TARIFFS (Part I) – WHY?

                                                                                           March 2025

On January 20, 2025 President Trump said, “I always say that tariffs are the most beautiful word to me in the dictionary.” He is threatening to impose 25% tariffs on all goods imported from the US’s major trading partners: Canada, Mexico and China, followed by the EU.

Most countries impose duties on imports. But tariffs are additional duties imposed for political or economic reasons, such as to stop a country dumping products at or below market cost, which would hurt the importing nation’s domestic industry.

But blanket tariffs on all goods from one or more countries are likely to be disastrous to global trade.

Case in point: The US stock market collapsed in October 1929, after a decade long bull market. By 1932, the Dow Jones Index had fallen by 89.2%.

By 1933, the unemployment rate in the U.S. had risen to 25%, about one-third of farmers had lost their land, and about half of its 25,000 banks had gone out of business.

But what would likely have been a deep recession turned into the Great Depression due to tariffs.

In June 1930, two Republicans, Senator Reed Smoot of Utah and Congressman Willis Hawley sponsored the Tariff Act of 1930, which imposed tariffs on 20,000 imported goods. When other countries retaliated with their own tariffs, US imports and exports fell by 67%, creating devastation for the US and the global economy.

Trade is critical for global growth. Some countries have an abundance of resources that they can export to countries that cannot meet domestic needs on their own (think oil and gas). Or that can produce goods cheaper than other countries, so both countries can benefit from the cost savings (e.g., China and the US) through trade.

Trump thinks that the world is taking advantage of the US, because of its trade deficit.

The reason that the US runs large trade deficits with other countries is that the US shipped millions of its jobs to China and other countries with low labour costs in the 1980s and 1990s, to increase the profit margins for US companies. It now has to import many of the goods it used to produce domestically. Countries are not taking advantage of the US, it is US policy itself that dictated this outcome.

Before the US imposed income taxes in 1913, tariffs  accounted for between 50-70% of government revenues. Now the US raises just 1-2% of its revenues from tariffs.

Let’s consider a US company that imports oil from Canada. Canada supplies about 60% of the US’s oil needs. When the goods are delivered, the company has to pay the Canadian supplier, and separately pay US Customs for all duties and tariffs imposed on that product (note: Canada does not pay the tariff, the US company does).

With a new 25% tariff, the cost to the importer has suddenly risen dramatically. It is too large for the importer to absorb without a huge impact on its demand/profitability, so it will pass most or all of the cost onto the consumer, which will cause an increase in inflation.

Trump’s statement that the country sending the goods pays the tariff is demonstrably false, it is the US consumer who will pay it. This would not only send inflation much higher, it will also likely induce a recession.

On Feb 10, 2025 Trump imposed a blanket 25% tariff on all steel and aluminum imports, a move the Ford Motor company president says will add “cost and chaos” to the auto industry.

We can see the impact of tariffs from Trump’s first term. He imposed tariffs on $ 50 billion of Chinese goods.    China retaliated with tariffs on US goods, and cancelled all soybean orders from the US (the US had to pay farmers $ 18 billion in compensation). They then went tit-for-tat with further tariffs.

Tariffs were also imposed on other US trading partners, such as Canada, Mexico and Canada. The total goods that tariffs were imposed upon in 2018 and 2019 amounted to $ 380 billion. 

These tariffs were paid by American businesses and consumers. A 2021 study by Oxford Economics and the U.S.- China Business Council concluded that the United States lost 245,000 jobs as a result of the Trump tariffs. A May 2019 analysis conducted by CNBC found Trump’s tariffs were equivalent to one of the largest tax increases in the U.S. in decades.

Deutsche Bank estimated that $ 5 trillion of market capitalisation was lost by US companies. 

Ironically, between the time Trump took office in 2017 through March 2019, the U.S.’s trade deficit grew by $119 billion, reaching $621 billion, the highest it had been since 2008.

In 2018, 1,100 economists, including 15 Nobel Laureates, wrote a letter warning that tariffs would lead to increased prices for US consumers; farmers would be harmed by higher prices and loss of exports; US exports would suffer from retaliatory tariffs and a trade war would threaten US security due to a rise in international tensions.

Peter Navarro, the key architect of the 2018 tariffs and the current ones, predicted in March 2018 that no country would impose retaliatory tariffs on the US.  “I don’t believe any country is going to retaliate for the simple reason that we are the most lucrative and biggest market in the world,” Navarro said in an interview. He was wrong. They did then and they will now. Canada, Mexico, China and the EU have all indicated they will strongly retaliate if new tariffs are imposed. This will hurt the economies of all countries involved.

The latest Harris poll finds that almost 60% of Americans oppose Trump’s tariffs, citing concerns over prices rising as a result.

Canada and the US have the largest trading partnership in the world. In 1971, President Nixon threatened to impose 25% tariffs on Canada. There were intense negations. Prime Minister Trudeau met with Nixon (Nixon privately told his aides that he thought Trudeau was a “pompous egghead” and a “son of a b__ch.” When this became public, Trudeau said he had been called worse things by better people). By 1972, the threat of tariffs had fizzled out.

In 1972, Nixon gave an address to the Canadian Parliament. He said, “No self-respecting nation can or should accept the proposition that it should always be economically dependent upon any other nation.”

He was right and in the face of Trump’s threats, Canada is seeking to expand its trade with China, Japan and the EU.

No one wins in trade wars created by large tariffs. The consequence of new tariffs and associated job losses is likely to ignite inflation and provoke a recession in varying degrees in each of the countries affected.

The Smoot – Hawley Bill comes to mind.