The US started a trade war it wants to lose
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As Donald Trump promised before the presidential election, he is imposing tariffs on goods from Canada, Mexico, China and the EU. This is a trade war that the US will lose.
Why a trade war?
Putting tariffs on foreign goods is actually an old phenomenon. Donald Trump believes that anyone who sells more goods to the US than the US sells to them (trade deficit) must be subject to sanctions. There can be many different reasons why one country has a trade surplus with another. For example, it could be a question of raw materials such as oil and gas. It can also be because the country’s industry is uncompetitive.
Donald Trump believes that if tariffs are imposed on foreign goods, it will cause businesses that are outside the US borders to move to the US to avoid taxes. Trump also conveys increased tariffs to his voters as if it is the shipper who pays for the tariffs. The reality is that it’s the buyer, in this case US consumers, who pay. The price of increased tariffs will lead to more expensive goods where they are sold. The volume of goods sold is likely to go down for that reason. So the question is, will companies move all or part of their business to the US in order to avoid tariffs? Here, it is the calculations of the individual company that apply.
How does a company calculate whether to relocate?
There are many questions as to whether it is profitable to move due to tariffs. I will reproduce some of them:
- How much does it cost to move production?
- How long does it take to move production?
- Is it realistic to believe that we will get all the necessary expertise in the move? If not, will we be able to get similar expertise where we are moving?
- If we move production, will it lead to tariffs in other markets for these goods?
- How long will this tariff last?
- What does a relocation entail in terms of other costs (labor costs, taxes, etc.)?
These are all things that each individual company must consider. For example, a company producing goods for a global market may find it worthwhile to continue to produce the goods outside the US due to tariffs in response to the US trade war.
Response to US tariffs
Canada, Mexico, China and the EU respond to US tariffs. The answer is that US goods will become more expensive in these markets. Canada may also respond by stopping exports of oil and gas to the US. For example, Canada is in talks with the EU about LNG (liquefied natural gas). The EU will thus replace the US market. The USA is left as the big loser.
Closer economic cooperation between Canada, the EU and China is also likely. This could lead to a decline in the USA’s role as the world’s economic powerhouse. “Make USA grate again” could quickly become “Make USA weak again”
Sources:
https://apnews.com/article/trump-tariffs-canada-mexico-china-643086a6dc7ff716d876b3c83e3255b0