New import tariffs between Europe and US on horizon
The change in the political representation of the United States of America is causing considerable tension in international trade. President Donald Trump wants to impose retaliatory tariffs on imports of goods into the United States, which will undoubtedly have both fiscal and economic consequences, including on a global scale. According to the US political representation, the reason for the introduction of protectionist measures is the unequal position of the US and other countries in international trade.
Countries around the world have the option to introduce protectionist measures in the form of import tariffs, quotas, boycotts, thresholds or technical standards to protect their national economies. In recent decades, the global approach to international trade has been fairly liberal. However, some countries have retained the option to protect important areas of their economy (e.g., the automotive industry of the leading powers).
First retaliatory tariffs: Canada, Mexico and China
The United States started to apply tariffs on imports of goods from Canada and Mexico (at a rate of 25 percent), while increasing by a further 10 percent tariffs on imports of iron and aluminium products from the People's Republic of China. The reason is the long-term negative merchandise trade balance, which means that the United States import more goods into their economy than they export out of it. This is not necessarily a bad thing from an economics perspective, as the United States finance the greater import of goods with the inflow of foreign capital. Other protectionist reasons accompany the introduction of tariffs, such as aiming to prevent the import of drugs into the United States.
Possible impact on European exporters
The US president's rhetoric suggests that the US will not stop at the countries named above, and that they may soon be joined by India, Taiwan, and the European Union. For European exporters, this would mean a drop in demand (the US is the EU's largest trading partner). Last week, the EU responded to the possible introduction or increase of import tariffs by pointing out the need to include in the trade balance also services, not just goods. After considering the negative balance for services on the EU’s part, the overall trade balance between the US and the EU is a difference of around 1 percent.
Implications for the US and international trade
On one hand, protectionist instruments may quickly resolve inequalities in international trade in the short term. Particularly in a large, advanced and open economy such as the United States, these measures may primarily help domestic producers, as due to its position, the US may for some time be able to influence the import prices of foreign producers. The introduction of import tariffs will of course also result in more revenue for the US Treasury. However, the downside of such measures lies in its global implications. Import tariffs on goods will make the inputs of local importers more expensive, which will raise their selling prices, worsen the position of US exporters, and reduce the American consumers’ purchasing power. Additional tariffs on steel and aluminium imports from China will hit the US automotive industry, which will see a rise in input prices. In the short term, new jobs will be created. However, due to a lack of competitiveness, the multiplier effect may cause job losses in adjacent industries, i.e., those linked to imports of goods to the US. Finally, the increase in prices of imported products will cause inflationary pressures.
An overzealous introduction of protectionist measures may also trigger trade wars between countries in the form of further retaliatory tariffs. It should also be remembered that historically, the United States have benefited from the balance of trade in goods in other ways. The US dollar is the transaction currency in most transactions in international trade, and it is also the reserve currency of other central banks, which allows the United States to finance the deficit on favourable terms thanks to the high demand for the US dollar.
It is very difficult to predict the reaction of individual countries to the new US trade policy. However, from an economic point of view, the introduction of protectionist measures will not be beneficial in the long term, as it makes the free market mechanism of international trade disappear. Long-term studies show that countries with an open trade regime achieve higher GDP growth and better productivity.