Trump’s Tariffs: Unexpected Gains Amid Global Trade Tensions

Could it be that US President Donald Trump’s “crazy” imposition of tariffs against most of its trading partners is starting to work for him?

While most observers, including myself, have pointed to Trump’s tariffs as a way of penalising US consumers and sending global free trade back to the inefficient bad old days, there are some undeniable positives starting to emerge from the US perspective.

Lack of retaliation is telling

With very few other countries effectively retaliating against the sweeping tariffs, the US has already managed to collect nearly $US50 billion ($77 billion) in extra customs revenues.

To be fair, US inflation has also picked up as domestic US consumers pay more for some of their consumer goods but the pricing effect so far has been lower than many anticipated.

The lack of retaliation from other countries seems to have created the sweet spot for the collection of US customs duties which hit a record high of $US64 billion in the second quarter – a full $US47 billion more than over the same period last year.

It is possible this sweet spot may be temporary, with the possibility of retaliatory tariffs from big trading blocks such as the EU still waiting in the wings as trade negotiations continue before the August 1 deadline, but at the moment it seems that Trump’s tariffs moves are less “crazy” and more “crazy like a fox”.

Costs shifting to others

Interestingly, while Trump’s claim that the tariffs would be borne by other countries and suppliers rather than US consumers seems farcical to anyone with even a basic understanding of how tariffs work, there may be some logical support for Trump’s outright illogical assumption.

The US remains the biggest consumer market in the world, so global suppliers may be mitigating US price rises at the retail level by reducing costs or spreading the pricing burden across other countries.

For a multinational supplier, it might be easier to introduce a global 4% price rise across the board rather than losing US sales by imposing a 20% price rise in just that country.

To the extent that this might be happening, Trump’s actions could be producing something of a free kick to his “external revenue” model.

Effect on global trade could be muted

It is early days in the introduction of the large US tariffs but so far there has been little sign of the sort of big reductions in trade that often happen when tariff walls are built around the globe.

This partly may be due to a lack of retaliatory tariffs but also may have something to do with the highly interconnected system of world trade that was developed during the free trade era which Trump is now busily disrupting.

Faced with Trump’s threats to build even higher tariff walls against those countries which dare to retaliate, the US has largely been able to turn tariff collection into a one-way street as trading partners begin to chicken out.

For a company such as Apple which has suppliers all around the globe, it is virtually impossible for it to quickly switch to a US-centric supply model, but it still needs to remain price competitive in the US at the consumer end with smartphones and other products.

So, it will try to reduce the impact of high tariffs being felt by consumers as much as it can.

Economists have almost universally warned that the tariffs will lead to reduction in global economic growth but the size of that reduction depends on what level average tariffs reach and whether they apply in both directions.

If the US manages to largely avoid retaliatory tariffs  at the same time as it collects higher tariffs on its imports, it could leave the country in a stronger position than might otherwise have been anticipated.

Trading partners starting to chicken out

Canada has already started softening its position on imposing tariffs given the importance of US trade and the EU and even Mexico have both been very careful in their language around imposing extra tariffs on US exports,

Even the very high tariff walls that were erected and then temporarily put on hold between China and the US may fall quite dramatically if the two countries can reach some sort of deal.

From the point of view of many countries, it makes economic sense to not retaliate to keep the US tariffs as low as possible, although this may change over time.

For Australia, which has a trade surplus with the US, the threatened 10% general tariff and higher sectoral tariffs are a penalty that makes no logical sense but it still might be logical to just accept it as a fact of life and not poke the bear by retaliating in any way.

Early days but so far US is winning

The situation is very fluid but in the longer term if there is a failure to retaliate, US companies will be able to freely engage with global supply chains at the same time as the EU and Asian manufacturers face high tariffs in getting access to the giant US market.

We will have to wait until the expiry of the August 1 deadline to see where the tariff situation finally lands and what level of average tariffs apply.

Even then there may be quite a few lagged effects but in the short term at least, Trump’s seemingly foolish and precipitous actions may have achieved his goal of raising more revenue, with Trump’s unpredictability and the US’s status as the world’s biggest economy combining to make even foolish actions seem inspired.