After promising during his campaign that he would restore taxes on imports to the centre of their economic policy during his second term as president, the president took a dramatic step in this direction on 1 February. Trump signed decrees to impose horizontal duties 25% on imports from Canada and Mexico and 10% from China. Customs duties will enter into force at 12:01 a.m. on Tuesday 4 February. Some U.S. customs duties on goods from these three countries are already approaching or even exceeding the levels imposed by Trump, according to Bloomberg. But these apply only to selected categories of goods. Their enforcement in all areas is an important derogation. CORVERSE Currently, for imported industrial goods, which account for 94% of the value of American goods imports, the US has a weighted average commercial duty rate of 2%, according to the US Trade Representative’s Office. Half industrial goods enter the country without customs duties. 1. What is Trump trying to achieve? Scott Bessend, Trump’s Finance Minister, gave indications of how his boss could use the new tariffs during his hearing of his confirmation in early January. Bessend, a former hedge fund administrator who helped his former boss, George Soros bet against other countries’ currencies, told senators that one should expect Trump to use the tariffs in three ways: ADVERSE – to correct unfair commercial practices (which Trump has said will revive the American industry) – to increase revenue for the federal budget (important to help pay Trump’s plans to prolong the 2017 tax breaks) – to be used as a lever in negotiations with foreign forces instead of sanctions, which Trump believes have been used too much. Strengthening American production Trump has talked about the use of tariffs to rejuvenate processing and to stop the US from being “stole” from other countries due to trade imbalances. He has formulated the idea of using a mixture of duties and incentives, such as rapid licensing, as a way to attract companies to build their facilities in the US. During his first presidency, he imposed several rounds of duties on Chinese products, whose effects are still being assessed. Many economists believe that they functioned as a tax on American consumers and retained the U.S. economic growth. Local manufacturers do not always begin to manufacture products affected by customs duties. And if the nation imposing the duties does not have an alternative domestic supply of those goods, then the prices of those goods may increase. None of this has reduced Trump’s enthusiasm. “We will bring back the companies,” he said during an interview he granted Bloomberg editor-in-chief John Micklethwait at the Economic Club of Chicago in October. “We will further reduce taxes on companies that will manufacture their product in the US. We will protect these companies with strong tariffs.” Trump said he had just begun using customs to reform the American economy during his first term, when Covid-19’s pandemic struck and upset his plans. His candidate for the position of Trade Minister, Howard Lutnik, shaped the tariff plan as a means to regain respect for the world during his hearing of its ratification, telling senators that US allies and opponents “take advantage of us, do not respect us, and I would like to see this end.” Increase in revenue The revenue from the tariffs could help pay the tax reliefs Trump promised. He wants to extend the reductions in income taxes adopted in 2017 during his first presidency, many of which are due to end at the end of 2025. It has even made proposals to extend these tax exemptions, for example by exempting from taxation tips and social security profits. Its aim is also to reduce the corporate tax rate to 15% from 21%. These measures are expected to lead to a loss of state revenue of 4.6 trillion dollars over a period of 10 years. Trump’s tariff increases, if fully implemented, could generate revenue of 2.5 to 3 trillion dollars over the same period, according to Bessent. Peter Navarro, Trump’s advisor on trade issues, told CNBC on 31 January that the effort for tariffs can replace revenue from tax reductions. “The duties can easily pay for it,” Navarro said. “President Trump wants to move from the world of income taxes and countless IRS employees to the world where tariffs, as in the time of [President William] McKinley, will pay for many government spending we have to pay and reduce our taxes”. Using a weapon of diplomacy Trump has become wary of sanctions, for removing other countries from the dollar, and sees tariffs as a way to gain leverage in negotiations, according to Bessend. Trump’s brief confrontation in January with Colombia – in which he threatened to impose tariffs on return flights of irregular immigrants – gave a taste of Trump’s strategy. For a few hours, it appeared that a trade war between the US and one of their closest allies in Latin America was inevitable. Trump then withdrew his threat after reaching an agreement between the two countries. The White House claimed victory, saying that Colombia “concluded all the terms of President Trump” and would accept deportations with American military aircraft. Colombia said the deported returned with its military aircraft. Trump’s tariff orders for Canada, Mexico and China aim to address what he calls “a threat to the safety and protection of Americans, including the public health crisis with deaths due to the use of fentanyl”. 