THE GREAT TRADE WAR HAS JUST BEGUN

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Following a previous blog post, "TARIFF IS THE MOST BEAUTIFUL WORD IN THE DICTIONARY", in which I examined the case for and against tariffs, and following another blog post, TRUMP HAS JUST DECLARED A 'FAIR WAR' ON THE REST OF THE WORLD, arguing that Trump's tariffs aren't designed to be reciprocal tariffs and therefore can't solve the problem of unreciprocated tariffs, this blog post will argue that his tariffs will fail in its mission mainly because it's very unclear what Trump's mission is.

In writing this blog post, I'm trying to understand Trump's tariffs from a MAGA standpoint. I'm not arguing, as a Brit, that his tariffs are bad for Britain and other countries, which indeed they are. His tariffs will not make America great again, notwithstanding the view that America was never not great to be great again. I'm arguing that Trump's tariffs will not work for America.

I'm aware that America has a history of tariffs. Most countries have such a history. Tariffs were first levied in Ancient Greece. But I argue that tariffs generally haven't got a happy history. Japan and South Korea are probably the exceptions, but America isn't in the same position as these two countries were in imposing tariffs to protect their domestic industries from foreign competition. Both countries succeeded to the extent that Japan, though it has to be said not South Korea, has significantly reduced its tariffs since its companies can now successfully compete on the world stage after its post-war reconstruction.

Back to Trump. It's not at all clear what his goals are with his imposition of tariffs on almost every country in the world. Trump at various times times has justified his tariffs as a trade policy to combat alleged unfair international trading, as a fiscal policy to raise monies to finance tax cuts and reduce America's national debt, as an industrial policy to onshore manufacturing which has moved offshore, and as a foreign policy to extract concessions from other governments. There's no way his tariffs can achieve these competing and even conflicting policy goals.

Before looking at these four policy goals, it needs to be stated that on the presidential election campaign, Trump singled out certain countries/regions, notably Canada, Mexico, China and Europe, as targets for his tariffs. It now transpires that every country is going to be slapped with tariffs even islands only populated by penguins.

It also needs to be stated that Trump in his presidential election campaign promised to tackle the cost of living crisis on day one of his presidency. Tariffs are inflationary so it seems that promise of sorting out the cost of living crisis has been ditched, probably even before he entered the White House. In his campaign Trump never told voters this, and he certainly never told voters in any meaningful detail that tariffs will hurt Americans at least in the short term. Responsible and serious politicians would do this.

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Back to policy wonkery and Trump's competing and conflicting policy goals of his tariffs plan. First, as a trade policy, he imposed tariffs because of alleged unfair trading practices from other countries. But his tariffs aren't reciprocal tariffs and have been imposed on nearly every country in the world. Trump's tariffs, as designed and levied, will not address the problem of unfair trading. It also has to be mentioned that the World Trade Organisation (WTO), of which America is a member, has a mechanism to resolve trade disputes. In the past America has done very well using the WTO to resolves its trade disputes against, say China and the European Union, in its favour. Trump decided not to use the WTO but to act unilaterally. Trump doesn't like multilateral negotiations under the auspices of international organisations. Though priding himself on his negotiation skills, his transactional and unilateral approach to making deals isn't well suited on the world stage of sovereign states. This is one key area where running a government is very different to running a business. (It's no surprise that Trump's two recent attempts at making a peace deal in Ukraine and Gaza have largely failed.)

Second, as a fiscal policy, tariffs on imports to America will at first bring in money to the US Treasury's coffers. The Trump administration may be able to finance tax cuts (I suspect only to the very rich at first) and it may be even be in a position to reduce its debt (and I suspect Trump doesn't care about debt whether it's his own or his country's debt; his businesses have gone bankrupt at least four times). Though Trump is boasting how much money is pouring into the US Treasury's coffers as a result of monies raised from tariffs, it is very reasonable to assume that the flow of these monies will dwindle as American consumers stop buying the more expensive tariffed imports and switch to buying non-tariffed American-made products wherever possible.

Third, as an industrial policy, Trump claims that his tariffs will be a massive incentive for American companies to onshore their manufacturing and for non-American companies to set up shop in America because their manufactured goods will be then exempt from tariffs. Tariffs, as an industrial policy, has an intuitive appeal especially to those who lost out in the globalisation game. This explains why, for example, the United Auto Workers labour union (we say trade union here), representing American car workers, is in favour of Trump's tariffs. Blue-collar workers in Western countries have been one of the big losers with globalisation as manufacturing was offshored because of lower labour costs (and therefore higher profits) elsewhere.

