Trump 2.0 tariffs are a blunt tool to meet multiple aims. That’s bad news

donald trump

US President-elect Donald Trump, almost two months before taking office, impacted financial markets this week with a social media post threatening a sharp tariff hike on his country’s three largest trading partners, Mexico, Canada and China.

Trump’s preferred tariff policy, which he spelt out during his election campaign, is a 10 percent tariff on all imports and a 60 percent tariff on stuff sourced from China. In his first term as president, his tariff policy on China was one of the more consequential actions of his administration.

An importance difference in Trump’s social media post this week is that it’s targeted at two of the three constituents of the US-Mexico-Canada Agreement (USMCA), a deal that Trump signed as president. The causes for the tariff threat against them are not economic. Instead, they aim to fulfil his political agenda on cracking down on illegal immigrants and drugs. Consequently, they introduce a dimension which is an add-on to the economic motive underlying Trump 1.0 tariff policies.

How Trump 1.0 tariffs played out

In 2018 and 2019, the US imposed tariffs on over 60 percent of imports from China which were pegged mostly at the 25 percent level. A consequence is that China’s share in US imports fell from 21.6 percent in 2017 to 16.3 percent in 2022. This was an expected outcome. But there was more to it.

Research published by the World Bank highlighted an important dimension to the consequences of Trump 1.0 tariffs. China’s loss of market share in US imports was grabbed mostly by a handful of countries, with India being one of them. But China didn’t get cut down to size on account of tariffs. As US-bound exports of Vietnam, Taiwan, Canada, Mexico and India increased, they simultaneously began to import more from China.

In effect what happened is a reshuffling of global supply chains. US imports of overall tariffed products grew at rates similar to those that were not impacted by Trump 1.0 tariffs.

It is countries that were deeply integrated in supply chains running through China that experienced the most rapid growth in exports to the US This was pronounced in electronics.

India’s trade trends

India has been one of the beneficiaries of the ‘China plus one’ trend which took root after the Trump 1.0 tariff regime. A recent report by Crisil shows how it has played out in the bilateral trade ties with the U.S and China.

In 2013-14, India’s export of electrical equipment and electronics to the US had a 3.3 percent share of the export basket. By 2023-24, it had increased to 14.3 percent, the item with the largest share in the export basket.

During the same period, electrical equipment and electronics imports from China which made up 27.9 percent of the import basket, increased to 30.8 percent in 2023-24. This item has the largest share in India’s overall imports from China, which have increased substantially in the last decade.

Why Trump 2.0 tariff approach appears different

Some studies showed that Trump 1.0 tariffs didn’t undermine China. It only extended supply chains which cost the consumers more. In addition, it helped countries such as Vietnam, Mexico and India.

This time, Trump appears to be using tariffs as a blunt instrument to meet multiple objectives, from choking the flow of fentanyl to the US to the more conventional economic goal associated with protectionism. It is likely to make the fallout harder to foresee. The targeting of Mexico and Canada, on the face of it, appears to be for non-economic reasons.

Supply chains are not easy to relocate as they represent considerable fixed costs both in terms of money and effort in integrating countries into a production process. Given this background, the early indications are that Trump 2.0 tariffs are going to increase global economic uncertainty. That’s never good for economic growth.