Trump's trade wars are going to hike inflation and interest rates in the US and around the world and won't boost jobs in the US or make middle or working-class Americans better off. The price of his mayhem is going to be enormous.
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This is the transcript:
Trump has declared trade war, and it's going to create mayhem.
The convention in the USA is that the incoming President makes no announcements before they arrive in the Oval Office, which will be on January 20 2025 in the case of Trump. But, convention isn't something that Trump worries about, and so he has already announced that he is going to impose tariffs, supposedly on that very day when he arrives in office, on all imports into the USA from China and from Mexico and from Canada.
In the case of China, there's going to be an additional 10 per cent tariff because most goods already have tariffs when they come from China into the USA.
But he's also going to impose 25 per cent tariffs on imports into the USA from Mexico and Canada because he apparently believes that they are exporting people into the USA illegally, which is definitely not true in the case of Canada. And he also thinks that they are undermining the American economy by supplying goods which are, for example, creating the opioid crisis, suggesting that fentanyl is apparently produced in Mexico and Canada for use by Americans who are then addicted to it, for which there is very little evidence.
So, what is Trump doing by declaring trade war in this way? He's going to unleash mayhem. Why is he going to do that? Because a tariff increases the price of goods imported from these countries into the USA. And the USA is heavily dependent on imports from China, from Mexico, and from Canada.
In fact, roughly 40 per cent of all imports into the USA come from those three countries. In other words, Trump is going to increase the price of imported goods in a way that is going to hit the US consumer almost immediately.
If you listen to Trump's narrative, these tariffs will be paid for by China, Mexico, and Canada, but that's not true. If Canada is exporting a product to the USA for a US dollar in price, then Canada doesn't change the price of its export because Trump has put a tariff on those goods. What happens is that the importer of those goods into the US has to pay, as from January 20th if Trump sticks to his word, 25 cents to import that product from Canada.
The tax is paid in the US, by the US importer, who will, if they still want to import that product, have to pass on that price to the US consumer. In other words, the price of these tariffs will almost in its entirety be paid by the US consumer.
Now, Trump would argue otherwise. He would say that because the product is now 25 per cent more expensive, the US consumer will buy a US-manufactured product instead of a Canadian-manufactured product. But in reality, that's not going to happen, and there's good reason for that.
For example, 40 per cent of all oil used in the USA is actually imported. And the vast majority of that comes from Mexico and Canada. So, unless Trump has got some mechanism to suddenly increase oil production in the US by 40 per cent, and I very strongly suggest to you that he hasn't, then the US consumer is going to be paying a lot more for their oil come January 21st, 2025 than they are now because the price of that tariff on imported oil from Mexico and Canada is going to have to be recovered by the importer into the USA.
There are plenty of other products where this is going to be seen to have an immediate impact. For example, at least half of all fruit consumed in the USA comes from Mexico. In the case of tomatoes, it's over 60 per cent come from Mexico. And in the case of avocados, it's over 90 per cent. And I'm told the US can't survive without an avocado.
So, in that case, that tariff on those products is going to go straight onto the shop price for the US consumer, and there is no alternative supplier. This is as a matter of fact a tax on the US consumer. And what is the biggest export from Mexico to the USA? Well, actually, it's electrical consumer goods. And that price is also going to be passed on because there isn't the manufacturing capacity inside the USA to substitute for that Mexican capacity that exists now.
In other words, Trump is not entering into trade war on these countries, although let's not pretend that this will not have a massive impact upon their export capacity, and on their trade flows, and on their financial well-being. What he's actually doing is declaring trade war on the people of the USA, who are going to see significant price increases which will hike inflation in the USA, which is the exact opposite of what he promised people when he stood for election.
And he's also going to see a big reaction from the Federal Reserve as a consequence, who are going to be pushing up interest rates in the US to try to tackle this inflationary boost, with the consequence that inflation will not only go up around the world, but interest rates will go up around the world, and the consequence of that is almost too horrible to think about.
Most of the world's developing countries pay their interest based upon US dollar borrowings and they will be impoverished by Trump's actions.
Here in the UK, we will see the Bank of England trying to compete on interest rates and we will probably see our rates at least remain as high as they are at present, which are uncomfortably high, or even increase.
