Three Possible Consequences for the Global Economy if Trump Enacts New Trade Tariffs

During Donald Trump’s earlier term as US president, he ignited trade disputes with China and Europe. However, in spite of his assertive assertions and the enforcement of tariffs, the US trade deficit did not see any significant improvement.

In actuality, the deficit deteriorated, climbing from $195 billion in the first quarter of 2017 to $260 billion in the same quarter of 2021.

Initially, Trump’s tariffs were capped at 25%, focusing on a limited selection of goods. Presently, his proposed strategy appears to suggest that the US will apply tariffs of 10% or 20% on most imports. Canada and Mexico could potentially face tariffs reaching 25%, while imports from China may be subjected to tariffs as high as 60%.

This new proposal represents a notable shift from the former approach. What implications could this have for the US, the UK, and the global economy?

Scenario 1: Confrontation

If the president-elect stands firm on his intention to implement uniform tariffs, a likely outcome could be inflated prices for consumers due to costlier imports. This may lead to increased demand for products made domestically, consequently raising domestic wages, with a possible escalation in inflation.

The chances of the US economy overheating in a short period are very real. Nevertheless, counterbalancing factors are also at play. Elevated tariffs combined with significant investments domestically could strengthen the dollar, making imports less expensive before tariffs are applied, potentially easing inflationary pressures.

Additionally, the impending risk of major public sector layoffs could lessen the strain on the job market. Technological advancements, like those seen in driverless vehicles, might also play a role in this scenario.

Relaxing environmental regulations in the energy sector, along with possible diplomatic progress with Russia and in the Middle East, could lead to lower energy prices.

Scenario 2: The art of the deal

Donald Trump is well-known for his deal-centric approach to politics. In the context of trade, this indicates a move away from the international regulations that have shaped global trade since the conclusion of WWII.

The selection of Scott Bessent as treasury secretary underscores this inclination. He views tariffs as a “sanctioning tool” for broader political and economic strategies.

This indicates a probable scenario in which the US entices other countries with favorable market access in exchange for various concessions, such as enhanced political relations, considerable investments in the US, or expanded opportunities for US exports.

This could result in a significant realignment of supply chains, where imports from more efficient countries are replaced by those from less efficient regions. Consequently, this may decrease the US trade deficit with China, while widening the deficit with the EU, UK, Mexico, and Canada.

A critical question remains: will these negotiations involve China, and will China be willing to participate? If they refuse, we could witness the emergence of two distinct economic blocs – one oriented around China and the other around the US.

Scenario 3: Deterrence

In a third, albeit less likely, scenario, the Chinese government might acquiesce to US calls for adjustments to their bilateral trade deficit, believing that it is not the right moment to challenge US supremacy.

China may opt to maintain its export-driven growth model, solidify its standing, penetrate foreign markets, and endure the Trump administration. This would necessitate the Chinese government to consent to larger and quicker procurements of American goods and services than previously agreed upon in the deals between the Trump and Xi administrations.

For the UK and Europe, UK exports to the US might face a 20% tariff, potentially impacting sales and affecting UK manufacturers that export goods to the US, such as pharmaceuticals or machinery. The primary challenge for the UK will be whether to retaliate by imposing tariffs on US goods, and if so, to what degree.

Engaging in a trade dispute with the US would not serve the UK’s interests; however, the subsequent actions will depend on the directives established by the Trump administration. There are already discussions indicating that the UK may need to select between aligning with the US or the EU, particularly if regional trade blocs begin to develop due to retaliatory measures from other nations.

While the ramifications for the EU would be similar, a significant distinction exists. The EU operates as a bloc with its own trade policy and possesses an economy comparable to that of the US. Therefore, the motivation for retaliation and the resulting trade frictions between the EU and US is considerable.

If the EU decides to follow this course, it would create difficulties for the UK. In this situation, the UK would ultimately need to choose a side: either to nurture its special relationship with the US at the expense of further deterioration in trade with the EU, its nearest market, or to politically and economically align more closely with the EU.

Unfortunately, as countries strengthen their trade barriers, they may inadvertently set the stage for conflict.

Agelos Delis, Senior Lecturer in Economics, Aston University and Sami Bensassi, Reader in Trade and Development Economics, University of Birmingham

This article is republished from The Conversation under a Creative Commons license. Read the original article.