Tariffs 101: Understanding Trump's Trade War
Kenneth Rapoza, Senior Contributor, Forbes
Jun 7, 2019
Three years into the Trump presidency and he is the first president probably since Jimmy Carter not to orchestrate a foreign country's government collapsing on itself. Obama gave us Libya and almost Syria. Bush 43 gave us Iraq. Clinton gave us the break up of Yugoslavia. Bush 41 gave us Panama.
But Trump is the first president going back to the 1930s to launch a multi-pronged trade war against America's A-list trading partners. The U.S. hasn't seen this kind of rough-and-tumble trade action since the Great Depression.
Back in the 1930s, the Smoot-Hawley Tariff Act sought to protect American manufacturing from foreign competitors. Some say it exacerbated the Great Depression.
We are not heading for a recession anytime soon, but with Trump, there is always a concern that 25% will be the price for trading with the world's largest national consumer market. And that price could force markets into recession territory.
"Most countries around the world remain woefully unprepared for this change in direction of U.S. trade policy. They are in complete denial," says Jan Dehn, head of research for Ashmore Group, a $75 billion emerging markets asset manager. "They are hugely exposed to the U.S. economic, financial and legal systems. It is precisely this dependence which confers upon the Trump Administration a power...to inflict significant damage on other countries," he says, but only "in the short run."
Dehn thinks that one long-term consequences is the forming of new economic alliances that ultimately reduce dependency on the dollar, American consumers and corporations.
So far, Trump's one-year old trade war hasn't had much impact on the U.S. economy. First quarter earnings showed no evidence of a corporate earnings recession, despite some warnings that prices could rise soon due to existing tariffs.
Now those tariffs are much higher. U.S. companies are seriously looking to remap their supply chain out of China. Doing just that is one of the main aims of Trump's China policy.
"I am looking for suppliers elsewhere now, outside of China," says Alex Camera, CEO of a Seattle-based audio equipment manufacturer called Audio Control.
Expanding tariffs against China were put on hold in March, but finally rose last month to 25% on $250 worth of Chinese imports. Tariffs on an additional $300 billion of Chinese imports are in the works.
For now, the market expects that Trump and Xi Jinping will have a "come-to-Jesus" moment at the G20 Summit in Osaka, Japan later this month and shelve the idea of imposing tariffs on everything China ships to the U.S.