Does the US imposition of tariffs seem insane? Think it looks like self-harm? That’s because you looking at it from the wrong perspective. But will the grift work now that countries know the game he is playing?
Most people are aware that the imposition of tariffs means that the companies importing goods have to pay an additional charge to bring them into the country, In this case bringing goods into the USA. The effect is that prices rise and the USA suffers an increase in inflation. Unfortunately this also means that the goods other countries are trying to sell into the US market become too expensive compared to a US supplier, if there are any.
With suppliers of raw products such as aluminium, they can hope to sell the materials elsewhere. The chances of this are minimal as they have spent decades finely tuning their output to match a steady demand. The more likely scenario is that there is an oversupply into the world market and prices start coming down. Canada is a major supplier of aluminium into the US market and will be impacted by the tariffs.
The price of aluminium on the London Metal Exchange has been very stable for a long time, although over the next few days it is likely to tumble. Canadian smelters will have little choice and will likely reduce production. This will probably result in layoffs for workers.
How could this benefit the USA? The USA barely makes the top ten of countries producing aluminium. China is the largest volume producer with Canada as the fourth largest source. While the comparatively small US producers, could benefit from the tariff environment, they would not be able to meet demand which might produce the strange situation where aluminium prices are higher in the USA, but cheaper globally. Possibly imported aluminium could then become competitive again.
For the manufacturers trying to make goods in the USA this is a nightmare. Companies like stable conditions so they can plan capacity and production. Tariff wars bring chaos to manufacturing. If people really wanted to make American manufacturing a success story this will not be the answer. Most likely many companies will fold.
It all becomes a bit of a mess, with similar scenarios playing out with other goods subject to tariffs.
Economist and trade analysts are expending a lot of energy trying to explain the above basic facts to those who might listen, but they will not be able to reach the ears that matter. Trump’s. However, even if he was equipped to understand what they would hope to tell him, it wouldn’t matter because he is playing a different game.
The Tariffs Grift
At this stage it is useful to clear your mind of anything you may or may not understand about international trade and economics. This isn’t about that.
If you are holding on to the idea that Trump wants to rejuvenate American manufacturing and make America great then you need to consider where he gets his own merchandise made. The vast majority is made in every other country apart from the USA. He could not careless about manufacturing.
What he does care about is money for his cause and building a base of companies that know that in order to survive they have to be faithful to the ironically named MAGA cause into the future.
So how does this tariff debacle serve the future of MAGA? To understand this we have to remember what happened when Trump lobbed the tariff grenade over the US borders during his first term. There was a massive push back from affected US manufacturers. The consequence of this was that Trump administration set up a process that allowed them to apply for special exemptions, called Section 301 exemptions. This was highly consequential as an exemption could relieve a company of tariffs as high as 25 percent. The companies that got the 301 exemptions had a huge advantage over their competitors.
Despite recommendations for the Section 301 Exemption process to be regulated and published, the process is opaque. In 2018-19 the Office of the United States Trade Representative, received more than 50,000 requests regarding exclusions relating to China, while the Commerce Department received nearly 500,000 exclusion requests for the tariffs on steel and aluminum.
There is no doubt that companies which were favoured by the first Trump administration were more likely to receive the 301 Exemptions.
In the run up to the last Presidential election many companies will have been mindful of the benefits of being considered friendly to Trump, and not being seen as friendly to his opponents. Did any companies get a hint that he would run the tarrif grift again? That is difficult to know until some of the people involved publish their memoirs.
While Trump cannot run for president again under the current constitution, he does have a sense of establishing a dynasty. A strong incentive for companies to continue to support the MAGA brand will put future carriers of the MAGA torch in a strong position.
What happens next?
This time around the countries affected by the tariffs will have smart people who will be aware of the stunt that Trump is trying to pull off. It will be interesting to see how they deal with him this time round. While they will portray a veneer of adhering to accepted international trade responses, they may have developed strategies to game Trump back. International trade is a serious business and countries affected are going to take a dim view being manipulated as part of a grift.