Will Trump’s tariff hikes start global trade war?
The average tariff rate on all imports could spike seven times higher in 2025 under Trump. The United States has not seen an average tariff rate that high since the Great Depression era, say experts
The US President Donald Trump has officially announced the much-anticipated tariffs on imports from Canada, Mexico and China. While Canada and Mexico have to pay an additional 25 per cent hike from its pockets, China got 10 per cent tariff hike.
Earlier, Trump had threatened China with 60 per cent of tariff, claiming that it this will bring jobs back to America. Hence, it can be assumed that 10 per cent tariff hike on China is the first of them.
Now all this could lead to the beginning of a trade war, which might spread to other countries as well.
Trump’s excuse to put extra tariff against all three countries was “they weren’t doing enough to prevent an influx of ‘drugs and ‘illegal immigrants’ into the US.” While border security and drug trade concerns could be the primary initiators, Trump seems to have other motivations too.
Trump has not wasted anytime to use tariffs as a weapon to pressurise other countries to achieve unrelated geopolitical goals. In January, when Colombia prohibited the US military airplanes carrying Colombian nationals deported from the US to land, Trump used the threat of tariff to force Colombia to reverse course.
Again, he had a couple of days back, warned BRICS nations, which includes India, of tariff hile, if they try to bring their own money into international trade, surpassing US dollars.
The US move will have a big impact not only on these three countries, but on the global trade as well.
According to the experts, the average tariff rate on all imports could spike seven times higher in 2025 under Trump’s tariff hikes. The United States has not seen an average tariff rate that high since 1934, amidst the Great Depression and the Hawley-Smoot tariffs.
At present the volume of trade between the US, Canada, and Mexico is enormous, encompassing a wide range of goods and services. Some of the biggest sectors are automobiles, energy, agriculture, and consumer goods.
One of the hardest hit industries will be the automotive industry, which depends on cross-border trade. A car assembled in Canada, Mexico or the US relies heavily on a supply of parts from throughout North America.
Tariffs will raise costs throughout this supply chain, which could lead to higher prices for consumers and make US-based manufacturers less competitive.
There could also be ripple effects for agriculture. The US exports billions of dollars in corn, soybeans, and meat to Canada and Mexico, while importing avocados and tomatoes from Mexico. Tariffs may provoke retaliatory measures, putting farmers and food suppliers in all three countries at risk.
Trump’s decision to delay and reduce tariffs on oil was somewhat predictable. US imports of Canadian oil have increased steadily over recent decades, meaning tariffs would immediately bite the US consumers at the fuel pump.
Not the first time
This isn’t the first time the world has dealt with Trump’s tariff-heavy approach to trade policy. In 2018, the US levied duties on steel and aluminium. Canada and Mexico are both major exporters of steel to the US. Later, Canada and Mexico imposed retaliatory tariffs. Ultimately, all countries removed tariffs on steel and aluminium in the process of finalising the United States-Mexico-Canada Agreement.
Notably, many of Trump’s trade policies remained in place even after President Joe Biden took charge.
Options for Canada and Mexico
Responses to these tariffs could range from measured diplomacy to aggressive retaliation. Canada and Mexico may target politically sensitive industries such as agriculture or gasoline, where the US could feel the pinch.
This time, Canada and Mexico have also responded with threats of retaliatory tariffs. At the same time, they’ve also made attempts to make Trump happy – such as Canada launching a crackdown on fentanyl trade.
Legally, Canada and Mexico could pursue an action through the United States-Mexico-Canada Agreement’s dispute resolution mechanisms or the World Trade Organization (WTO).
Both venues provide pathways for challenging unfair trade practices. But these practices can be slow-moving, uncertain in their outcomes and are susceptible to being ignored.
A more long-term option for businesses in Canada and Mexico is to diversify their trade relationships to reduce reliance on the US market. However, the facts of geography, and the large base of consumers in the US mean that’s easier said than done.
Global trade war
Arguments for bringing critical industries back to the US, protecting domestic jobs, and reducing reliance on foreign supply chains gained traction after the ascent of China as a geopolitical and geo-economic rival.
These arguments picked up steam during the Covid-19 pandemic and have increasingly been turned into actual policy.
The potential for a broader trade war looms large. Trump’s short-term goal may be to leverage tariffs as a tool to secure concessions from other jurisdictions.
Trump’s threats against Denmark – in his quest to obtain control over Greenland – are a prime example. The European Union (EU), a far more potent economic player, has pledgeed its support for Denmark.
A North American trade war – foreshadowed by the Canadian and Mexican governments – might then only be harbinger of things to come: significant economic harm, the erosion of trust among trading partners, and increased volatility in global markets.