2. Is Trump’s approach new? The US largely taxed imports for much of their history before largely abandoning this policy since the 1930s, as government leaders embraced the idea of free trade. One important reason for this was the reaction to the 1930 Smoot-Hawley Act, which led to an estimated 20% increase in average import duties. The law was intended to help alleviate the effects of the Great Depression, but ended up making the situation worse. This debacle triggered a period of several decades, during which the rise in free trade occurred, culminating in the creation of the World Trade Organization in 1995. During this time, the duties became cursed for the Republican Party. They returned during Trump’s presidency from 2017 to 2021, when he turned to them in an attempt to revitalize the American industry and face what the US views as unfair commercial practices of China. President Joe Biden continued this trend. 3. Can Trump increase tariffs without Congress approval? Yeah. Through a series of statutes, Congress has authorized the US president to modify tariffs to address various problems. These include a threat to national security, war or state of emergency, damage or potential damage to a US industry and unfair commercial practices from a foreign country. While companies could try to fight the highest tariffs in courts, due to the respect previously given to presidential powers, such challenges “will face a steep uphill”, according to an article published by the Center for Strategic and International Studies and co-signed by Warren Maruyama, a former general advisor to the Office of the US Commercial Representative. 4. How do customs work? The duty, also known as duty or levy, is usually calculated as a percentage of the value of a good (as declared during the customs clearance procedure). Goods crossing borders are given numerical codes within a standard nomenclature called the ‘International Harmonised System’. Tariffs may be attributed to specific product codes relating, for example, to a truck box or to broad categories such as electric vehicles. Customs services collect customs duties on behalf of governments. 5. Who pays duties? The duties shall be paid by the importer or by an intermediate body acting on behalf of the importer, although costs are usually passed on. Trump argues that, ultimately, it is the exporter who essentially ends up bearing the cost of a duty. Studies have shown that weight is more diffuse. The foreign company producing the product may decide to reduce prices as a concession to the importer. Or he can spend considerable sums to build a factory somewhere to circumvent the duty. Or an importer – Walmart and Target are among the largest in the US – could increase product prices when sold. In this case, it is the consumer who indirectly bears the cost of duties. 6. How is China involved in all this? For decades, belief in free trade was supported by a cross-party consensus in the US and by multinational companies who wanted access to cheap and effective supply chains abroad. China’s rise as a global economic power dissolved the consensus. It was accepted in the WTO in 2001, China gained greater access to world markets, even when its critics say it violated the letter and spirit of free trade rules, for example by subsidizing its industries and forcing foreign companies operating in China to separate their know-how. Some researchers have concluded that competition from China caused a decrease in employment in the USA among manufacturers who faced an increase in imports. During Trump’s first presidency, his government imposed new tariffs on Chinese imports worth about $380 billion in 2018 and 2019. The Biden government maintained these duties and increased further in 2024 to $18 billion worth of goods. The new enthusiasm for customs has spread to the European Union. It voted at the beginning of October to impose 45% tariffs on electric vehicles from China, which in turn threatened to retaliate against European products. In the 2024 campaign, Trump argued that horizontal taxes on imports would have benefits beyond defending domestic industries: They would flood the finance ministry with billions of dollars in revenue, push non-production companies in the US to do so and allow the US to extract concessions from both commercial allies and their opponents. 7. How have US tariff increases affected so far? It may be difficult to classify the economic impact of the duties. They can stimulate employment by attracting investments, as companies try to circumvent customs duties by transferring factories to the country that imposes taxes. At the same time, they can cause repayable duties that cost jobs in other sectors of the economy. One possible problem with tariffs is that local manufacturers will not overcome all obstacles to meet domestic demand for a commodity subject to new duties. And if the nation imposing customs duties does not have an alternative domestic supply of those goods, then the prices of those goods may increase. Economists continue to unravel the burden of inflationary effects of Trump’s original tariffs from a much greater shock to supply chains and economic activity that began shortly after the US trade war began- China: the Covid-19 pandemic. In February 2019, the San Francisco Federal Bank estimated that tariffs add 0.1 percentage point to consumer price inflation and 0.4 percentage point to a metric that measures business costs for investment. Erica York, senior economist of the non-party Tax Foundation, estimated that the highest tariffs imposed by Trump and Biden increased the annual cost for American households by $625. In addition, York estimated that increases would abolish 142,000 full-time jobs and, in the long term, reduce long-term gross domestic product by 0.2% on average. Critics of Trump’s further drastic tariff increases say they would have the same kinds of effects on a larger scale.
What Trump seeks to achieve with the new tariffs – 7 questions and answers
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