By Anwarul Hoda, Honorary Professor, ICRIER
President Trump began his second term of office in January by declaring a trade and tariff war against the US’s trading partners. Not only did he raise US tariffs, but he also demanded that they reduce and even eliminate tariffs on their imports from the US.
Ten months down the line, what is the assessment on how successful the US president has been in wresting an advantage for his country? Where are the Trump tariffs headed?
The world had already had a foretaste of President Trump’s unilateral trade action: during his first term, he had raised tariffs on steel and aluminium on the pretext of national security. This time even the pretence of abiding by internationally accepted trade rules is missing. His openly stated aim is to reset these rules.
He contends that during the last few decades, while the US has reduced its import barriers drastically, partner countries have not. As a result, he argues, the US has run up large bilateral trade deficits and suffered de-industrialisation. His stand is that in raising tariffs, he is only bringing them up to the levels of import barriers that prevail in other countries, and hence the term “reciprocal tariffs”.
Under the US Constitution, the Congress has the original powers to impose tariffs, but the laws authorise the president to take actions that may include imposing tariffs to achieve certain objectives, such as to protect essential security interest or curb unfair trade practices. The International Emergency Economic Powers Act (IEEPA), 1977, is another law that provides the president with the authority to regulate international economic transactions during declared national emergencies. Trump has turned to this legislation and declared that the persistent bilateral trade deficits had resulted in a national emergency, giving him the justification to impose reciprocal tariffs on trading partners. On April 2, he invoked the IEEPA to impose reciprocal tariffs.
In taking unilateral tariff action, President Trump broke two foundational General Agreement on Tariffs and Trade and World Trade Organization (WTO) commitments. In raising tariffs, he retracted from the pledge not to breach the level bound in past negotiations. In fixing country-specific tariffs, he threw the sacrosanct most-favoured-nation obligation out of the window.
And yet, there has been no strong reaction, let alone retaliatory action, from a large majority of trading partners. Contrary to all expectations, the European Union (EU) led the way in a conciliatory response. Given the long history of its trade conflict with the US, capitulation by the EU was least expected. Trump and European Commission President Ursula von der Leyen had an epoch-making meeting on July 26-27 at Turnberry, Scotland.
They signed a framework agreement in which the EU not only consented to the US tariff rate of 15% (more than five times the average pre-existing level) but also indicated its intention to eliminate tariffs on all industrial goods on its side and provide preferential markets to a range of agricultural goods imported from the US. Indeed, the EU went further than agree on tariffs; it promised a large-value procurement of energy and also signalled that European companies would make large investments in the US. This tame acquiescence gave a cue to Japan and Korea to give in and make similar concessions.
India has dared and kept the US at bay, not agreeing to a demand for market access in the politically sensitive areas of dairy and agriculture. However, the two sides have continued negotiations and are expressing optimism on a successful conclusion by the year-end.
China alone has been defiant. It has not only lodged a WTO dispute, but also imposed matching retaliatory tariffs, as the US sought to punish defiance with spiralling tariffs. It has compelled the US to lower reciprocal tariffs from the peak levels and accept a temporary truce.
With President Trump in a punishing mood, the general tendency of trading partners is to avoid confrontation. The current status of dysfunction of the WTO dispute settlement machinery must have certainly been a factor. In any case, the vast majority of trading partners lack a trade weapon that can deter the US. China alone has leverage in its ability to deny critical minerals known as rare earth elements, the lack of which can cripple vital industries, and it used it to compel the US to accept a compromise. The EU has comparable retaliatory strength but it is constrained by the need for US security support, particularly at a time when Russia is flexing its military muscles and threatening NATO’s eastern front in Ukraine.
With success in the unilateral imposition of higher tariff levels on all trading partner countries, barring China, it looks like President Trump is winning the trade war. What can be said about the future prospects of Trump tariffs?
At present, the president’s tariff actions are facing domestic challenges. The wide expectation of an adverse fallout, as the higher tariffs work their way up the supply chains, has not materialised. Expert analysis shows that retail prices may have increased by only 0.7% since reciprocal tariffs were imposed. President Trump has acted nimbly to forestall any public reaction against even this modest price rise. Around Thanksgiving, he lowered reciprocal tariffs on important food items such as beef, coffee, orange juice, and bananas.
Legal challenges are more daunting. The Court of Appeal has already upheld the verdict of the US Court of International Trade that, in imposing tariffs, the president has exceeded the authority granted in the IEEPA to regulate international economic transactions during declared emergencies. As the world awaits the pronouncement of the US Supreme Court, the future for Trump tariffs is uncertain.
In the context of the world trade troubles caused by President Trump, Anne Krueger’s idea of a new multilateral organisation without America has evoked interest. It is also significant that after a meeting at Melbourne on November 20, the EU and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership have issued a joint ministerial statement that emphasises a rules-based, non-discriminatory multilateral trading system with the WTO at its core. This is a formidable trade coalition. Can the tide turn against Trump tariffs?