Though this argument may hold intuitive appeal, it's a simplistic and forlorn argument. It will take years for manufacturing companies, for example, to build and equip factories, to recruit workers to run the factories, and to arrange its supply and distribution chains. Also it's very likely that such factories will still need tariffed imports to build and run its factories. And even if all this was done, the crux of the problem still remains that American manufactured products won't be able to compete against manufactured products made in countries with lower labour costs.

Fourth, as a foreign policy, Trump's tariffs especially as they've been applied to imports from nearly every country in the world can be seen as a foreign policy tool. I think Trump expects he can extract concessions from many countries which he's slapped tariffs on in return for a relaxation of such tariffs. He's already got such concessions from Israel's Netanyahu. It's reported that the British government is prepared to ditch or at least reduce its digital services tax levied on many American big tech companies operating here in return for no tariffs to be imposed on British imports to America. (I wonder what role Elon Musk played in all this, obviously no conflict of interest there!)

Trump is boasting about how many countries' governments want to negotiate with him about his tariffs. Most governments have no effective choice because if they retaliate with tariffs they'll lose more than they gain. So we have this unseemly queue of governments wanting to give gifts to President Trump. His presidency is very much an imperial presidency. Possibly only China and the European Union can stand up to Trump's America. Others with smaller economies, and therefore less economic and financial power, will probably have to kiss Trump's ass otherwise they will lose access to America's markets. Trump is behaving like a schoolyard bully.

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Trump's America is proving to be a very unreliable ally, and I'm making a big distinction between the Trump administration and Americans as a people. It's quite clear that any deal he strikes isn't worth the paper it's written on. Many countries are now facing a strategic choice. Does, for example, Australia side with its traditional defence ally, America, or its biggest trading partner, China? Do Canada and Mexico give up on America, its biggest trading partner, and look for friends and markets elsewhere? Does Britain side with America and protect its so-called but nebulous special relationship, or its biggest trading partner, the European Union? Will Japan and South Korea look to Asia and maybe Europe rather than America to do business with? I suspect countries friendly to America are going to pivot away from America. Though America is a big game in town, it's not the only game in town! And I don't think you can blame these countries because Trump's America has deliberately pivoted away from its allies for some bizarre and stupid reason!

And this leads me to China. China has called Trump's bluff. The last time I checked, Trump is imposing an eye-watering 125 per cent tariff on imported Chinese goods, and China has imposed an 84 per cent tariff on imported American goods. No doubt these figures will change perhaps tomorrow or the next day. But the great trade war has begun. Generally speaking, both these countries have been big winners in the globalisation game. Both governments have allowed access into each other's markets. Cheap Chinese imports kept inflation down in America (and other Western countries), and China lifted millions of Chinese out of poverty because of its economic growth in producing goods that the West consumed (though I'm sure Hong Kongers, Tibetans and Uyghurs don't see it that way).

There's an intergovernmental organisation called BRICS, comprising ten countries including Brazil, Russia, India, China and South Africa (hence its acronym). It wouldn't surprise me if BRICS, representing emerging markets in the world, given Trump's tariffs on China, starts to rival more Western and American-backed international organisations. Is this what Trump wants, China, India and Russia working more closely together and possibly against American interests? The man is a fool!

Trump has played very footloose with tariffs. Tariffs affect jobs, prices, stock markets, investments, pensions, interest rates, savings and exchange rates, things that affect the livelihoods of ordinary Americans to pay the rent and to put food on the table.

Tariffs are inflationary and recessionary. And trade wars are often precursors to real wars.

Yesterday Trump backtracked on, or rather paused, his tariff plan after a week of stock market chaos. That's stable presidency for you; surely Trump isn't a Panican?! Though tariffs on car, aluminium and steel imports remain, the baseline 10 per cent is to be applied on all imports except for Chinese imports. I'm sure those penguins will be celebrating! Trump has blinked but I guess that's the art of the deal! But it's now America versus China, who's your money on?

I suspect one key reason for Trump's backtracking is what was happening to US Treasury bonds (or bills as Americans like to call them), these are effectively IOUs. Investors were selling and not buying US Treasury bonds, and it's rumoured that China, a key player in the bonds markets, was partly behind this. Now I realise bonds won't excite people, but they are a key way in which governments can borrow money. Government bonds are normally seen as a very safe investment especially when there's financial turmoil; governments or at least Western governments don't go bust so they'll repay their loans with interest over time.

But if investors sell or don't buy buy US Treasury bonds then America is 'forced' to increase the yields on its bonds, thus increasing the interest charges on its debt. America's debt is astronomical. Its debt becomes a big problem when investors don't want to lend America money. Up to now investors have largely been happy to lend money to America. This is America's Achilles heel!

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