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Trump’s ‘beautiful’ tariffs are going to cost US consumers

Taiwan, Thailand and Malaysia are also seeing increased manufacturing activity as some lower valued-added manufacturing in China relocates.


Mexico’s appeal, apart from its proximity to US, was that it had agreed, with Canada, a new trade deal with the US.

Then, of course, last week Trump decided to use his favourite negotiating tool – “the word TARIFF is a beautiful word indeed!” he tweeted at the weekend – to try to coerce Mexico to stem the flow of illegal immigrants to the US, threatening a five per cent tariff on all imports from June 10, with the rate ratcheting up by five percentage points a month until it reaches 25 per cent in October.

For the re-locators, unless Mexico folds quickly, that’s a very large spanner in the works.

In fact it’s a problem for many more than the re-locators, given that the supply chains for many US companies involve shuttling parts and finished goods back and forth across the border.

It’s also a warning for China – and others like Japan and the European Union, with which the US also wants to strike new trade deals – that they can’t rely on good faith dealing from the Trump administration. Mexico had a trade deal with the US but still finds itself facing punitive tariffs.

Late last week US Treasury belatedly released its latest bi-annual report to Congress on the macro-economic and foreign exchange policies of America’s major trading partners. Vietnam, for the first time, made it onto Treasury’s “monitoring” list of economies whose bi-lateral goods trade with the US exceeds $US40 billion.

Treasury also announced that it has lowered some of the thresholds for declaring countries on that list as currency manipulators.

Vietnam intervenes quite heavily in the market for its currency, albeit in both directions, so probably could be labelled a manipulator if the administration really wanted to curb its exports, not that the administration appears to need an excuse to use the threat of tariffs to try to impose its will on others.

Donald Trump is ramping up pressure on Mexico to stem the flow of illegal immigrants to the US.

Donald Trump is ramping up pressure on Mexico to stem the flow of illegal immigrants to the US.Credit:US Customs and Border Protection via AP

The Mexican tariffs, if implemented, would have a very destructive impact on both sides of the border because the economies are so entwined.

Trump sees trade in simplistic zero-sum terms, with the US “the ‘Piggy Bank’ nation that foreign countries have been robbing and deceiving for years.” He thinks the exporters pay the tariffs and that if that cost is steep enough companies will relocate to the US and “Make America Great Again.”

A company that relocates activity from China to a Vietnam or Mexico does it to avoid the tariffs, accepting higher manufacturing costs in the process.

Whether they stay in China and increase their prices to offset the tariffs or relocate to a higher-cost jurisdiction, however, all the analysis say it is US companies and consumers that actually pay the price.


The Federal Reserve Bank of New York’s Liberty Street Economics blog looked at this issue late last month.

It said the tariffs the administration imposed last year had complete pass-through to the domestic prices of imports – Chinese exporters didn’t reduce their prices. It is effectively a US tax (the duties end up in US Treasury’s coffers) on US companies and consumers.

The researchers analysed the impact of suppliers reorganising their supply chains, saying that the cost of imports would rise because production had been shifted to a more expensive source of supply but, because tariffs were avoided, there was no offsetting revenue for the US.

They described the tariff-induced shift in supply chains as an efficiency or “deadweight” loss.

On its analysis, the recent increase in the tariff rate, from 10 per cent to 25 per cent, on $US200 billion ($287 billion) of imports from China would cost US consumers $US106 billion a year but raise only $US26.94 billion in tariff revenue – the “deadweight” loss for the US would be about $US79 billion.

Trump has made it clear that he is using the tariffs to try to encourage/coerce companies into shifting manufacturing activity to the US.

Given that the US economy isn’t, like China or Vietnam, a relatively low-cost environment, that would (in the unlikely event that it actually happened) add dramatically to those deadweight losses.

Stephen is one of Australia’s most respected business journalists. He was most recently co-founder and associate editor of the Business Spectator website and an associate editor and senior columnist at The Australian.

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