Whether it is a bargaining trick or not, some of the major transaction-oriented deals by US President Donald Trump - and his tantrums - are not going to have the desired effect on the US economy; in fact, they may well severely damage it, forcing an about-turn.
Let’s start with tariffs. The world’s economic gears are so enmeshed and move together in synchrony that if someone throws a spanner into the works in just one area, it can have a chain effect on quite nearly the entire economy.
Reuters reported that new 25 percent tariffs on imports from Mexico and Canada would have taken effect on Tuesday, along with a doubling of duties on Chinese goods to 20 percent, sparking trade wars that could slam economic growth and lift prices for Americans still smarting from years of high inflation.
The tariff actions, which look set to upend nearly US$2.2 trillion in annual trade, went live after Trump declared that the top three US trading partners failed to do enough to stem the flow of fentanyl and its precursor chemicals into the US, Reuters added. They referred to Mexico, Canada, and China.
Delaying some tariffs
But there are already signs of a pullback when Trump subsequently announced a delay yesterday, imposing tariffs on Canada and Mexico because of the impact of the higher costs on the US car industry itself.
Not only this, his becoming an unreliable ally of Europe, Nato, and Ukraine, well-demonstrated by him and his vice president publicly flaying the Ukraine president recently, showed the world unequivocally that the US could no longer be depended on. This will have repercussions.
One of the US’ great strengths is the openness of its economy with little or no tariffs on most products. That allowed it to rely on low cost manufacturers elsewhere to provide basic consumables and inputs, permitting it to move higher to more value-added products.
This helped considerably in the development of the US as a centre for innovation and excellence in not only high-end manufacturing but the services industries. The easy recognition and import of expertise and capital from all over the world fuelled it.
If Trump does not know this, he knows nothing. I am inclined to believe, like most others, that these are bargaining chips, as part of Trump’s transactional games, to extract the most for the US and make America great again.
But it is wrought with serious problems. Trump’s policies in terms of tariffs, unreliability as an ally, and immigration, threaten to upset the applecart with consequences that could be quite different from what he expects for the US.
Tariffs’ unintended consequences
The US uses lots of imported intermediate goods for its manufacturing. He has doubled tariffs on Chinese goods to 20 percent. Below is an excerpt of a conversation Financial Times columnist Martin Wolf had with Richard Baldwin, Professor of International Economics, IMD.
Baldwin explains how a tariff on Chinese goods will be bad. You can see the transcript here.
“So let me just give you an example. He put (a) 10 percent (now 20 percent) tariff on all Chinese inputs. …about 40 percent of China exports to the United States are intermediate goods, which are used by American-based companies to produce other stuff. So now what he’s done is made those inputs 10 percent (20 percent) more expensive if you make it in the US.
“So this idea that putting tariffs on China will move industry to the United States might have worked in the old world, where the United States was making cars almost entirely in the United States. But now, American cars are made with parts and components from all over the place, including China… and so he’s just relatively ill-informed.”
Yes, ill-informed he is, if not, he is just laying a bargaining chip on the table, Trump style. Question is what will he do if his bet is met, as it is likely to be, by the affected countries? Raise it? By how much?
If he does, he not only kills domestic industry but is likely to spark an unprecedented rise in prices in the US - inflation will skyrocket like it has not in recent years, and that will mean the collapse of his administration, in all probability before his term is up.
The only way out for him is to suggest some compromise in between, such as greater measures to stop the influx of the dangerous drug fentanyl into the US through uncontrolled imports in return for no tariffs. And then claim victory.
A dangerous diplomacy
But it’s not the kind of diplomacy the world is used to - extremely unpredictable, irrational, and dangerous while rubbing everyone the wrong way and leading them to consider whether the US will continue to be a responsible world leader.
After that spat with Ukraine’s president Volodymyr Zelenskyy, Europe has turned highly suspicious of the US as a reliable ally.
Zelenskyy was trying to tell Trump that the Russian problem was everyone’s problem. But Trump would have none of it, demanding peace without security guarantees, as well as blanket rights to minerals in Ukraine.
With that kind of stance, Europe is doing some serious rethinking. The European Union is thinking of setting up a defence fund, as is Germany, the major power there.
Ahead of a deal on a coalition post the recent German elections, the Germans are already considering setting up their own two funds - a defence fund of €400 billion and an infrastructure fund of €400-500 million, Reuters reported.
In the short term, they may buy arms from the US, but they are likely to invest in their own arms manufacturing industry to boost their economies and drastically reduce future reliance on US arms.
Some, like Germany, may even go nuclear while nuclear powers UK and France will increase their capability and capacity. That will have deleterious effects on the US arms manufacturing machine, a major growth centre for the US.
Gambling with US’ future
The crackdown on immigration, making migrants the bogeyman for US crime, and the stamping out of gay and lesbian rights will cause people and enterprises to have second thoughts about moving to the US.
This is from those who have contributed immensely to the US’ intellectual and entrepreneurial capital in the past.
Trump’s risky endeavours may give him some gains now, materially little, but more in terms of public perception. But in the future, the odds are heavily stacked against him, unless he rolls back some highly questionable moves. How do you do that without losing face?
It will be no exaggeration to say that he is gambling with the US’ future as a responsible power and a world economic, strategic, and political leader. You need more than brute force for that - you need to earn the respect of others. - Mkini
P GUNASEGARAM says power in the hands of the small in mind, action and outlook is dangerous, possibly fatal.
The views expressed here are those of the author/contributor and do not necessarily represent the views of MMKtT.
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