All Financial Wisdom

Trump’s Commercial Wars

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Donald J Trump is declaring commercial war on those who have been the main allies and commercial partners of the US: the EU, Canada, Mexico, China etc…

The EU is already taking tariff measures, and surely other countries will not stay put. In addition, although everything has started with steel and aluminum, it seems that Trump will dedicate himself to putting tariffs on other products as well.

Tariffs for steel and aluminum

All this began with the tariffs on steel and aluminum, although the truth is that if there is one thing to recognize is that Donald Trump is fulfilling his campaign to defend protectionism. He always wanted to force Apple to manufacture iPhones in the US instead of China (it does not matter that China has to import most of the components of an iPhone to assemble it), although for the time being it has started with these products.

When Trump announced the steel and aluminum tariffs, the EU thought it could get an extension, an exemption. After all, in the developed Europe, one could not think that it could talk about dumping (export subsidies) by governments or low wages, but the Trump administration has already decided that tariffs will apply to the EU as well.

The EU has decided to respond by strategically placing tariffs on products from the states that voted for the Republicans in the last elections. So in a first phase there will be taxes of 25% on 186 products such as orange juice, blueberries, rice, corn, whiskey, tobacco, cosmetics, jeans and steel with an impact of 2.8 billion euros. In a second phase, tariffs will be a 10% to 163 products such as lacquer, wipes, blankets or ceramics with an overall impact of 3.6 billion euros. The idea is that it is the same impact that steel and aluminum tariffs will have on European economies.

A complicated G7 summit

But it seems that Trump isn’t done yet, for he plans to continue with other products. For example, there is much talk about cars.

According to the German magazine WirschaftsWoche, Trump told Macron that he planned to veto German cars, until there was not a single Mercedes left on Fifth Avenue. Although it is true that vetoing Mercedes and BMW is complicated because they have production plants in the US, Audi and Porsche do not have a single plant from which they could skip the restriction to cars manufactured in Europe.

All this with the G7 summit this weekend. This year it is in Canada, and Donald Trump has started the summit by announcing in advance that the trade deficit with the EU and Canada is excessive. US allies already see the Trump administration as a serious global problem.

He will leave early to meet with Kim Jong-Un on the denuclearization of the army of his country.  Once the former TV star leaves, will the rest of the countries talk about how they are going to deal with Trump’s commercial rates?

If it is true that China, the EU and Canada are willing to fight in the economic battle, it is also true that Trump’s trading partners know that it is not easy. For example, Merkel is not sure that Germany can continue to win from a US trade war, as the Spiegel newspaper says. In Berlin, they know that the American market is vital for the German car industry and they want to protect it at all costs.

Protectionism is not good

The problem with protectionism is that its defense is intuitive, while the defense of free trade is not so. But let’s think about it in a developed economy and the tariffs imposed on steel and aluminum with which we have started. Let us suppose that we stop importing steel and aluminum. This makes steel and aluminum more expensive, reducing or eliminating imports and creating jobs in the US that help workers. It seems like a good idea, right?

Not exactly. To start, because a steel or aluminum plant is not installed from one day to the next, it takes many months to be operative. In addition, the mix of local production and its overcapacity is not usually exactly the same as the mix of imports.

Meanwhile, surely steel and aluminum manufacturers will see an increase in demand, and may even raise prices, they may even simply raise them and adjust them to the international market, maintaining the same production and number of jobs, and of course earning more. While the factories will have to pay more money for steel and aluminum.

In reality, the United States is an advanced economy, an industrialized country that produces advanced goods and services and high technology that sells to the rest of the world. But that does not mean that our products do not have competition. Think of airplanes (which need aluminum) and cars made of steel. As the internal cost increases in the market, manufacturing costs also increase.

So maybe those Fords and Boeings stop being competitive, or less so in the foreign market and a country like India stops buying Made in the USA airplanes to buy Made in Europe airplanes, and stop buying American cars for buy japanese cars instead.

US prices of steel and aluminum have increased by 40% so far this year and are already 50% more expensive than in China and the EU. What in principle should help the American Industry, may end up having the opposite effect.

So we will see how the events unfold in the coming days. I get the feeling that our trade war against the world is not going to end well.

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