There will be a spillover consequence of Trump's stupidity. But we will have to live with that stupidity because I believe it will happen. But the people who will suffer most are the people of the USA. And Trump is going to upset an almighty lot of them very soon, when it becomes clear that his economic madness is not going to create cost for China, Canada or Mexico to anything like the degree that he claims but is instead going to hit the American middle and working classes very hard indeed.
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Interesting response from Canada
https://www.theguardian.com/world/2024/nov/28/canada-donald-trump-tariffs-leaders-chrystia-freeland
It’s a grim future for us all with Trump in the White House. Irrationality rules.
Here in the UK, we will no doubt feel a backwash at the very least. I suspect we will be included with some tarriffs being imposed. Then, as prices rise, we will get the usual Pavlovian dog response from the BoE of an increase in interest rates. But at least I assume we would know something from Richard’s piece yesterday, “The National Debt has fallen by £1.5T”, that the national debt will fall further. I suspect we will just see further austerity. Life is likely to become more difficult and uncertain for us all.
Tariffs on imports and the consequences thereof really is economics for dummies!
But he’s surrounded himself with sycophants and neocon businessmen so all good on the happy sinking ship El lunatico.
A lose-lose. Well it sends a message about priorities, USA issues first I guess but lacking strategy, tariffs a blunt instrument like interest rates. Previously said ‘no price tag’ for deportations – (implying the value is higher) rarely hear that rhetoric about any area of public policy!
May I ask something really naïve and stupid?
I can see how targetted, political sanctions (I believe yoghurt was one last time) would hurt the US administration. But what impact would it have if Canada said “OK. Fair enough. We’ll keep the oil/aluminium/wood whatever. Someone else will buy it”?
Like I said, naïve and stupid, but genuine!
The Candaians would have to find someone else to buy their products – which may be very hard because supply chains will be into the US – or face a loss of income
Ah, thank you.
I keep trying to think of another angle about this proposed policy but I cannot think of one at all.
The worst that could happen is that as prices rise, Trump will double down on blaming external causes which could lead to anything – even war with Iraq Part 2 in the form of a conflict with Iran.
The issue is that you have a lot of very pissed off ,angry and baying people to manipulate.
It’s like playing with matches next to an ammunition dump.
I suspect reality will take over at some point as he is already – against convention – setting several ammo dumps ablaze. Sending the Army into Los Angeles, Chicago or NY – especially the latter – shouts ‘Civil War’ as it is.
Thanks for an excellent narrative. It is quite difficult to get one’s head round all the second order effects and feedback loops, and this helps.
Undoubtedly tariffs will push up prices in the US. Undoubtedly the Fed will increase interest rates, even though that won’t make any sense. The effect of interest rate rises in the US will be to suppress demand there. This happens by taking money from those that don’t have it, and need to borrow, and giving it to those with money, thereby increasing inequality. I don’t think Trump supporters voted for increased inequality. Why would the Fed suppress demand further in response Trump suppressing demand by imposing tariffs? It makes no sense but doubtless will happen. Trump will then get angry with the Fed (and perhaps he’d be justified for them making his bad decisions worse).
When the Fed raises interest rates the dollar will rise. This may have two effects.
Firstly it will increase imports for goods without tariffs (assuming there are any), because they will be cheaper, and reduce US production, and therefore jobs, for those goods. I doubt that is what Trump supporters want.
Secondly other countries, e.g. the UK will respond by pushing up their own interest rates, even though that makes no sense either. The Bank of England’s justification will be to “bear down” on the inflation that would otherwise be imported through higher dollar values relative to the pound (nonsense though that is). But suppressing demand in the UK, through rate rises, is not going to affect the cause of the problem, which is tariff rises in the US.
I suppose a more measured UK response, rather than raising interest rates, would be to impose tariffs on US goods, in a measured way, to offset price reductions caused by a higher value dollar. Those tariffs could then be recycled to subsidise UK exporters damaged by US tariffs. I guess that’s a trade war :-(. I doubt that will happen because UK politicians will say it would contravene international trade agreements, even though Trump will be driving a coach and horses through such agreements.
