“It’s potentially a Herculean task,” said Ted Murphy, an international trade expert at Sidley Austin, a law firm in Washington. “For every widget, every tariff classification, you can have 150 different duty rates. You’ve got Albania to Zimbabwe.”
The order that Trump signed on Thursday directed his agencies to study how to proceed with reciprocal tariffs. That raised the risk of increasing costs for American consumers at a time of deepening concern over inflation, challenging the President’s vows to bring down prices on groceries and other everyday items. And that heightened the possibility of greater delay from the Federal Reserve in lowering borrowing costs.
It also hastens the diminishing of the world trading system, which has long been centred on multilateral blocs and adjudicated by the World Trade Organisation (WTO). Trump is aiming to advance a new era in which treaties give way to country-to-country negotiations amid a spirit of nationalist brio.
The transition threatens to add to strains on global supply chains after years of upheaval. International businesses have contended with an unfolding trade war between the world’s two largest economies, the United States and China. They have confronted impediments to passage through the Suez and Panama canals, sending shipping prices soaring.
Now, Trump has presented them with another formidable puzzle.
Under the system that has held sway for three decades, member countries of the WTO set tariffs for every type of good, extending the same basic rate to all members. They have also negotiated treaties – with other countries and via regional trading blocs – that have further eased tariffs.
Trump has long described the United States as a victim of this structure, citing trade deficits with China, Mexico and Germany. In announcing the advent of reciprocal tariffs on Thursday, he served notice that he claims authority to renegotiate the terms to his liking, absent respect for existing trade agreements.
It seemed no coincidence that Trump made his announcement on the day India’s Prime Minister, Narendra Modi, visited the White House. The US runs a substantial trade deficit with India, with the value of its imported goods outweighing its exports last year by US$45 billion ($78.5b).
Those imports include plastics and chemical products that incur tariffs of less than 6% when shipped to the United States, according to data compiled by the World Bank. When similar categories of US goods are exported to India, they confront tariffs ranging from 10% to 30%.
If the Trump administration were to lift US levies to equal levels, that would force US factories to pay more for chemicals and plastics.
The same pattern holds across a broad sweep of consumer and industrial products – footwear from Vietnam, machinery and agriculture from Brazil, textiles and rubber from Indonesia.
A leading electronics industry trade association, IPC, on Thursday warned that increased trade protectionism would damage the US economy.
“New tariffs will raise manufacturing costs, disrupt supply chains, and drive production offshore, further weakening America’s electronics industrial base,” the association’s president, John W. Mitchell, said in a statement.
Some experts see in Trump’s approach a potential negotiating tactic aimed at forcing trading partners to lower their own tariffs rather than a prelude to the US lifting its own. If that proves true, the process of calculating new tariff rates might lower prices.
“There are a lot of ways this can go very badly for us,” said Christine McDaniel, a former Treasury official under President George W. Bush and now a senior research fellow at the Mercatus Centre at George Mason University in Virginia. “But if he can get other countries to open up their markets, there is a narrow path where this could end up promoting trade,” she said.
Still, others warn that any process of negotiation could be guided less by national objectives than the interests of Trump’s allies. Tesla, the electric vehicle company run by administration loyalist Elon Musk, could benefit from exemptions to increased tariffs on key components.
The tumult is leaving companies that operate in the United States having to guess how events will transpire as they weigh the costs of importing parts or finished goods. Business, as the cliche goes, craves nothing more than certainty. That commodity is getting more scarce.
Who’s next?
Ever since Trump’s first term, when he put tariffs on Chinese imports – a policy that former President Joe Biden extended – companies that sell into the US market have shifted some production out of China.
Surging prices to move cargo by container ship have prompted companies to close the distance between their factories and their US customers, a trend known as near-shoring.
Walmart, a retail empire ruled by the pursuit of low prices, has moved orders from Chinese plants to India and Mexico. Columbia Sportswear has scouted factory sites in Central America. MedSource Labs, a medical device manufacturer, has moved orders from factories in China to a new plant in Colombia.
Trump has challenged the merits of such strategies by threatening 25% tariffs on imports from Mexico, Canada and Colombia, before quickly delaying or setting aside such plans. He has imposed across-the-board levies on steel and aluminium. He has delivered 10% tariffs on Chinese imports. Where he may turn next is the subject of a potentially expensive parlour game playing out in corporate boardrooms.
Some surmise that the uncertainty stemming from these moves is precisely the point. Trump has long asserted that his ultimate goal is to force businesses to set up factories in the US – the only reliable way to avoid US tariffs. The more countries he menaces, the greater the risks for any company that invests in a plant somewhere else.
The trouble is that even businesses with factories in the US depend on parts and raw materials from around the world. More than a quarter of US imports represent parts, components and raw materials. Making these goods more expensive damages the competitiveness of domestic companies, imperilling American jobs.
Last week, Ford Motor warned tariffs on Mexico and Canada would wreak havoc with its supply chains.
“A 25% tariff across the Mexico and Canadian border will blow a hole in the US industry that we have never seen,” the company’s CEO, Jim Farley, said.
For now, the business world is again struggling to divine which of Trump’s pronouncements are merely a gambit, and which portend real changes.
On spreadsheets maintained by multinational companies, the applicable tariff rates for every country on Earth suddenly seem subject to reworking.
Or not.
“We take Trump seriously, but not necessarily literally,” Murphy said. “He talks in broad strokes, but we have to watch what actually emerges.”
This article originally appeared in the New York Times.
Written by: Peter S. Goodman
Photographs by: Philip Cheung, Eric Lee, Alejandro Cegarra
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