Donald J Trump won the United States Presidential elections with record-breaking margins. He will take oath as the 47th President of the United States after Biden’s term completion in January 2025. Before joining the office, Trump announced to levy tariffs on goods entering the United States.
In his first term of presidency, he imposed 10% – 25% tariffs on Chinese goods. China retaliated similarly to counter. However, both move ahead in a trade war to ban each other’s companies.
Why is Trump planning to levy tariffs on imports?
During the presidential campaign, Trump made many promises to the working class, including maintaining the tax cuts from the Tax Cuts and Jobs Act (TCJA). This law temporarily relieved the middle class but primarily benefited big companies and the wealthy. As these benefits expire by the end of 2025, Trump aims to extend them.
Trump also plans more tax cuts, targeting around 93 million Americans by eliminating income tax on tips, overtime pay, and Social Security benefits. He proposes special exemptions for firefighters, police officers, military personnel, and veterans and even promises to eliminate federal income tax entirely.
However, these significant tax cuts could reduce government revenue, increasing the deficit. Trump’s solution to the situation is to institute tariffs!
Who can be impacted by his decision on tariffs?
Figure 1: United States Top 10 Trading Partners in 2023
Trump explicitly named Canada, Mexico, and China the three countries most affected by the upcoming tariffs. He said he would impose 25% tariffs on Canada and Mexico, up to 60% tariffs on China and 10%- 20% across the board as one of his first executive orders. The reason is evident from the table above, as these countries are the top three trade partners of the United States.
According to the government, foreign companies pay tariffs, but ultimately, tariff cost is borne by domestic importers, leading to increased product prices. Consequently, domestic companies pass this financial burden onto consumers. In reality, Americans end up paying higher prices due to these tariffs.
The Trump administration endorses his first term’s tariffs, asserting that import taxes significantly benefit American workers and businesses.
Why are tariffs imposed?
When a country spends more on imports than it earns from exports, it faces a challenging situation. To correct this trade imbalance, the government imposes tariffs on imports. These tariffs increase the prices of imported goods, encouraging domestic buyers to shift towards local and more affordable products.
How do tariffs impact international business?
Historically, the International Monetary Fund mentioned that the US-China trade war drags the global growth rate. Business investments pause globally because of the uncertainty in the top two economies. In 2019, the international crisis lender said that announced tariffs would reduce global economic output by 0.8%, equating to a loss of approximately $700 billion—comparable to the entire economy of Switzerland vanishing.
How will the impacted countries retaliate against the tariffs?
In 2019, China reciprocated the US with a similar percentage of tariffs on goods and services. Similarly, Mexican President Claudia Sheinbaum indicates following a tit-for-tat strategy to retaliate if Trump imposes tariffs on Mexico. Canada is also considering retaliation against US tariffs. In 2018, Canada responded to US tariffs on Canadian steel and aluminium with billions in new duties on American products.
What do experts think about the president-elect’s tariff plans?
Swati Dhingra, an external member of the Bank’s Monetary Policy Committee, stated that if Trump imposes the threatened 60% tariff on Chinese goods sold in the U.S., Chinese exporters may reduce their prices in other markets to maintain their current trade volumes.
According to the experts, Americans can expect a 1.4% to 5.1% increase in inflation due to tariffs because companies will pass on it to the customers.
Wayne Winegarden, Senior Fellow in Economics at the right-leaning Pacific Research Institute, indicated that additional tariffs will affect the prices of foreign goods and those produced domestically.
“We import steel used in car manufacturing so that car prices will rise,” Winegarden explained. “You can expect overall prices to increase.”
Winegarden characterized the tariffs as a broad-based consumption tax detrimental to the economy.
What US imports are from Mexico, Canada, and China?
Figure 2: US Imports from Mexico, Canada and China in 2023
The United States’ top three trade partners are Mexico, Canada and China. China is a significant source of electronics and machinery, while the US exports agricultural products and aerospace goods. Trade with Canada is heavily centred around energy, automotive, and machinery sectors, benefiting from geographic proximity and integrated supply chains. Under the USMCA agreement, Mexico facilitates a significant exchange of vehicles, machinery, and agricultural products.
Following the imposition of tariffs, Electronics and tech products, such as smartphones and laptops, particularly those from China, will likely see price increases. Automobiles and auto parts from overseas manufacturers are expected to rise in cost, affecting both new and used car markets. Household appliances, including refrigerators and washing machines, may also become more costly due to imported steel and aluminium tariffs. Additionally, clothing and footwear from tariff-affected countries and certain imported foods like fruits, vegetables, and seafood are projected to experience price hikes. These increases reflect the broader economic impact of tariffs on the supply chain and retail markets.
How do tariffs impact inflation in the country?
Imposing tariffs without any preparation on imported goods will invite inflation in the economy. Companies increase the prices of the product to adjust the tariff hike. Eventually, people of the country bear the burden. Central Bank, under pressure, has to cut interest rates as a consequence of the high inflation rate caused by the Trade War.