Trump's tariff own-goal
3 April 2025
US President Donald Trump has made so many fundamental errors with his so-called "Reciprocal Tariffs" announced yesterday (2-Apr-2025) that it is almost comical. One could forgive a President for being ignorant of economics, but any of the sycophants around him who were trained in economic theory appear too timid to stand up to him, and he's just imposed a giant own-goal on US consumers, including manufacturing workers. Here's why.
The formula adopted for determining the "worst offenders", as published on the US Trade Representative's website, is incredibly crude. It takes the trade imbalance in goods with each country or territory (Exports minus Imports) and divides that by Imports, that is (E-I)/I, to determine the "effective tariff" rate charged by that country. So if the country buys almost no US goods (typically because it is poor) then that formula produces almost a 100% figure (I/I). Therefore, some of the poorest countries in the world, which are the providers of the lowest-cost labour for the most labour-intensive goods, are deemed to be the "worst offenders" on that measure. Items like toys, shoes, garments and finished electronics are among those products.
Trump's Executive Order starts with a 10% additional tariff on all imports (except those already covered in certain other orders), but then there is an "Annex 1" list of 57 offending territories which will be tariffed at higher rates. Many of those will be barely affected because their exports to the USA comprise mainly products which are exempt in "Annex 2", for example, petroleum from Brunei, phosphate from Nauru (population about 12,000) or silicon chips from Taiwan.
But the largest tariff impact will be on imports from labour-intensive manufacturing countries including China, Vietnam, Cambodia, Thailand, Malaysia, Indonesia, India, Pakistan and Bangladesh. And since the tariffs on those countries are all comparable around the 50% level, US importers will have nowhere else to go, or at least nowhere that can quickly replace those manufacturing bases. So importers will not have much leverage against the suppliers, and will simply have to pay the tariffs and mark up the price they charge to US consumers.
But wait, you think, isn't this all about bringing manufacturing jobs back to the USA? No, because even at a 50% tariff, it will not become economic to set up factories in the USA to make sneakers, shirts, baseball caps or soft toys. It will still be cheaper to import them. Even smartphones use too much labour to make them in the USA. So US consumers will have to pay the price.
The higher prices will of course impact US consumer demand for those products, particularly items which are more discretionary, such as replacing a smartphone or buying a new laptop when the old one still works. But a lot of consumer goods are not that durable - how many people will darn a hole in a sock rather than buy a new pair? And will US sock makers come roaring back? Make American Socks Again? No, imported, high-tariff socks will still be cheaper.
So the reduced US demand will affect overall imports from the affected countries, but it will not even come close to rectifying the trade deficit. It isn't going to make poor countries rich, so that they can buy much more of US products, even if they take all of their actual (not fictional) import tariffs to zero.
So Asian manufacturing companies can, to a large extent, hold the line against US importers' requests for better pricing, except for the effects of reduced demand on discretionary items leaving excess capacity in some sectors. The likely currency impact of reduced exports will have some benefit to pricing as it reduces the labour cost in US dollar terms, but that's about all.
There are some other interesting effects for larger ticket purchases. It will become more attractive for US citizens to visit other countries (particularly those with zero or low sales taxes) and buy anything that they can carry/wear home, claiming that they left the USA with it and it isn't an import. So HK tourism should benefit from US tourists looking for their next iPhone or sneakers, as should British Columbia in Canada. Similarly, if you are in the market for a Swiss watch, a trip to Switzerland or (again) HK beckons!
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