All of which is a bit rambling, sorry. I guess my point is that US tariffs will send economies round the world into chaos. And it is difficult to predict, with all the second order effects and feedback loops, what will happen. But it won’t be good.
Thanks
Given that you are anti-free trade and also anti-Trump, this must be a difficult issue for you to comment on, without appearing inconsistent!!
Remind, where is there any evidence that ‘free trade’ has ever happoened?
This economics teacher tells all of his students “a free market exists only in the textbook we told you to buy”
I agree
The person to whom you are referring to has never been against any form of trade or a mixed economy either.
But if you are referring to Freeports of course – where it is likely we will see an influx of dangerous un-regulated goods – from anything to poisonous vapes to batteries that spontaneously combust, then he has certainly been against that.
I also take it that you are anti-tax and duty orientated which is what you are really getting at isn’t it?
“And Trump is going to upset an almighty lot of them very soon, when it becomes clear that his economic madness is not going to create cost for China, Canada or Mexico to anything like the degree that he claims but is instead going to hit the American middle and working classes very hard indeed.”
And Republicans will be swept out of both Houses of Congress in 2026.
I am looking at purchasing stocks in broom manufactures as there will be a great big large economy size mess to sweep up.
🙂
Happy Thanksgiving
What about the tariffs that the EU imposes on all non-EU countries?
Are these bad too? I’ve never heard you criticise the EU in the same way?o
I am not opposed to all tariffs and have never said I am because that would be untrue.
I am opoposed to disruptive trade wars and their consequences.
Is it really so hard for a troll to work that out, or are trade wars to your liking?
For a time tariffs of this nature are going to hit hard on some Mexican sectors. Am thinking of the tomato growing industry. They cannot store the surplus and unemployment will grow?
The tax is paid in the US, by the US importer, who will, if they still want to import that product, have to pass on that price to the US consumer. In other words, the price of these tariffs will almost in its entirety be paid by the US consumer.
Agreed, Richard, well said. So let’s have free-er trade globally – except with mercantilist economies that erect tariffs.
I’m not for tariffs or trade wars, far from it but just to get my thinking straight. Governments need tax revenue (yes I know it’s spend then tax back rather than tax in order to spend) but suppose the US Government needs tax receipts of say $X and tariffs are just another way of taxing the US consumer, if they reduce other taxes, income and sales taxes by the corresponding amount would not the US consumers overall be no worse off? Or is the issue which of the the US consumers would be the ones to feel reduced or increased tax burdens? If so is that why Trump plans to do it?
This is not about tax
This is about trade war
Please hold more than one idea ion your head at once
I must admit, I was one of the few on the left who wanted a Trump victory. The USA has long been ‘the’ rogue nation, self serving to the nth degree, utterly disinterested in a stable World, a World economy that works for all, or peace and an end to eternal warfare. Everything is wrapped up in the ‘big me’. The mighty ‘WIFM’ is all that matters to the vast majority of US citizens. As such Trumps utterly foolish economic policies that will cause inflation to rise, put pressure on US retailers, and crush a large part of the public services, will badly damage the US in multiple sectors. Good.
The USA, as De Gaulle rightly identified in the 1950’s, is the biggest menace to World peace, to economic balance across the World, and to the hopes of prosperity for the majority of the Worlds populous, since the inter war fascist powers. The EU was set up to counter the US’s self serving World crushing powers, as France and Germany realised the menace a nation that cared for none, even its own, meant to other economies.
Trump, with his right wing pleasing, hedge fund managers and megalomaniac corporate bosses in his cabinet, are hell bent on carrying out the great neo-liberal experiment of getting rid of the public sector, and slashing govt spending to the point where it barely manages to function. Again, good. While China is no great alternative, the USA has had its chance and shown it cannot escape the narrow parameters set by the religious right, corporate USA and the politicos in its pocket. Time for someone else to have a go.
Stupidity takes many forms.
You have clearly embraced one of them.
How can embracing the very thing you say you want to be rid of be described as anything else?
Sorry? By embracing someone who will damage the USA’s economy and potentially knock it off its World straddling perch, is contradictory how? Not trying to be confrontational, but I don’t see the double negative?
If you can’t see the problem I can’t explain it