Less than two weeks before the US chooses its next president, one candidate has made protectionism his standard, vowing to slap arbitrary and punitive tariffs on all kinds of trade, especially with countries he sees as rivals.
Donald Trump has ratcheted up his hostile rhetoric on trade in the last few weeks. Based on his speeches, if he leads a second administration it would impose a 10% tariff on all US imports and 60% on all Chinese goods — unleashing a trade war. He has mooted tariffs as high as 200% on some Mexican goods.
The policies run counter to decades of economic orthodoxy and international diplomacy and treaties to promote freer trade. Experts in Washington this week for the Annual Meetings of the World Bank and International Monetary Fund continually raised the alarm about the danger this one-sided attitude to trade poses to economies — including that of the US — and to multilateralism itself.
“We have to look outwards, not inwards,” said Felipe Chapman, finance minister of Panama, at the Atlantic Council on Tuesday. “I’m most worried about going back 100 years in protectionism. That is a wrong decision. It produced big wars in the past and has been the trigger of economic crises. There is plenty of history to illustrate that it’s the wrong path.”
Institutions like the World Trade Organization have kept the world safe for a long time, said JP Morgan chief executive Jamie Dimon at the annual Institute of International Finance meetings on Thursday.
Economists warn that tariffs will force up prices. “In a scenario where trade tariffs are imposed everywhere, it will entail a more inflationary environment and a global economy that will grow less,” Fernanda Guardado, chief Latin America economist at BNP Paribas, told GlobalMarkets. “That would also be true for the US, which will probably suffer from the outset of such a scenario.”
Assuming new revenue from universal tariffs is recycled into the US economy then inflation could rise by 100bp, said Paul Ashworth, chief North America economist at Capital Economics. Another economist said even tariffs of 30% on Chinese goods, half the 60% Trump has threatened, could add 200bp-300bp to US inflation.
The sharp rise in interest rates in the past two and a half years has succeeded in getting inflation back to, or close to, central bank targets. But fresh inflation, triggering a slowing or pausing of the rate cutting cycle, or even a return to rate rises, would cause economic pain.
Trade blow
But the danger goes well beyond inflation. Trade is the most relevant outcome of the US election, said Guardado. Trump wants to impose huge barriers and even if his opponent Kamala Harris does not bring in any new tariffs, she is unlikely to wind down those in place.
China would likely retaliate with its own tariffs.
“Tariffs on both sides will reduce output, so you will have lower growth, and increased inflation,” Robert Holzmann, the governor of Austria’s central bank, told GlobalMarkets in Washington. “It will happen in the concerned countries [the US and China] and worldwide because we’re an integrated global economy. How large the effect will be seen, but certainly it will be non-negligible and hurt us, both in the US and Europe.”
There is huge uncertainty over which countries Trump would target more than others — besides China — and which goods might bear the biggest brunt, said Ashworth.
Mexico is in the firing line — somewhat surprisingly. Despite drawing Trump’s ire before the 2016 election, Mexico avoided tariffs in his first administration after it vowed tighter controls on its border with the US.
Mexico was also able to negotiate with Trump a new free trade zone, the US-Mexico-Canada Agreement, which replaced the old North American Free Trade Agreement.
But this time, Trump has promised multiple, huge tariffs on Mexican goods. They include a 200% tariff on agricultural equipment maker John Deere’s products if it moves production to Mexico and a 100% tariff on cars imported from Mexico — later ramped up to 200%.
This may all be pre-election bluster. Trump is known for talking big and changing his mind.
But such action could deal Mexico a harsh blow. For every 10% decline in vehicle exports Mexico’s GDP could drop 0.6%, according to Capital Economics, alongside a sharp fall in the peso.
The most worrying outcome could be a collapse of the USMCA.
But Trump’s sabre-rattling against the Mexican car industry might not be a major risk, thought one Mexican investment banker.
“The reality is that the industry is so intertwined between the two countries that it’s not a realistic proposal,” he said. “Talk to auto parts manufacturers in Monterrey: a gearbox alone crosses the Mexico-US border 30 times while it’s being made. It’s not as simple as bringing the car industry from Mexico to the US. And I don’t think Trump will even push for that — the big car makers would put up huge opposition.”
Europe muddle
For Europe, a win for Trump in November would accelerate the structural shifts it is already struggling with: protectionism, reduced exports to the US and China and the need to spend more on defence, said Andrew Kenningham, chief Europe economist at Capital Economics.
Fitch warned on Thursday that a second Trump presidency would cause “significant” trade disruption with the EU. Universal tariffs might have a modest initial impact but they would be hitting growth that is already weak.
Europe would suffer under universal tariffs, although Kenningham thought the region might be able to avoid them in return for concessions, similar to how Mexico evaded them in the first Trump administration.
But if the US decides to prioritise its own interests more decidedly, the EU is likely to do the same.
One finance minister said Europe faced a big problem: it had focused far too much on competitiveness within the EU bloc rather than on what large external trading partners were doing.
“We forgot that there’s a world outside of Europe which is completely different,” Klemen Boštjančič, the finance minister of Slovenia, told GlobalMarkets in Washington on Thursday. “So now the Chinese and the US are doing things which are different to us.”
Only in the last year has the question of the EU’s competitiveness in the global economy become an important issue, he said.
“The problem is that the Chinese and US can make decisions faster and more of us are becoming aware this is an issue,” said Boštjančič. “This will have to change. It is a key issue of the EU, where even France and Germany support change. We need a strong coordinative body within the EU to be able to make decisions.”
The continent needs to stop complaining about the US and China and focus on making itself competitive again, he argued. An example was the European car industry, said Boštjančič, something he called the pillar of European trade.
“Our hybrid vehicles that still run on petroleum are advanced compared to China, which is not the case with electric vehicles,” he said. “But because we were so focused on the green transition, we’ve been subsidising EVs. So for years we’ve been indirectly subsidising Chinese producers and Chinese industry.”
That might be the right direction, he said, but the cost was high. “We didn’t take care of our own interests,” said Boštjančič. “We need to be much more careful, now and in the future.”
Multilateralism under fire
More fundamentally, Trump’s America First agenda undermines international cooperation.
This year’s IMF and World Bank Annual Meetings coincide with the 80th anniversary of the Bretton Woods conference which gave rise to the institutions, and a monetary management system that has endured ever since.
Other multilateral organisations have since followed, including the United Nations in 1945 and WTO in the 1990s.
“These are critical institutions,” said JP Morgan’s Dimon. “But now you have people that want to change that. They are autocratic nations and they want to change [the system].”
Russia hosted a BRICS summit this week, promoting an alternative to the institutions set up by Western powers in the 1940s.
A particularly pessimistic view came from Evan Medeiros of Georgetown University’s School of Foreign Service, who said the relationship between the US and China was only going to get worse over time.
This fracturing in the global architecture, symbolised by the BRICS summit and policies like tariffs, are a threat to the economic prosperity of all nations.
“Globalisation, and pushing for more, has helped the global economy,” said Retšelisitsoe Matlanyane, minister of finance and development planning for Lesotho, at the Brookings Institute on Thursday in Washington. “Policies that are pro-multilateralism will do a great deal of good for the world economy. Be it tariffs or in the financial space, we have to be able to integrate more.”