A Risky Trade

US President Donald Trump speaks often of his love of tariffs. For dealmakers, such as himself, the red-hot US market provides a useful economic weapon that replaces lethal military threats. Rather than providing allies with preferential access to that market, he exploits their dependency on it to extract concessions, exert his will, and deliver the results he wants.

A tariff is a tax charged when an American firm (or consumer) brings a product into the country. The importer pays the tariff at the border, which may, depending on commercial decisions, impact the product’s final price paid by US consumers. Some companies will pass on the entire cost of a tariff to consumers. Others will absorb the cost or switch their supply chains to avoid a tariff.

Trump and his cabinet have articulated four main uses for tariffs: eliminating trade deficits and balancing goods trade; reshoring manufacturing to the United States; providing a revenue source that can be used to offset tax reductions; and providing leverage in negotiations with foreign countries. Those heavily dependent on US exports, mainly allies or free trade agreement partners that consequently have intertwined supply chains, have the least leverage against tariffs. Indeed, Trump’s actions have scored “wins” against such countries.

But tariffs are blunt instruments that also work against Trump’s other goals. Tariffs affect exchange rates, causing the dollar to rise against other currencies. A rising greenback makes US goods more expensive and imported ones cheaper, increasing the trade deficit.

Trump’s “American First Trade Policy” executive order from January 20 instructed the US government to review all trade policies, including tariffs, trade deficits, unfair trade practices, and certain taxes. This review will make recommendations for increasing the effectiveness of US trade and tax policy. Som existing American trade laws are more than 100 years old and are not fit for purpose for the 21st century.

But Trump is not waiting for the review in his effort to score victories for Americans. On January 26, he used the threat of tariffs to convince Colombia to accept military flights repatriating migrants. He is now using the same strategy against Canada, China, and Mexico to stop fentanyl from entering the United States. 

In recent statements, Trump indicated the EU and the United Kingdom are next in his sights. So far, Congress and financial markets have been unconcerned about threats to impose tariffs. This provides the president with latitude as he waves away concerns from the business and agricultural communities. Brussels and London, therefore, can prepare for the president’s next moves by thinking about actions that address the underlying issues on which he focuses. Canada, Colombia, and Mexico have shown how small offers, packaged as big wins for Trump, can help prevent economic collateral damage.

But constant tariff threats will get tiring and, if they continue, countries will reexamine their relationships with the United States. Just as COVID-19 caused companies to reevaluate the resilience and agility of their supply chains, Trump’s actions may spur American allies to think more carefully about their partnerships. These countries need reliability and predictability, and US policy now offers neither.