The astonishing re-election of Donald Trump as President of the United States of America is bringing world politics into a situation of unprecedented uncertainty, at least since the end of the Second World War. The same for economics and trade. Announcements and decisions on tariffs overlap in a chaotic way and it is difficult to understand the reasoning behind.

Canada, Mexico, Europe, traditionally allies countries and privileged trading partners of Washington, became targets, sometimes with specious motivations (such as accusation of drug smuggling), other times complaining of generic “bad” behaviour (presumably referring to the trade imbalance with the European countries). At first it was assumed that the threats of tariffs on imports were used as a negotiating club, with the aim of imposing his own conditions on international trade relations. Hyperbolic announcements would have been a bargaining tool to put the “adversary” countries in a state of inferiority, such as to induce them to accept unfavourable conditions, to avoid the announced tariffs. Now, however, it seems that the US President is sincerely convinced that customs duties are a valid tool to revitalize national production and rebuild the US industry.
Import duties are taxes on imported goods, so their immediate effect is to constitute an income for the State that imposes them. The indirect effect is to constitute a compensatory tax (“negative tax”) in favour of domestic producers, not subject to duties. Generally, however, the purpose of duties is not limited to increasing tax revenues, but rather to the intent to implement a specific economic policy, which is what Trump implies. Economic theory, historically[1], has identified the following functions of duties:

– Reducing the level of imports in order to cut the balance of payments deficits;

– Counteract dumping practices, i.e. goods produced in third countries at lower costs;

– Take retaliatory action, based on the principle of reciprocity, against trade-restrictive measures adopted by other countries;

– Protect new industrial sectors, until they are developed enough to compete with the most developed industries of other countries;

– Protect “key” sectors, also in terms of security.

According to the Trump administration, the main reason for the use of duties, among other things, is the will to adjust the US trade balance, counteracting the “unfair” import of goods by almost everyone, from neighbouring Canada and Mexico to Europe and China, etc. In this way, the intention is to facilitate domestic industry, protecting it from unfair competition (lower prices) from abroad and encouraging its development, with positive consequences on production, employment and growth.
From the economic analysis point of view, nevertheless, tariffs are not considered a suitable instrument to rebalance a trade deficit. Commercial imbalances depend on different macroeconomic variables. As far as the United States is concerned, exports flowing there from the rest of the world derive from the overcapacity of China, Europe and some countries in the Global South, whose domestic consumption does not absorb all production. US domestic demand should therefore be satisfied by domestic production: assuming that this happens, it will require a long period of adaptation of production processes and in any case there is no certainty at all that it can be achieved, especially in some sectors. In fact, the empirical evidence is in the sense that high tariffs harm both those who suffer them and those who impose them, to the extent that they inevitably end up being passed on to consumers who suffer an increase in prices. In part, this increase in prices can redirect demand towards local products, at least in theory. In reality, it is very difficult to steer demand so selectively, especially in the current times where the production processes are divided, for the majority of manufactured goods, into multiple steps in which tens or hundreds (if not thousands) of components from many different countries are transformed or assembled. In fact, the consequence of tariffs, except in special sectors, is in most cases generalized inflation.
Coming to Europe, it is true that the European Union’s trade surplus with the USA is considerable in the goods market, the order is of around 157 billion euros in 2023. The tariffs announced by Trump will certainly damage European exports, even more so if they set European countries against each other to the point of calling into question the exclusive competence of the European Commission in this matter: this could happen by imposing duties on Europe on certain products and not on others, for example Germany would be heavily affected by tariffs on cars, while France or Italy would be affected by duties on wine, etc. It is surprising, however, that the European institutions and the Member States themselves have not yet pointed out that in the services sector, unlike goods, the ratios are reversed: it is the EU that is in trade deficit, for about 109 billion (again, 2023 data)[2].
It is mainly digital services that the US exports to Europe through its large corporations, in some cases we would say “impose”, given the aggressive and semi-monopolistic trade policies used in some cases. So far, the European authorities have adopted a soft policy, avoiding immediate retaliation in the hope of establishing a dialogue that leads to a reduction of the American threat. In other situations, this would be considered a wise policy, as trade wars are not convenient for anyone. However, it is unlikely that this attitude will work with the Trump administration, on the contrary it’s likely that it will be taken as confirmation of weakness. It would perhaps have been appropriate to immediately adopt retaliatory measures, “reciprocal” counter-duties on some goods that have already been studied by the Commission services. Furthermore, it would perhaps be appropriate to fear strong duties on services exported by the big five GAFAM[3] and by the companies of Elon Musk’s empire (Tesla, SpaceX), thus hitting the lively interests of some of the large financiers and active supporters of Trumpism. In any case, it is certain that Trump’s policies are having the effect of breaking the mechanisms of regulation of international trade laboriously built in the post-war period, in analogy with the disavowal of multilateralism in international relations, to impose his “power politics” also in economic relations. In the meantime, the first effect that the duties, announced or applied, are having is to generate uncertainty in global markets. Therefore, in the general growth prospects. We will see who will benefit from it.

Note

[1] J. K. Galbraith, Economics in perspective, 1987.
[2] Eurostat.
[3] Google, Apple, Facebook, Amazon, Microsoft.

Photo: Trump’s tariffs