With his latest tariff moves, President Donald Trump has initiated the opening salvos of a potential global trade war.
Up to now, his targets have been individual countries: China, Canada, and Mexico. On Monday, however, he announced 25% tariffs on all steel and aluminum imports. This is an escalation of the 2018 actions during his first administration when he carved out exceptions for some steel-producing countries and some Chinese goods.
This time, there are no exceptions.
Why We Wrote This
New U.S. tariffs create tension. The question is whether the next steps by the U.S. and its trading partners will involve more escalation – or conciliation to ease the conflict.
And on Sunday, the president said he would announce reciprocal (dollar-for-dollar) tariffs later this week on any nation that imposes duties on U.S. goods.
“That’s not a full-blown trade war yet,” says Kyle Handley, an economics professor and director of the Center for Commerce and Diplomacy at the University of California, San Diego. “It’s more of a trade cold war.”
It takes two or more to go to war. And so far, only Beijing has retaliated to the new tariffs the Trump administration imposed on China last week. A trade war will expand if and when others follow suit.
Tensions are rising
Tensions are clearly rising, and the question is whether the next steps by the U.S. and its trading partners will involve more escalation or concessions and bargaining to ease the conflict.
Reactions from abroad varied. In France, foreign minister Jean-Noël Barrot said the European Union would retaliate if America’s steel tariffs were enacted. “There is no hesitation when it comes to defending our interests,” he said in an interview on French television prior to Mr. Trump’s Monday announcement.
In Mexico, the No. 2 steel exporter to the U.S., President Claudia Sheinbaum took a wait-and-see attitude and promised to keep a cool head. She and Canadian Prime Minister Justin Trudeau both won one-month delays from U.S. tariffs earlier this month by stepping up efforts to secure their borders with the United States.
For China, already locked in a seven-year trade war with the U.S., Monday marked the first day of its $14 billion retaliation against specific U.S. imports. It imposed levies of 10% to 15% on imports of U.S. coal and other energy products as well as farm equipment and some cars. A Foreign Ministry spokesperson called for more dialogue and consultation, saying, “Protectionism leads nowhere.”
It’s a refrain many economists are echoing. But in some sectors of the economy, U.S. leaders cheered the president’s moves.
“Trade measures work,” Zach Mottl, chairman of Coalition for a Prosperous America and president of Atlas Tool Works, said in a statement released Monday. He credited Mr. Trump’s 2018 steel tariffs as helping to revive the domestic steel industry. He also pointed to the group’s recent analysis that surging imports into America were putting more than 1 million U.S. jobs at risk. The nonprofit coalition represents domestic manufacturers, workers, farmers, and ranchers who support domestic self-sufficiency over cheap imports.
Wall Street seemed unfazed, with markets moving up on Monday.
Who pays for tariffs in the long run?
But economists, as well as many American business leaders, are taking the longer view. They worry that any gains from “saving” a few targeted industries will be swamped by the effects of what amounts to a tax on everyone else. By imposing new tariffs on everything from imported tools to televisions, the federal government is, in effect, imposing a tax. Importing companies either absorb that cost or they pass it on to consumers.
That’s what happened after the 2002 tariffs President George Bush imposed on steel, according to one study. Local steel employment did not go up, and steel-consuming industries, such as automakers and appliances, saw job losses that persisted for several years, according to James Lake, an economics professor at the University of Tennessee in Knoxville who specializes in international trade policy.
Dr. Handley’s research found that President Trump’s 2018 tariffs spilled over into the export sector, because many of the companies involved in importing steel are also using it to fashion goods they then export. One example is Boeing. His 2020 study found that the tariffs on imports pushed up the price of manufacturing the most affected exports, like airplanes, by up to 4%.
The costs of the latest tariffs won’t just show up in direct revenue and sales losses, he adds. The problem is that the uncertainty caused by Mr. Trump’s sudden moves will cause companies not to make any investments at all because crucial questions will remain unclear. That would mean new factories won’t get built, and new workers won’t be hired because of the ongoing uncertainty.
“If you have that kind of pullback, that’s bad for economic growth,” Dr. Handley says.
