On April 2nd, known as ‘Liberation Day’, a new tariff policy initiated by the US President, Donald Trump, shocked both his adversaries and allies as he declared a significant upturn in tariffs. This presented a challenge to Goodfellow, a UK based company that provides advanced materials and metals, which found itself adversely affected by these changes overnight. Internal evaluation disclosed that the cost base for its sales in the US faced an approximate increase of about 10 percent. This was problematic for a company which relies on the US for about 35 percent of its total business.
In spite of sourcing a minuscule proportion of its purchases from China, Goodfellow felt the brunt of these drastic cost increases. The company exports to over 60 nations worldwide and the potential retaliatory tariffs by the EU could escalate costs for its subsidiary located in Baltimore. Watson, a demoralized company executive, stated that while they can adapt to the consequences of this ‘new normal’, it is impossible to make plans in the face of continuous modifications.
Watson further underlined the unavoidable fact that even the most optimistic scenario would result in more expensive products for customers and modifications to the supply chain. The administration’s decision to use tariffs as a way to bring back manufacturing jobs to America was anticipated by many observers, given Trump’s louder-than-life persona. However, the extent of the tariff spike, lifting average rates to figures resembling those seen in the mid-20th century, took even the fiercest protectionists by surprise.
The unorthodox method used for setting the new rates also sparked a wave of questioning. It was later revealed that the US administration had used a formula where it divided the trade deficit in goods by total imports for each partner country, halving the result to reach the final figure. The tariffs affected even the countries with net imports like the United Kingdom, imposing a minimum of 10 percent.
The US economy has been experiencing a trade deficit for several decades now. American citizens and businesses tend to spend and invest more than they earn, thus creating a scenario where this deficit might continue unabated despite the increased tariffs. In many instances, the deficit with trading partners can be attributed to geographical reasons such as some fruits being more easily grown in warmer climates. However, these practical considerations seem to hold no sway with an administration unwaveringly driven to disrupt the current order.
For the European Union, a significant trading partner for the US, Trump’s ‘Liberation Day’ was somewhat expected given his belligerent trade policies during his first term and accusations of the EU taking undue advantage of the US. Trump’s team proclaimed that the EU levels a 39 percent tariff on American goods, a claim that stands in stark contrast to the World Trade Organisation’s (WTO) estimation of a mere five percent.
Although initial retaliatory tariffs by the EU were put on hold to allow room for negotiation, there are plans to respond with a substantial €100bn tariff package targeting US imports if conciliatory efforts are unfruitful. This package is expected to affect imports including Boeing aircraft, medical apparatus, automobiles, and bourbon whiskey. Certain EU member states are expressing concern about instigating conflict with the US in view of existing security concerns.
A recent NATO summit discussed European defence expenditures, reflecting the heightened tensions and concerns in the backdrop of the ongoing conflict in Ukraine. One powerful tool the EU holds is its ability to target digital services, a segment where the US currently enjoys a net surplus. A potential consequence of the strained EU-US relationship could be the EU cultivating stronger ties with other significant trading partners.
In an interesting turn of events, Brussels is considering reviving a strategic alliance proposal with a 12-nation Indo-Pacific trade bloc that consists of Canada, Japan, Mexico, and the UK, among others. Despite existing tariff disagreements over items like electric vehicles, the EU’s trade relations with China might see a positive turn as well.
Despite the multiple attempts by the EU to restrain it, trade disparity between China and the EU has only worsened. If there is a complete decoupling of the Chinese and American economies, it would have massive implications for the global economy, potentially causing an increase in inflationary rates and slowing down economic growth.
According to VanGrasstek, the greatest threat to the global economy is not the cessation of globalization, but the fragmentation of the existing system into rival trading blocs. VanGrasstek further suggests that we might be living in a unique moment in history where no major world power has a compelling reason to uphold an open trading system. This notion becomes even more compelling considering that China’s economy has started focussing lesser on exports, signaling a shift from its traditional economic operations.
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