Impact of Donald Trump's Tariff Policy

The Trump administration's decision to impose significant tariffs on imports has reignited global trade tensions. The policy aims to boost domestic investment and job creation under the narrative of ‘Make America Great Again’.

Tariffs and Retaliation

• 20% tariffs on Chinese imports and 25% tariffs on imports from Canada and Mexico.
• Canada retaliated with 25% tariffs on C$30 bn ($20.7 bn) of US imports, potentially extending to C$125 bn ($86.2 bn).
• China imposed additional tariffs of 10-15% on various US products.

Trade Deficit and Economic Theory

• In 2024, the US has a trade deficit of approximately $300 bn with China, over $200 bn with Mexico, and $40 bn with India.
• Classical economists like Adam Smith and David Ricardo argue that tariffs interfere with free trade, leading to inefficiencies and higher consumer prices.

Economic Consequences

• Tariffs lead to increased consumer prices, with costs passed onto consumers.
• Domestic inflation may rise, complicating interest rate cuts by the Federal Reserve.
• Disruption of global supply chains, reducing competitiveness and firm-level productivity.

Historical and Current Impacts

• The Smoot-Hawley Tariff Act of 1930 worsened the Great Depression through widespread retaliation.
• The US-China trade war led to job losses in export-dependent industries.
• Between 2009 and 2024, China's GDP grew at a CAGR of 9.01% compared to the US's 4.78%.

Trade Deficit Trends

• US trade deficit with China increased from an annual average of $311 bn under Obama to $361 bn during Trump's first term, decreasing to $327 bn under Biden.
• Projected decline in US GDP growth by 0.3 percentage points, resulting in a loss of $75 bn in economic output.
• Estimated 0.25% decrease in US employment, equating to over 400,000 job losses.

Key Takeaways

• Free trade is beneficial for economic growth.
• Protectionist policies lead to slower growth and economic losses.