U.S. Tariffs on Trade Partners and the Consequences of the Tariff War
President Donald Trump’s decision to impose new tariffs on imports from Canada, Mexico and China is set to have major impacts on global trade. This current situation of tariff war between the world’s largest economies is apparently a complex issue of the global economy and protectionist trade policies.
Our analysis will examine the reasons behind this decision, China’s response, the impact of protectionism on the world economy and the effects it may have on Albania and international relations.
Taking a closer look at the issue and the approaches of the parties, we have stopped to examine some questions to provide our commentary.
Why did Trump impose new tariffs, but temporarily suspend them for Canada and Mexico?
The Trump administration’s decision to impose a 25% tariff on imports from Canada and Mexico, but suspending its implementation for a month and a more aggressive and direct policy towards China has several strategic reasons and:
First, President Trump seeks to change the terms of NAFTA[1], replacing it with the USMCA[2], which was approved in 2020. Suspending tariffs is a pressure tactic to force these countries to accept more favorable terms for the US. On the other hand, suspending tariffs is a diplomatic way to avoid further straining relations with these partner countries. Canada and Mexico are the US’s main trading partners, with annual trade exchanges exceeding $1.3 trillion. Imposing tariffs would have direct negative effects on US industry, especially in auto manufacturing, agriculture, and energy. When the US imposed tariffs on steel and aluminium, Canada and Mexico were hit hard, driving up costs for US automakers like Ford and General Motors, which imported raw materials from those countries. This was a factor in the temporary suspension of tariffs on those two countries.
Second, the US government seeks to focus on China as the main economic adversary by confronting it directly. In the Trump administration’s economic strategy, China is seen as the main competitor, especially in the technology and manufacturing sectors. Tariffs are a tactic to curb China’s growth as an economic superpower, so the Trump administration did not see the need to apply immediate tariffs against it, while with regional allies it can use a softer and negotiation-based approach.
How is China’s tariff response to the US understood?
China’s counteraction is an expected measure, since it also has a strategic reaction, if we look at what tariffs it has increased in response on several key US products:
Coal (15%) and liquefied natural gas (15%)
Crude oil and agricultural machinery (10%)
Trucks and industrial equipment (10%)
This direct response to American protectionism aims to hit American exports in sectors that could hurt the US economy, such as the energy industry and agricultural machinery.
The US is a major exporter of energy, and tariffs on these goods directly affect the energy industry, reducing American competitiveness in international markets. On the other hand, these tariffs, increased by 15%, could have an impact on Trump’s electoral base. Tariffs on coal, liquefied natural gas and agricultural products hit American states that depend on these industries and that supported Trump in the presidential election.
China also aims to hit American agricultural states, which are President Trump’s electoral base, with tariffs on agricultural products and machinery and equipment. US soybean, corn and wheat producers have suffered heavy losses in the past due to Chinese tariffs, bringing political pressure on the US administration. Because of the tariffs, China significantly reduced its imports of U.S. soybeans in favor of Brazilian producers, giving competitive economies an advantage. In 2018 alone, Chinese soybean imports from the U.S. fell by 75%, while Brazilian exports increased significantly.
The tariffs also affected large U.S. companies such as Caterpillar dhe John Deere, which lost market share in China.
At the same time, this response is an attempt by China to diversify its markets. In the long term, China has pursued a strategy to reduce its dependence on U.S. imports by increasing trade relations with countries such as Russia and the Middle East for energy, and Brazil and Argentina for agricultural products.
How much does a tariff war harm the sustainable development of the global economy?
The trade war between major economic powers has profound negative effects, as it increases economic uncertainty for investors and international companies. Investors become more cautious due to the unstable trade climate. Many international companies that depend on global supply chains face rising costs and market uncertainty. Another proven consequence is the slowdown in economic growth. According to the International Monetary Fund (IMF), the US-China trade war reduced global growth by 0.5% in 2019. Protectionism can negatively affect global GDP and reduce international trade, reducing consumerism and investment.
On a broader level, this war damages supply chains. Many products have raw materials or parts produced in different countries, and tariffs increase the cost and lead to inflation of final and intermediate products.
Countries that are more dependent on exports to major markets could be hit hard, as they face price increases and difficulties accessing international markets. Smaller countries, such as those in the Balkans, face greater challenges in finding sustainable markets.
How could increased tariffs on the EU affect Albanian exports to the US?
Albania is not a major exporter to the US, but an increase in US tariffs on the EU could have indirect impacts.
One impact would be on Albanian exports. If European companies face higher tariffs, they could reduce demand for Albanian products, such as textiles and agricultural products, to offset the increased costs of exporting to the US.
For example, in 2018, the US imposed tariffs on European steel, which led to increased production costs for EU firms and a decrease in imports from Albania of auxiliary materials used in the construction industry.
If European investors are affected by US tariffs, they may reconsider expanding investments in Balkan countries, including Albania. European companies that have invested in Albania and other countries in the region may reconsider their plans, negatively affecting employment and economic development.
In an optimistic approach, this situation also means new opportunities for Albania, provided that mechanisms are used and found to benefit. If the EU and the US enter a tariff war, Albania could benefit by offering alternatives for production or exports, especially in sectors where free trade agreements could be included. But, as we have seen recently, Albania could seek to strengthen trade relations with alternative markets, such as Turkiye and the Middle East.
Is there room for diplomatic solutions to trade disputes?
From the experience of past periods, there may still be room for dialogue, but this depends on the political will and strategy of each party.
Negotiations can bring about reciprocal agreements. As was seen with the Phase One Agreement between the US and China in 2020, it is possible for the parties to agree on common terms, reducing tariffs and adjusting trade imbalances, where China agreed to increase imports from the US.
But is China ready to take this approach again?
This is precisely a matter of will and strategy.
Pressure from the World Trade Organization (WTO), although the US has challenged the authority of the WTO, could be an option for multilateral intervention that could help ease tensions.
Pressure from the private sector and business sectors close to President Trump’s focus is also having a strong impact. US and European companies have strong interests in avoiding trade wars, so they can pressure and lobby their governments to reach agreements on tariff reductions.
The global interdependence of the economy makes an ongoing trade war harmful to all parties, creating incentives for compromise.
While protectionism is seen as a tactic to protect domestic industry, it also creates negative side effects such as increased costs for consumers and businesses. Protectionism may protect some US industries in the short term, but in the long term it harms global trade.
US-China-EU tensions may continue, but as in the past, economic diplomacy remains the best option to avoid a global economic crisis.
For Albania, the impact may be more indirect, but a cautious approach should still be taken to manage the potential effects on exports and investments.
The government should carefully analyze changes in international trade to minimize risks and seize new opportunities.
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