Donald Trump tariffs: Opening salvos fired in trade war - what comes next? - Voice of Asia

Just a day prior, Donald Trump was threatening to launch a multi-front trade war against Canada, Mexico, and China, which would plunge the global economy into uncharted territory. Yet, a mere twenty-four hours later, the situation seems to have shifted considerably.

Currently, tariffs—or rather, taxes—aimed at America's closest neighbors and trading partners have been put on hold for 30 days. However, the measure imposing a 10% tariff on all goods imported from China has taken effect, and Beijing has responded with corresponding countermeasures. What potential economic consequences might these initial actions bring, and could they escalate into a broader trade war?

China has already been affected by substantial tariffs imposed by the United States, a situation that began during Trump's first presidential term. However, the White House's comprehensive imposition of new tariffs on all goods imported from China—from toys to cell phones to clothing—is unprecedented in its scope and impact. Beijing's promised retaliatory tariffs—including new levies on oil, agricultural machinery, and some automobiles from the United States—are far smaller in scope than those of the U.S. Yet, this retaliatory action has placed us in a tit-for-tat situation where countries affected by tariffs feel they have no choice but to strike back to show their own citizens that they will not be pushed around by foreign powers.

This is precisely the definition of a trade war. Economic historians warn that trade wars often generate their own momentum and can quickly spiral out of control. Trump has cited various reasons for imposing tariffs, from increasing tax revenue to boosting American manufacturing and rebalancing trade. But what has transpired in recent days confirms that the new president views tariffs as a potent means of compelling other countries to act according to his wishes. For example, when Colombia initially refused to accept U.S. deportation flights of its nationals, Trump threatened massive punitive tariffs on Colombia, a threat he rescinded after Bogotá capitulated.

The White House may also view the reactions from Mexico and Canada yesterday as evidence that the threat of tariffs works. He had threatened to trample his own North American Free Trade Agreement unless those two countries tightened their border controls. Though the additional measures these two countries actually pledged yesterday on border security are debatable relative to what they were already doing. However, the problem with the White House's use of tariff threats in this way is that if other countries do not give way—or a deal fails to be reached—Trump may well feel he has no choice but to follow through, or risk losing all credibility. And the targeted countries may also feel they must implement their prepared countermeasures, even if they would prefer not to.

This high-stakes dynamic—in which things could spiral out of control in an atmosphere of mistrust and political pressure—is precisely what makes many analysts and economists uneasy about the unfolding situation with Mexico and Canada this week. Another reason many economists worry about Trump's intimidatory tariff diplomacy is the chilling effect it could have on business investment and confidence. U.S. auto companies have deeply integrated industrial bases in the United States, Mexico, and Canada. Auto parts cross borders multiple times in the vehicle assembly process. A 25% tariff on each crossing would be devastating for these businesses. These North American tariffs are currently suspended, but it is hard to see auto industry executives in the U.S. or Canada making further investments in these cross-border supply chains anytime soon—perhaps for many years to come.

This will negatively affect their productivity, as well as the wages of employees in all three countries. The view of many economists is that having cross-border supply chains makes these companies more productive than they would otherwise be, and that this raises the wages of American workers relative to manufacturing only in the United States. These effects apply on a global scale. Given Trump's tariff threats to the European Union, how many U.S. companies are likely to proceed with planned investments in Europe—and vice versa?

During Trump's first presidential term, countries such as Vietnam and Malaysia indirectly benefited from U.S. tariffs on China, as multinational corporations shifted manufacturing from China to those countries to avoid the tariffs and continue exporting to the United States. But what if Trump now threatens to impose tariffs on them as well? Trump's tariff threats are injecting huge uncertainty into the global economy—and may already be doing damage even if the threats do not always translate into actual new taxes.