If newly elected US President Donald Trump imposes tariffs on imported goods as per his election promise, trade with other countries will decrease drastically. How will its impact be global? Will it end the era of US trade liberalization that began in the 1980s or reverse everything?
According to a model by Bloomberg Economics, many countries around the world will suffer trade losses due to Trump's proposed tariffs. These countries will trade more with each other to offset trade losses with the United States. In this, globalization will continue, but it will no longer be centered on the United States.
Bloomberg Weekend spoke with Mayeva Kausin, chief trade and climate economist at Bloomberg Economics, to explain the situation.
In their opinion, imposing tariffs on all imports into the United States would be like going back to the 1940s. Trump has proposed a 60 percent tariff on China and 20 percent on the rest of the world. Currently, the average US import tariff is about 3 percent. It was 1.5 percent before the trade war with China. In the United States, the Smoot-Hawley Tariff Act of 1930 raised the average tariff to about 20 percent. But before this increase, the then duty rate was 14 percent. There, Trump's increase in tariffs from 3 percent to 60 percent would be an even bigger blow.
As historical examples of its effects are hard to find, Bloomberg used a 'computational general equilibrium model' of the world economy. According to the model, imports of U.S. goods will fall by about 50 percent and imports of Chinese goods by about 90 percent. That means there will be almost no trade between the US and China.
What will happen to US exports?
Even if China or other countries do not retaliate, US exports will drop by about 40 percent. Tariffs on imports would raise the price of foreign goods and make U.S. exports less competitive. If other countries retaliated, U.S. exports would drop by about 60 percent. If imports and exports fall together, the US trade deficit will remain the same.
Will some sectors of the United States benefit?
Tariffs can be beneficial for sectors that compete directly with imports. According to Bloomberg's model, the country's mineral resources and textile sector could benefit.
What other countries in the world will benefit?
20 percent of the world's commercial goods come to or leave the United States. It will come down to 9 percent due to the imposition of tariffs. Other countries will fill the void in the US market and increase imports. Among other countries, trade in goods among themselves could increase by 5 percent, while total world trade could decrease by about 7.5 percent. Because the United States is an important country in world trade, but it is still very small compared to the rest of the world (Mexico and Canada are special exceptions).
How to sustain China's export trade surplus?
China currently exports far more than it imports. A large part of it is exported to the United States. Will China's export trade surplus continue if this trade ceases?
There is much potential to rebuild China's domestic supply and manufacturing capabilities. The country fared well in the first trade war with the US. China will likely find new markets. But politically, it could create pressure on other countries in the world, especially with dependence and competition from China. This challenge is not fully assessed by Bloomberg's model.
What if high tariffs are imposed only on China and not on others? In that case the supply chain can be restructured through the 'connective' economy. If global trade declines over the next 10 years due to US import tariffs, other countries may also impose retaliatory import tariffs. As a result, global trade may decrease further.
What will be the impact of tariffs on innovation and productivity around the world?
According to Bloomberg's model, trade with technologically advanced countries is more likely to increase productivity. Therefore, excluding the technologically advanced United States may have a negative impact on the productivity growth of some countries in the future. For example, this could be a big problem for Mexico.
From the US point of view, more resources should be spent on these sectors than on textile or mining production. This will require less resources to be spent on high productivity sectors.
What should readers watch out for?
To answer this question, Bloomberg's model says, one must observe how trade flows in the United States are changing and how quickly they are being adjusted. China's Producer Price Index (PPI) also remains to be seen to see if weak demand is weighing on pricing and whether a slowdown is in the offing. This could be a situation where if China does not find enough market for exports, it will be forced to reduce the price of the products in the factory, which will also affect the wages of Chinese workers.
US inflation, on the other hand, needs to be watched to see if tariffs are forcing consumers to sell more expensive goods.
Supporters of imposing tariffs on US imports argue that conventional economics is wrong on the matter. Are there any economic questions that could help overcome the tariff shock?
The biggest question in this case is how fast the adjustment takes place. We know that companies can very efficiently find new ways to overcome import dependency. But if the tariffs are too high and imposed on all types of goods, how quickly can they adjust?
Bloomberg Translated from Abdul Bached
