The ripple effect of US tariffs on global economies

In recent years, tariffs have become a central component of US trade policy, impacting international relations and economies worldwide. The resurgence of tariffs, particularly those aimed at China and specific industries, reflects a strategic move to protect US industries and reduce its trade deficits.

A second round of tariffs under the next US administration could fuel inflationary pressures, affecting both US and international economies. A universal 10% tariff on imports, as proposed, would directly raise prices for consumers, making imported goods more expensive. This price increase could reduce domestic purchasing power and may lead to reciprocal tariffs from trading partners, further escalating costs and reducing trade flows. Additionally, these trade policies might destabilize global trade by disrupting established supply chains, potentially leading to short-term job creation in the US, but creating a long-term economic inefficiencies​.

At the time of Trump’s election in 2016, the US trade deficit in goods was close to 3.9% of GDP with nearly half coming from trade with China. Starting in 2018, tariffs were added to an increasingly wide range of Chinese products. The average tariff on imports from China was 3.1% in 2017. It was raised in waves, exceeding 20% by the end of 2019, before a deal was reached in which China committed to increase its purchases of American products. Tariffs were also imposed on specific products from other countries, such as steel.

Surprisingly, the goods trade deficit for 2023 remained close to 3.9% of GDP. Although the share attributable to China was reduced to 25%, imports from other countries like Vietnam, India, South Korea and Germany increased.

A potential revival in tariffs would be detrimental to certain industries. Asia and Germany’s automotive and machinery industries are particularly vulnerable due to their high dependence on US demand. Such tariffs would likely reduce Asian and German exports and might encourage companies to adjust their supply chains or relocate production to the US.

As a potential response, countries could retaliate on targeted goods or offer trade concessions to diffuse the tension. During the first Trump presidency, the EU agreed to lower their tariffs on some US products and made concessions on the import of beef and soybeans. The EU may again offer to import more goods from the US such as armaments, liquified natural gas (LNG) and agricultural products. We believe that offering trade concessions and reaching bilateral trade agreements would be more favourable than imposing blanket tariffs on a large selection of goods.

In summary, enhanced tariffs could lead to increased consumer prices, hurt international relations, and potentially shift production and trade in the most vulnerable industries. These economic shifts would challenge the international economies, especially if retaliatory actions escalate to a trade conflict.