A little taste of Trump’s customs policy
The article by Florian Ielpo gives readers a glimpse of the effect of the new US president’s future tariff policy. It is interesting to add a few new elements.
Brief recent history
President-elect Trump announced plans to impose 25% tariffs on all imports from Mexico and Canada and an additional 10% tariff on imports from China. Tariffs on Mexico and Canada will remain in effect until the flow of “drugs, particularly fentanyl, and all illegal aliens cease,” while tariffs on China will remain in effect.” until [les drogues qui se déversent dans notre pays] cease.” He also said that on January 20 he would “sign all the necessary documents” to implement the tariffs on Mexico and Canada as part of his “many first executive orders.”
In doing so, Trump calls into question NAFTA which is the mother of trade between two countries questioned by Tump. What is NAFTA or NAFTA in French? The North American Free Trade Agreement (NAFTA) was implemented to promote trade between the United States, Canada, and Mexico. The agreement, which eliminated most tariffs on trade between the three countries, took effect on January 1, 1994. Many tariffs, particularly those related to agricultural products, textiles and automobiles, were phased out until January 1, 2008. NAFTA was repealed and replaced by the United States-Mexico-Canada Agreement (USMCA) in 2020.
Certainly, Trump has already proposed most of these measures, in different forms:
– in May 2019, he announced a tariff that would increase to 25% on imports from Mexico, effective 10 days later, if Mexico did not address the immigration problem, but the tariff did not has never been imposed.
– On November 4, 2024, he also committed to imposing a 25% customs duty on all imports from Mexico, again linked to immigration.
– As for Canada, it has announced its intention to renegotiate the USMCA, but has not formally threatened to impose tariffs; This announcement is therefore a little more surprising.
– As for China, the tariffs are significantly lower than the 60% he proposed during the campaign, but if imposed, they may not be the only ones hitting imports from that country .
Overall, the announcement is more reminiscent of the first Trump administration, when such tariffs were announced as a negotiating tactic, rather than the more systematic tariff policies (e.g., the 10-20% “universal base tariff”) ) that Trump frequently mentioned during the campaign.
The devil is in the details
Some additional details: 43% of U.S. imports of goods come from Mexico (15.4%), Canada (13.6%), and China (13.9%).
In his commentary on the tariff announcement, Alex Phillips, a policy analyst at Goldman, writes that if he had assumed that tariffs on imports from China would increase early next year, he is more likely that Mexico and Canada will avoid across-the-board tariffs. Mr. Phillips also notes that if these tariffs are implemented, they are about three times larger than the tariffs on China and autos that the bank assumes in its basic economic forecasts, but slightly less than a tariff universal of 10%. In a separate note from Goldman Delta One, trader Rich Privorotsky writes that the biggest surprise in Trump’s proposal is Canada.
Privorotsky also suggests that Trump’s announcement is another part of the wall of worry for Europe. Tariffs are a known risk (the extent of which is unknown) and “it’s the waiting that’s really the problem.” So, while it is logical that European stocks would fall in reaction to the news, Mr. Privorotsky estimates that a 25% customs duty on Canada (whose main source of trade is the import of energy ) is more of a negotiation tactic than a likely outcome.
When it comes to China, Goldman’s EM strategist Sun Lu focuses on the positive side, that is, “the price is fixed,” and offers the following analysis:
If Trump starts with China imposing 10% tariffs in order to push China to stop the importation of fentanyl into the United States, this is one of the areas where it is easy to argue. understand with China in previous trade negotiations and bilateral meetings. In August, China already agreed with the Biden administration to impose controls on the production of chemicals critical to making fentanyl.
-Trump clearly wants to use these tariffs as leverage to push Canada, Mexico and China to impose tighter restrictions on the aforementioned issues, paving the way for a suspension of tariffs if these conditions are met.
Points Raised by SouthBay Research Analysts
– 2017 – Trump launches trade war
– 2018/2019 – China relies on Vietnam to start circumventing restrictions. Direct Chinese exports fall, Vietnamese exports increase.
– 2020-22 – The trend reverses with the resumption of Chinese exports (Trump exit, COVID stimulates consumer demand). Port congestion makes Mexico an alternative route to the United States.
– 2023-24 – China’s direct exports continue to decline and indirect exports continue to increase.
Next, and most importantly for all the inflation alarmists out there, it’s worth noting that the inflationary impact of the last trade war was minimal:
– Trump imposed tariffs on China in 2018 and the downstream impact on consumer prices has been minimal at best. One of the main reasons is that China is so dependent on access to the US market that it has absorbed rising costs and kept prices relatively stable.
– Today, China is even weaker economically and even more dependent on factory operations, which is why it could absorb another round of tariff strikes. The Chinese government is likely to increase its support to prioritize capacity utilization and employment over profits.
The turkey in the joke is Europe
Germany is by far the leading European exporter to the United States: German companies exported nearly 158 billion euros worth of goods across the Atlantic last year. It is followed by Italy (67 billion), Ireland (51 billion) and France (44 billion). Germany is particularly dependent on the American market for its exports: the Ifo institute estimates that German exports to the United States could fall by 14.9% in the event of the introduction of customs tariffs – or 23.5 billion euros. Its automobile exports would be particularly affected with a drop of 32%, and up to 35% for its pharmaceutical products.
For the record, medicinal and pharmaceutical products represent 57.3 billion euros and cars and automobile parts 40.3 billion in exports from the European Union to the United States in 2023 (source: EUROSTAT).
In terms of imports to the European Union from the United States in 2023 we find oil for 42.4 billion euros, medicinal and pharmaceutical products for 33 billion and natural gas for 27.3 billion. More generally, we see that the bulk of European Union imports are linked to Chinese products.
Moral of the story
Perhaps the Europeans should follow the proposals recently made by Mario Draghi ?
