Three Possible Scenarios for the Global Economy if Trump Enacts New Trade Tariffs

During Donald Trump’s earlier presidency, he sparked trade disputes with China and Europe. Despite his assertive statements and the imposition of tariffs, the US trade deficit did not show improvement.

In fact, the deficit worsened, increasing from $195 billion in the first quarter of 2017 to $260 billion in the same quarter of 2021.

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Initially, Trump’s tariffs were set at 25%, affecting a limited variety of goods. However, his recent proposals indicate a shift towards implementing tariffs of 10% or 20% on a broader spectrum of imports. Canada and Mexico could face tariffs of up to 25%, while imports from China may see tariffs soaring up to 60%.

This new proposal significantly diverges from previous strategies. What could this imply for the US, the UK, and the global economy?

Scenario 1: Confrontation

If one is to take the president-elect at his word and Trump remains committed to enforcing uniform tariffs, a likely outcome could be inflated prices within the US economy due to more expensive imports. This could stimulate demand for domestically produced goods, potentially raising domestic wages and increasing the risk of inflation.

The chance of the US economy overheating is real. Still, counterbalancing factors could also come into play. High tariffs coupled with significant domestic investments might strengthen the dollar, making imports cheaper before tariffs are applied, which could help counteract inflation.

Moreover, the looming possibility of major public sector layoffs could relieve some pressure on the job market. Technological advancements, such as improvements in driverless vehicles, could also influence these dynamics.

Additionally, potential reductions in environmental regulations within the energy sector, alongside possible diplomatic advancements with Russia and in the Middle East, could lower energy costs.

Scenario 2: The art of the deal

Donald Trump is well-known for his deal-oriented political style. In terms of trade, this represents a shift away from the international regulations that have governed global trade since the conclusion of WWII.

The appointment of Scott Bessent as treasury secretary underscores this approach, viewing tariffs as a “sanctioning tool” in broader political and economic strategies.

This points towards a future where the US may lure other nations into favorable market access deals in exchange for various concessions, such as improved political relations, significant investments in the US, or greater openings for US exports.

This could instigate a major reshuffle of supply chains, with imports from more efficient countries being swapped for those from less efficient ones. Consequently, this might reduce the US trade deficit with China while increasing it with the EU, UK, Mexico, and Canada.

A crucial question arises: will these negotiations involve China, and will China be willing to participate? If China opts out, we could see the formation of two distinct economic blocs – one led by China and the other by the US.

Scenario 3: Deterrence

In a third, albeit less likely scenario, the Chinese government might acquiesce to US requests to modify their bilateral trade deficit, believing it’s not the best moment to confront US supremacy.

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China may opt to uphold its export-led growth strategy, fortify its position, penetrate foreign markets, and endure the Trump administration’s term. This would necessitate the Chinese government agreeing to greater and swifter purchases of American goods and services than previously stipulated in the agreements between the Trump and Xi administrations.

chess pieces and us and chinese currency
China must carefully consider its next steps. Image: Pla2na/Shutterstock

For the UK and Europe, UK exports to the US may face a 20% tariff, which could diminish sales and impact UK manufacturers exporting goods to the US, such as pharmaceuticals or machinery. The primary challenge for the UK will be determining whether to retaliate with its own tariffs on US imports and, if so, how extensively.

Engaging in a trade conflict with the US would not align with the UK’s interests; however, subsequent actions will greatly depend on the stipulations of the Trump administration. Conversations are already emerging suggesting that the UK may need to choose between aligning with the US or the EU, particularly if regional trade blocs start forming as a result of retaliatory measures by other nations.

While the implications for the EU would be comparable, a significant difference lies in the EU’s collective structure, operating as a bloc with its own trade policies and possessing an economy akin to that of the US. Therefore, the incentive for retaliation and consequent trade tensions between the EU and US is significant.

If the EU follows this course, it could create complications for the UK. In this scenario, the UK may ultimately need to select a side: either to nurture its special relationship with the US, risking further deterioration in trade relations with the EU, its nearest market, or to align politically and economically with the EU.

Unfortunately, as nations strengthen their trade barriers, they may unwittingly set the stage for future conflict.The Conversation

Agelos Delis, Senior Lecturer in Economics, Aston University and Sami Bensassi, Reader in Trade and Development Economics, University of Birmingham

This article is republished from The Conversation under a Creative Commons license. Read the original article.

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