Trump’s Trade War 2.0
Tactical Brilliance or Global Blunder?
Introduction:
Donald Trump wasted no time in threatening to reignite trade wars. Within two weeks of returning to office, the 45th and 47th President of the USA threatened tariffs on nearly every other major economic power. This included the BRICS countries, Canada, Mexico, and members of the EU. Canada and the EU are key allies of the USA. But would these tariffs actually help the USA - or hurt it?
What are tariffs?
Tariffs are a tax usually imposed on goods being imported into a company. Strictly speaking, it only adds costs for importers, but it does incentivize companies to manufacture goods locally rather than import them.
The Tariffs that Trump threatened:
Mexico and Canada:
Mexico and Canada, which were among the largest trading partners of the USA, had universal tariffs of 25% imposed on imports, (except Canadian oil and gas, which had a 10% tariff), as retaliation for unchecked illegal migration and fentanyl trafficking, effective from February 1.
Canada and Mexico both announced tariffs as a response. Canada imposed 25% tariffs on 155 Billion USD Worth of American Goods. After talking with Mexican President Claudia Sheinbaum, the tariffs on Mexico were delayed.
China:
Trump also imposed 10% tariffs on all Chinese imports, accusing China of pushing fentanyl to the USA in a bid to destabilize the USA and replace it. This is in addition to all the tariffs Trump imposed on China in his first administration. These were continued under the Biden Administration and will persist for a while now.
BRICS Countries:
Trump threatened the BRICS group of countries with tariffs unless they committed to not create a new currency. BRICS includes Brazil, Russia, India, China, South Africa, Egypt, Ethiopia, Indonesia, Iran and the United Arab Emirates. Threatening this coalition was not a very smart move, given that these countries are economically very diverse, making a common currency infeasible. Such threats also reduce the appetite of other countries to use the US Dollar for international trade. The US cannot force two countries to use the Dollar for transactions between them.
The EU:
Trump threatened the European Union and its member states with tariffs due to a large trade deficit. An intended side-effect was additional leverage being granted to Hungarian PM Viktor Orban in the theatre of European Politics. The rest of Europe, which was trying to isolate him due to his implicit pro-Russian stance during the ongoing Russian invasion of Ukraine, now has to stop these isolation efforts. Orban shares a warm relation with Trump, and can leverage this to at least postpone the imposition of tariffs, if not get rid of them altogether.
Colombia:
Trump imposed a 25% tariff on all products imported from Colombia.
Taiwan:
Trump has proposed the idea of imposing tariffs on certain products from Taiwan - Semiconductors and pharmaceuticals in particular.
Why do politicians use tariffs?
Tariffs are an important part of leverage a larger country has over a smaller one. Politicians use tariffs to gain the upper hand over another country when it comes to things like trade and commerce, or to hurt another country economically in response to any incident that led to a frosting of relations. They can also be used to compel companies to bring certain types of jobs to the country. For instance, India imposes tariffs on foreign cars being imported to discourage its citizens from buying foreign cars. This then compels car makers to build manufacturing units to India. Citroen, a French carmaker, built a factory in India before even selling a single car.
The unseen effects of tariffs:
Strictly speaking, tariffs are paid only by the company involved in importing. The original manufacturer doesn't pay anything. The prices are then usually passed onto the end customer. The tariffs on China, Canada, and Mexico are expected to increase prices for each American household by over 800 USD in 2025 alone.
The problem really occurs with products which cannot be imported from alternate countries or produced locally. In such a case, it just leads to an increase in prices for end customers. It is the reason why no country (except Russia) imposes tariffs on imported aircraft. Similarly, India doesn’t impose tariffs on certain machinery imported from China. India does, however, impose tariffs on steel products from China to increase competitiveness of its domestic steel industries. This will incentivize Indian customers to look at domestic steel products.
