America is no longer the future

Donald Trump has announced sweeping new tariffs with a 10 percent tariff on all trading partners with many facing much higher rates such as 34 percent on imported Chinese goods, 20 percent tariff on imports from the European Union, 24 percent on Japan and 26 percent on India.

Economists at the Cato Institute, which champions free trade and free markets commented: “With today’s announcement, US tariffs will approach levels not seen since the Smoot-Hawley Tariff Act of 1930, which incited a global trade war and deepened the Great Depression.”

This is a significant escalation, with the proposed rates much higher than anticipated. According to the World Trade Organization, in 2023, the trade-weighted average tariff rate (trade-weighted means considering the volume of trade, large or small, in the good that is being taxed), varied between 2 and 4 percent for the US, the European Union, Canada and China.

Trump raised a whole host of matters including currency manipulation by countries, which is not entirely relevant. But even when it comes to tariffs specifically, Trump is comparing apples and oranges. It is not the case that China has 25 percent on US automobiles and Trump is hitting back with a similar tariff on Chinese automobiles. Countries have different tariffs on different goods. Imports are often taxed at a higher rate for a good that a country produces and wants to protect, while tariffs are lower on goods that a country does not produce and is happy to import.

Back in February, I wrote that that Trump’s tariffs would likely cause a global recession. Multiple agencies around the world such as CBS and Sky News are reporting that stocks have begun to tumble in anticipation of these tariffs. But the bigger fear now is that the negative impact on supply chains will lead to stagflation, falling incomes and outputs coupled with rising prices.

Will these tariffs serve the interests of US consumers and businesses? Could Trump be right that the tariffs will inflict short-term pain (higher prices at the till for US consumers) for a longer-term gain by bringing manufacturing back to the United States?

Unlikely given how current global supply chains work. Most goods are no longer produced entirely within a country. Bangladesh, a leader in the readymade garment business, imports cotton from India, the US, Pakistan and Australia.

Tesla’s production is concentrated in the US. Yet, Tesla is still critically dependent on getting semi-conductors from Taiwan and South Korea. To start producing cars entirely within the US, Tesla will have to base its operations there. But currently a large part of Tesla assembly happens in one of its factories in Shanghai. This reduces Tesla’s shipping costs, which would otherwise be much higher.

Trump’s view of the world is dated and harks back to a time when the only rich nations of the world were in the industrialised West. But currently, out of seven billion people in the world, four billion live in Asia. Yes, many of those countries are still poor on average but they still contain a huge chunk of rich people. India has 1.4 billion people. If even 10 percent are well-off (and the actual proportion is higher) then this amounts to 140 million people, twice the size of the UK.

So, even if Trump did force some manufacturers to bring manufacturing back to the US, many of them will not be able to compete on costs with Chinese producers.

What Trump should really be doing is using US leverage (or, God forbid, work with the World Trade Organization) to get reduction in tariffs across the board.

The US still leads the world in inventions and innovations thanks mostly due to its superb universities, which attract the best talents from the globe. But increasingly these advances rely crucially on technological breakthroughs in other countries.

Thomas Friedman, the New York Times columnist, recently wrote that he just saw “the future and it was not in America”. He goes on to talk about the huge campus consisting of more than 100 individually designed buildings built by Huawei in Shanghai following sanctions imposed on that company by the US amid national security concerns.

Among other things, Huawei has come up with the world’s first triple-folding smartphone and created its own mobile operating system, Hongmeng, to compete with Apple’s iOS and Google’s Android.

Friedman quotes a US businessman who has been doing business in China for decades. “There was a time when people came to America to see the future,” he said. “Now they come here.”

The US is no longer the economic superpower that it used to be. These tariffs will be ruinous even for US consumers and businesses. The only silver lining is it’s highly unlikely much of this will come to pass as US lobby groups and politicians clamour for carve-outs and exemptions.

But, by that time, Trump would have moved on to another pet peeve.