking to cover the cuts is likely to be difficult.
Going forward
Who knows?! It is difficult to predict when, or indeed if, the tariff wars will end and whether the US will continue in its role as the leader of the World Order, although the current situation seems to indicate otherwise. The biggest concern will be the US economy going into recession which could see the same happening globally. At the end of the day, a trade war is unlikely to benefit anyone and all efforts should be made to avoid one.
This is a commentary and comments are welcome by email to: info@eaa.co.ke