US Tariff Trade War Self-Defeating
There is a certain irony that this administration has chosen to use punitive tariffs to move against perceived unfair trade practices by America’s main trading partners, whether it be China, Mexico, Canada, or the EU nations. Tariffs are simply taxes, and, when imposed at high enough levels and on enough goods that matter, tariffs tend to raise prices for domestic consumers, either because importers will pass on those tariffs to American consumers or because domestic producers will face less price competition from the foreign products subject to such tariffs and thus be emboldened to raise their own prices to American consumers. Moreover, if other nations subject to such tariffs then retaliate in a tit-for-tat manner with their own tariffs on American goods, that will then hinder United States export sales to those other nations.
As Americans then face both higher prices for the things they want to buy from other nations and lower demand for American goods they want to sell to other nations, that will strike twin blows against the stimulant effect of the recent federal tax cuts pushed through by this administration. Tariffs can thus be a very blunt instrument to apply against the trade practices of other nations and may end up doing significant injury to many different sectors of the American economy. American users of foreign-made inputs, such as steel and aluminum, subject to these tariffs may find their end products could be priced out of the market, and American exporters of US products, like soybeans and pork, subject to counter tariffs may lose markets and market share as foreign buyers switch their sources away from the United States.
Given the harsh rhetoric already exchanged among trade officials, national leaders will need to be very careful not to stumble into an irreversible cycle of tariffs and counter-tariffs that would seriously damage the global trading system, as happened with the 1930 Smoot-Hawley tariff increases. If the US and its trading partners cannot resolve their differences through negotiation, the continued spread and escalation of tariffs and the attendant business uncertainty could severely dampen the world economy.
Nelson Dong is a a senior partner at the international law firm Dorsey & Whitney, head of its national security group and co-head of its Asia group. He is a member of the board of directors of the National Committee on US-China Relations and of the Washington State China Relations Council.
Soybean Prices are a Proxy for How the Trade War is Going