Trump’s tariffs will backfire

TOKYO – US President-elect Donald Trump appears committed to imposing high tariffs on imports to the United States – or, at least, using the threat of tariffs to bend US trading partners to his will. Trump now says he will enact a 25 per cent tariff on all imports from Canada and Mexico on his first day in office, and raise tariffs on goods from China by 10 per cent. And he has previously advocated 60-100 per cent tariffs on imports from China and 10-20 per cent tariffs on imports from all other countries, including allies.

Some countries will probably retaliate with tariffs of their own; others might try to negotiate exemptions, by offering to increase investment in the US or to import more US agricultural products. A third possible response – which is particularly relevant for China – is off shoring, with firms shifting production to countries that are subject to lower US tariffs. And countries can try to reduce their reliance on the US, by diverting trade to other countries.

China is already laying the groundwork for such trade diversion: it has been pursuing a “charm offensive” with a wide range of countries, including US antagonists, such as Russia, to US allies, like Japan. For Russia, closer ties with China are an easy sell. Russia is a pariah in the West, almost entirely excluded from trade, investment, and financial transactions, and Russia’s “no-limits” partnership with China allows it to use China’s renminbi-denominated Cross-Border Interbank Payment System. In 2021-23, Russia’s exports to China rose by 63 per cent, while China’s exports to Russia increased 65 per cent , according to my calculation using the International Monetary Fund’s Direction of Trade Statistics (DOTS).

Beyond bilateral ties, China and Russia are working to strengthen trade and finance cooperation among the BRICS grouping of emerging-market economies (Brazil, Russia, India, China, and South Africa), which extended invitations to six new members last year (Argentina, Egypt, Ethiopia, Iran, Saudi Arabia and the United Arab Emirates). Argentina ultimately rejected the invitation, and Saudi Arabia has put its plan to join on hold. But the BRICS+ has undoubtedly gained traction, and further expansion may well be in the cards.

Many countries have proved reluctant to “take sides” in the US-China rivalry, preferring to maintain trade ties with both the West and the China-Russia axis. This is true even among democracies: in 2021-23, total Russian exports to India rose by 606 per cent according to IMF DOTS, owing largely to the Ukraine war – in particular, Russia’s need to redirect energy exports to friendlier countries, often at cut-rate prices.

So far, however, India is more an exception than the rule among emerging and developing economies, whose exports to the West have grown faster than their exports to Russia and China. According to IMF DOTS, the Global South (emerging and developing countries other than China and Russia) increased exports to G7 countries by 13 per cent from 2021-23; exports to Russia and China increased by only 5 per cent in the same period. But this may well change if Trump imposes across-the-board import tariffs.

China hopes to woo even close US allies. For example, it unilaterally reintroduced a short-term visa exemption for Japanese citizens. While Japan will not reject the US in favour of China any time soon, it might benefit from China’s charm offensive, such as the lifting of China’s ban on Japanese fishery products.

In Europe, China has set its sights on Hungary, where the Chinese electric-vehicle maker BYD is building a new factory in Szeged – a bid to reduce its future tariff bill, no doubt. In fact, the European Union (and Japan) might be able to negotiate exemptions to Trump’s tariffs, though this would not come for free, and any deal with China could still drive a wedge between the US and its closest allies.

Beyond alienating friends and partners, Trump’s tariffs will probably fail to advance his apparent goal of reducing the US trade deficit. If other countries adopt retaliatory tariffs, total exports from the US – and global trade overall – may well decline. Moreover, high US tariffs would fuel domestic inflation, forcing the US Federal Reserve to raise interest rates, which would probably cause the US dollar to appreciate, causing exports to fall and imports to rise.

Trump is also set to increase America’s fiscal deficit, as he has promised sweeping tax cuts, without identifying spending cuts that would make up for the lost revenue. As fiscal deficits undermine national savings and investment, the trade deficit, too, will grow. In other words, like President Ronald Reagan in the 1980s, Trump is likely to preside over twin deficits.

Of course, Trump will point the finger elsewhere, accusing US trading partners of “dumping” goods or maintaining artificially low exchange rates. Some observers, including myself, speculate that Trump’s pick for Treasury Secretary, Scott Bessent, might even call for a special G20 meeting to pressure other countries to revalue their currencies vis-à-vis the dollar, a move that would recall the 1985 Plaza Accord.

While Trump appears eager to impose tariffs on everyone, China has always been his favorite target. The apparent goal of taxes and other restrictions – imposed by both Trump and President Joe Biden – is to contain China’s rise, thereby preventing it from becoming a credible challenger to the US. But unless Trump takes a prudent approach to tariffs on imports from the rest of the world, it is the US that will be contained, in terms of both economic dynamism and global influence.

Takatoshi Ito, a former Japanese deputy vice minister of finance, is a professor at the School of International and Public Affairs at Columbia University and a senior professor at the National Graduate Institute for Policy Studies in Tokyo.