The US economy must have no challengers, says ex-president Donald Trump. And certainly not China. The only problem is his MAGA (Make America Great Again) strategy would involve slapping tariffs on virtually every product entering the US and potentially also destroy the global trading system.
India isn’t a great trading nation but we’d certainly be hit even if only part of his plans became reality. (Trump called India “a very big abuser of tariffs” just before Prime Minister Modi left for his latest US visit).
For starters, Trump wants to slap 60 per cent duties on nearly all Chinese goods from computers (exports of over $200 billion), semiconductor devices ($29 billion) or non-knit women’s suits ($29 billion). He scoffs when economists tell him such moves would send prices soaring.
“When you take a hard look at the data, they really aren’t worth it for jobs and they raise costs for consumers,” says Biden Administration economist Kim Clausing. But Trump insists these moves will return jobs to the US and turn it into a thriving, full-employment nation.
Other friendlier trading partners might get off lighter with 10-20 per cent tariffs. Pushing tariffs to levels unseen since the 1930s, according to the Trump School of Economics, would bring in cash, make it possible to slash taxes and, thus, achieve the US extreme right’s dreams.
For 200 years, Britain was funded by tariffs, the Financial Times notes, without endorsing the idea. Income and other personal taxes only began supplying significant revenue at the start of the 20th century. World War I sent UK taxes soaring from 6 per cent in 1914 to 30 per cent in 1918. In the US, top tax rates for the very rich were even higher post-war.
Many tax hardliners argue Nafta (North American Free Trade Area), which allows duty-free imports from Canada and Mexico, should also be torn up which would be devastating to both economies.
More importantly, Trump insists to voters in heartland manufacturing states who have lost employment due to imports, such moves would return jobs to the US.
Trump’s arguments have found fertile ground among unions with traditional Democratic allies like the Teamsters refusing to endorse Kamala Harris. Even the Biden administration blames China for the loss of manufacturing jobs. Treasury Secretary Janet Yellen raised temperatures in April by saying two million US manufacturing jobs had been lost since 2001 when China joined the World Trade Organization (WTO).
Bypassing WTO rules
China is hitting back at the US by taking its case to the WTO. But in recent years, countries like the US have been paying little heed to WTO rules.
Trump’s tariff plans are the equivalent of showing two fingers to the WTO — and blowing the entire global trading system to bits.
There are some harbingers of what might happen if Trump raised tariffs through the roof. We just have to look back to the US 1929 Smoot-Hawley Act that hiked tariffs to 20 per cent on 20,000 items, the aim being to protect US farmers during the Great Depression. Inevitably, other nations hit back and US exports crashed by two-thirds between 1929 and 1932. Imports also cratered.
But, most importantly, unemployment doubled from 8 per cent in 1929 to 16 per cent in 1931, aggravated by the Act’s impact. It should be noted the Democrats are also in favour of tariffs, just more targeted, careful and strategic ones aimed at industries trading unfairly.
In fact, during the last Trump administration, the job losses from trade retaliation were higher than the job gains from tariff protection, economists say. Trump’s latest plan would raise costs for an average family by at least $1,700 a year, they say. Harris argues the effect of his tariffs could be as much as $4,000 per household.
But Trump is intent on doubling down. In the US and right-wingers in Europe are desperately looking for ways to cut taxes while boosting jobs, while maintaining social services and standards of living.
Ex-British prime minister Liz Truss is making videos claiming her disastrous tax-cutting budget was the right move at the right time and would have changed the direction of the country’s economy if she hadn’t been summarily turfed from office.
But it’s the battle between the US and China that will determine the direction of the global economy in the coming years. India has discovered it’s tough to keep the economy chugging along without Chinese products. If Trump becomes president and tries to slap huge tariffs on Chinese products he may make the same discovery.