Even when imposed, tariffs do not immediately stimulate local production. It takes a while to build new production lines or bring shuttered ones back online. In the short term, they are not effective. Counter tariffs also make them less effective. This holds doubly true for products which do not have any alternative suppliers. The only advantage that Trump has is the size of the American Economy. Access to it can bring a whole new level of prosperity. The Bombardier C-Series Aircraft (now the Airbus A220 Series) almost went to the brink of failure when the US International Trade Commission imposed an 80% anti-dumping duty on the aircraft.
What are Trump’s goals with tariffs in particular?
Trump has several different goals with the countries he has threatened with tariffs.
Mexico, Canada, and China:
With regards to China, Mexico, and Canada, it was the allegation of China sending fentanyl and other illegal drugs and narcotics to the USA via Mexico and Canada. Trump also accused Canada and Mexico of not cracking down on illegal immigrants trying to cross borders to enter the US. Fentanyl has claimed over 75000 lives in the USA in 2024 alone. Trump aims to reduce the volume of fentanyl being smuggled into its frontiers from both the northern and the southern borders. The tariffs on China are also partly due to Trump’s allegation of China dumping its products in the US Market even below cost price to hurt American industry.
EU:
With regards to the EU, it was a large trade deficit with the USA that Trump wanted to correct. He also offered to sell more oil and gas to Europe, possibly unaware that US gas export capacity was already near its peak. He also threatened Denmark in particular, keen to take control of Greenland. A trade deficit is not as bad as Trump makes it out to be, especially given that the currency of the USA is the reserve currency of the world and the US Dollar is not pegged to the Gold Reserve.
BRICS:
The threats to BRICS are with regards to the calls by Brazil’s President Luiz Inácio Lula da Silva to other BRICS countries to create a “BRICS” currency to smooth over fluctuations in the US Dollar vis-a-vis local currencies. The reality is that a BRICS Currency isn’t really feasible, since the structures of the economies of all these countries are very different. A BRICS Currency would lead to at least one of the BRICS countries to end up like Greece, Portugal, Italy, or Spain. Essentially, they would be left with a stagnant economy. It also disregards the fact that some of its members are at loggerheads with each other. Egypt and Ethiopia over the waters of the Blue Nile, and India and China over the border conflict in Ladakh and Arunachal Pradesh. Then there is the issue that China economically dominates trade with almost all member states, meaning it could also ask for disproportionate control over the monetary policy of the currency.
Colombia:
The tariffs on Colombia were threatened in response to Colombia’s refusal to let flights carrying Colombian migrants (who entered the US illegally) arrive. The Colombian government then yielded and allowed flights to arrive.
Taiwan:
Trump intends to bring semiconductor manufacturing back to the USA with his tariffs. The biggest problem here is that it will take a very long time to establish the requisite supply chains for the same. There are also the problems that semiconductor manufacturing 1. needs a highly skilled labour force in the specific context, and 2. it is very water intensive, and the effluent will wreak havoc anywhere it is released. While American labour is highly skilled, it is questionable if that is in the context of semiconductor manufacturing. By imposing tariffs, Trump will do nothing but hurt American businesses, especially those in AI, Data Processing, Gaming, and such, at least in the short term. Trump’s tariffs will end up inadvertently hurting American interests for a few years.
Conclusions:
Trump’s threats of tariffs have proven effective in some cases. Colombia has now agreed to accept its citizens who illegally migrated to the USA. Mexico agreed to deploy additional forces on its borders to prevent the flow of fentanyl into its northern neighbour, but it is not anything new. It has done the same before, and the fentanyl crisis started well after that. Canada also agreed to reinforce the border and deploy 10000 troops. Both the USA and Canada agreed to postpone tariffs by 30 days. However, the more that Trump threatens tariffs, the more the USA loses its stand as a stable trade partner for the rest of the world. It flies in the face of the traditional US Economic policy, where countries produce what they are most capable of, and then trade for the goods they need. This was why the US outsourced a lot of manufacturing jobs, why many of the 787’s components are made in Japan, and why the F-35 is a program with global involvement.
Disclaimer:
I am not an economist. This is based on my understanding of how tariffs function, and their immediate impact on the local economies in past cases.