The world is reeling from US President Donald Trump’s “Liberation Day”, when he announced the highest US tariffs in more than a century. The United States is hiking taxes on imports from almost every country in the world. Shoes made in Bangladesh and sold to American wholesalers for US$20 will now cost at least US$27. A machine part that General Motors imports from Europe for US$200 will now cost at least US$240.
The White House’s new, supposedly “reciprocal” tariff increases range from 11 per cent for the Democratic Republic of Congo to 50 per cent for Saint Pierre and Miquelon and Lesotho. For the European Union and China, which already faced US tariffs, the rate is rising by an additional 20 per cent and 34 per cent, respectively. In the immediate aftermath, global markets have plunged, triggering fears of a global recession.
The Trump administration says that the tariffs are part of a plan for bringing manufacturing jobs and production back to the US, and to balance US trade, which is currently in deficit. While economists and policymakers have mixed feelings about whether, and when, trade deficits actually matter, it is worth noting that the US deficit, which has persisted since 1976, did grow at a faster rate after the North American Free Trade Agreement in 1994.
But the White House’s explanation of how it set the new tariff rates was based on unfounded premises and wrong assumptions. First, it simply assumes that all trade deficits are due to unfair trade practices. If Canada sells more to the US than the US sells to Canada, the Canadians must be “ripping off” Americans.
But this premise ignores natural economic forces. While US policymakers have accused China of devaluing its currency and subsidising its exporters, and the EU of using regulation as a non-tariff barrier, trade deficits can also arise from comparative advantage and multilateral relationships.
For example, the US buys raw materials and critical metals from DR Congo, but DR Congo buys cheap manufactured goods from India because it cannot afford the higher-quality, relatively more expensive US-made products. These trade flows imply a bilateral deficit for the US vis-a-vis DR Congo, even in the absence of any unfair practices. Switzerland has almost no tariffs, but the Trump administration will now impose a 31 per cent tariff on its exports to the US.
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