Donald Trump reignited trade tensions around the world by placing 25% tariffs for imported aluminum and steel. This sparked an outrage from all major economies.
European Union, China and North American Allies have already begun to prepare their response, while concerns over a new trade war continue to rise.
Trump wants to help the US economy, but it is possible that this will lead to increased prices and even retaliation by key trading partners.
Tariffs on goods and services could cause trade disruptions and a slowdown in economic growth, given the high global inflation and stressed supply chains.
Why is Trump returning to tariffs, and what happens next?
Why does Trump continue to impose tariffs?
Trump claims that US trade is unfair and tariffs are needed to boost steel and aluminum production in the US.
White House claims the move was made to ensure that US metals are not dependent on other countries. Senior counselors have stated that:
It’s not just about the trade. This is about making sure that America doesn’t have to depend on other nations in critical industries such as steel and aluminium.”
Trump also suggested that the tariffs were just a beginning and that “reciprocal” tariffs would be imposed on other countries who impose higher tariffs on American products.
Trump announced similar tariffs on steel and aluminium in 2018 during his first term. He claimed that they would revive US manufacturing.
As a result, the cost of raw materials increased, and companies had to pay more for their products.
Source: Bloomberg
Global markets have already been hit by high inflation.
Raising tariffs could increase prices and hurt industries dependent on steel and aluminium, like auto manufacturing and construction.
What is the global reaction to Trump’s tariffs?
The European Union condemned these tariffs quickly and warned against proportional countermeasures.
Ursula von der Leyen, President of the European Commission, has promised swift retaliation against iconic US exports like bourbon and jeans.
Unjustified Tariffs against the EU won’t go unanswered. “They will be met with proportionate and firm countermeasures.”
Germany, Europe’s biggest economy, and one of the largest steel exporters to the US has indicated its willingness to take action.
Olaf Scholz, the German Chancellor said that if necessary, Europe could react “within one hour”. Scholz also stressed the power of Europe by saying:
We have the power to make this happen as the biggest market on the planet with over 450 millions citizens.
Brussels may also consider reinstating tariffs suspended following Trump’s initial trade war of 2018.
China and Canada are also pushing back. China has already placed new tariffs against certain US products, and Canada called it “totally unfair.”
The emerging economies of Asia also prepare for the impact. Trump’s “reciprocal” tariffs could be the most damaging to India and Thailand, since they have higher import duties than the US.
Targeted measures could be imposed on countries with high trade surpluses in the US, adding to uncertainty about global trade.
What is the impact of this on global inflation?
Tariffs are a form of taxation on imported goods, which means that steel and aluminium companies may be able to pass these costs onto consumers.
Tariffs could push up prices across industries, as inflation is still higher than pre-pandemic.
Stock market reaction has been immediate. Following the announcement of tariffs, shares in US steelmakers surged as investors weret on rising domestic prices.
This is bad news for those manufacturers who rely heavily on metal imports.
Costs of production could increase in industries such as aerospace and auto manufacturing. This may lead to increased prices or job losses.
Moreover, uncertainty about global trade could erode business confidence and reduce investment.
As the world tries to recover from economic shocks caused by the pandemic, and war in Ukraine, a prolonged trade war could disrupt supply chains.
Trump is he starting a trade war with China?
A full-scale war of trade is more likely, particularly if Trump implements his plan for reciprocal tariffs.
This time, unlike in 2018, where the US finally negotiated tariff cuts with a few allies. Leaders around the world appear to be less willing than ever to compromise.
China is already retaliating, while the EU prepares aggressive countermeasures.
Canada and Mexico weigh their options, as they are the two largest suppliers of steel to the US.
Global trade could be seriously disrupted if multiple countries implement tit for tat tariffs.
Geopolitics is also at work.
Trump’s tariffs don’t only concern trade, but also leverage economic power in advance of negotiations with Europe or China.
The US could be forcing its trading partners to sign new deals that would benefit American industry by taking a more aggressive approach.
History shows that trade wars are often harmful to all parties.
Tariff war between China and the US in 2018 and 2019 led to increased costs for American farmers and businesses, forced supply chain restructuring, and weakened global economic growth.
Next?
Trump’s implementation deadline of March 12 leaves very little time for negotiation. Expect rapid developments in the weeks ahead as countries announce their countermeasures.
EU and China have already begun drafting their tariff retaliation, while companies that rely on steel will lobby to get exemptions and policy changes.
As businesses adjust their prices and supply chain, they will be able to see the effect on global markets.
The global economy may suffer a major blow if this dispute turns into a tariff war.
If diplomatic negotiations prevent a full-scale confrontation, damage can be minimized.
The post Trump’s tariffs are costing Europe a lot, and they’re about to pay it may change as new developments unfold.
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