Trump & Tariffs – Deal making at its best

BASED on the latest data released by the US Census Bureau and the US Bureau of Economic Analysis, the United States recorded total exports of US$2.08 trillion and imported some US$3.3 trillion worth of goods last year, resulting in a trade deficit of US$1.21 trillion.

Compared with a year ago, total exports rose by 1.9% but imports surged by 6%, which resulted in the trade deficit rising by 14% year-on-year.

A global consumer

The United States is a strong domestic-based consumption economy with consumption alone accounting for two-thirds of the economy.

In fact, its three main components of imports are capital goods, which account for 29.5% of total imports, followed by consumer goods, which represents 24.7% of total imports.

Industrial supplies and automotive are the next two big import bills, accounting for 20.7% and 14.5% of total import bills.

In terms of country of origin for US imports, Mexico and China are the two largest sources amounting to US$505.8bil and US$438.9bil respectively, followed by Canada with some US$412.7bil worth of imports. The three nations alone account for some 41.5% of total imports.

The next three biggest exporters to the United States are Germany, Japan and Vietnam, which account for some 13.6% of US total imports.

Do tariffs work?

What are tariffs? Any country that imposes a tariff on imports has one clear reason for doing so. In most instances is to protect the local production which is in direct competition with imports.

To ensure some form of level playing field, countries may impose some form of taxes on the imports to ensure that the local manufacturers can reach their target market at reasonable prices although in essence, cost of producing is higher than importing the same product.

Some countries do not impose tariffs but use tax measures to protect local production. This could be in the form of import duties, excise duties or even levies. But in general, these are targeted towards a product and not based on country of origin.

Tariffs are also a form of tax on goods that are imported and in most instances are product-specific and not country-specific.

Imposing a duties on a country is driven by a different agenda as seen by US President Donald Trump’s move to impose a 25% tariff on Canada and Mexico as well as 10% on China.

He also vows to impose tariffs on the European Union as well as the imposition of a 100% tariff on Brazil, Russia, India, China and South Africa (BRICS) member nations if they make attempts to introduce a new currency or back any other currency to replace the US dollar.

Trump believes that there is no way BRICS will replace the US dollar in international trade.

He is also expected to go for certain sectors as well with a tariff on oil and gas imports within the next 10 days and on steel imports.

After the new tariff announcement against Canada and Mexico, the imposition of the tariffs was paused as both nations agreed to enhance border controls.

As for China, there was no deal at the time of writing but on the contrary, China retaliated with the imposition of levies on US imports including a 15% levy on coal and liquefied natural gas and a 10% levy on oil and agriculture equipment.

With almost US$920bil imports from Canada and Mexico alone, a 25% tariff will see the cost of goods landing in the United States rise by the same quantum, which will result in higher consumer prices and cause a US$230bil dent on disposable income.

A 10% tariff on Chinese produce will see consumers paying almost US$44bil in additional costs, which in turn will result in higher inflationary pressure.

This will cause the US Federal Reserve to be under pressure and rate hikes cannot be discounted. It is also estimated that due to US reliance on imports, cars will become more costly, resulting in the average price rising by US$3,000 per vehicle.

In essence, tariffs are a tax on households.

Trump’s insistence on tariffs also goes against the North American Free Trade Agreement, which allows goods between the three North American countries to be duty-free.

Trump’s move so far has been met with retaliation as Canada imposed a 25% tariff on C$155bil worth of goods.

As the price of landed goods on US shores will rise, the tariffs will have an impact on market demand as some consumers may cut back on purchases due to higher prices, especially on discretionary goods.

A retaliation against US tariffs by the affected countries will also see a similar situation whereby the demand for US products may drop.

All in all, tariffs are akin to economic war and it is the people and businesses who will suffer, resulting in lower economic growth or in worse cases, a recession.

Trump’s idea is for countries that are exporting to the United States to have manufacturing facilities in the country to avoid being imposed a tariff.

Attracting foreign direct investment is more than tariffs and taxes as cost of production is a primary factor that drives investment flows.

In essence, with the United States running trade deficits to the tune of more than a US$1 trillion, is Trump expecting the country to have zero imports with his determination to replace taxes with tariffs?

After all, if one looks at the total federal income tax receipts by individuals, which stood at about US$2.43 trillion in 2024, how much tariff does the United States need to impose to offset the tax receipts based on last year’s total imports?

Considering the value of imports last year at US$3.3 trillion, this works out to a tariff of 73.6% on all goods imported to the United States.

Surely, this will have a great impact on the global economy and may even trigger a global recession.

The current tariff move against Canada, Mexico, and China will only generate some 11.3% of total federal taxes from individual taxpayers.

Hence, it is clear that tariffs cannot replace taxes as tariffs affect every consumer, irrespective of their income level, while taxes are imposed mostly on those who fall within the tax brackets.

Perennial problem

The United States has been running goods and services deficits since 1976 and after nearly five decades, the country’s deficit with the rest of the world to more than US$17.7 trillion which was funded by borrowings as it mostly ran budget deficits except for a surplus only in four occasions in the last 50 years.

Trump’s attempt to address the deficit issue with tariffs is futile as tariffs cannot replace taxes or address the country’s deficit and debt problems.

Besides protesting against the United States by imposing tariffs on exports, impacted nations will likely allow their currency to weaken against the dollar to offset the impact of the tariffs.

This was rather obvious during Trump 1.0 as the yuan weakened by 6.5% from 2018 to 2019.

Currency movements can be shock absorbers that will allow exports to remain competitive despite the imposition of tariffs by the United States.

Deal, or no deal?

Since the announcement on tariffs and other measures, it seems as though Trump is running a business rather than a nation.

His tariff announcements came with attempts to address certain shortcomings with trading partners and as a tool for negotiation and deal-making.

His plans to make Canada the 51st state, assume control of the Panama Canal, taking over Greenland and the Gaza Strip are clear attempts to disrupt international relationships mainly for economic reasons.

By now, one could observe that Trump is using tariffs to send the message home that the rest of the world is responsible for the US trade and budget deficit while at the same time using a position of power for deal-making with the rest of the world and to be seen as a winner.