The tariff war against Mexico failed to materialize. But the impacts of the president’s stand will be long-lasting. The threatened action against our southern neighbor was for significantly different reasons than those given in the past. Instead of being used to correct unfair trade practices, they were proposed to foster non-trade policy concerns. And that takes us into uncharted and dangerous places.
Consider China. For decades, its trade policy has been unfair. It erected barriers that included not just tariffs but restrictive regulatory and business relationship requirements as well. It manipulated its currency to keep Chinese products cheap on the world market, suppressing competition.
Those actions meant U.S. consumers and businesses got great deals on Chinese goods, but U.S. company prices were undercut and other countries’ products were priced out of our markets.
But it didn’t stop there. There was and still is a concerted effort to steal the intellectual property of companies from around the world. Though many executives knew they were taking a risk to operate in China and did so nonetheless, that doesn’t dismiss the Chinese behavior.
President after president tried negotiating guarantees that intellectual property would be protected, but those efforts went largely nowhere. The current administration changed tactics and decided that imposing tariffs might force the Chinese to address the intellectual-property issue.
The tariffs on China are directed at correcting unfair trade behavior. That is the traditional and most defensible reason to impose tariffs, even if U.S. businesses and consumers pay the costs.
As for the Mexican tariffs, they were proposed to address a perceived “national emergency” -- illegal immigration. This is a domestic and/or foreign-policy issue that is typically handled through legislative or diplomatic channels. It is clearly not a trade issue.
There is now a new U.S. trade doctrine: Tariffs are acceptable tools to force other countries to take actions that have little or no relationship to trade. Economic power rather than military power is the policy of choice to compel actions on the part of other countries.
Unfortunately, there are real and long-lasting consequences of employing tariffs or tariff threats as a cudgel.
The intention of most trade agreements is to reduce barriers and tariffs. The U.S. has concluded a treaty with Mexico (and Canada). Yet the U.S. still threatened tariffs on Mexico that were outside that agreement.
Why would any country enter into a trade pact if the U.S. could still impose tariffs to further its political, domestic and/or security agendas, even if the country fulfills its responsibilities under the treaty?
The weaponization of tariffs means our trading partners will have to protect themselves. They will do so by becoming less dependent on American products and markets. Many American companies that are innocent bystanders will be harmed.
For example, China can restrict the export of rare earth metals. These are used in a large variety of electronics and China controls the lion’s share of the supply.
The U.S. doesn’t manufacture a lot of electronics. Still, a limitation of Chinese rare earth exports (on “security” grounds) would limit greatly the chances of expanding the industry in the U.S.
To protect its electronics sector, China will likely start accelerating the growth of its own semiconductor industry. Since it is well behind the United States, it has to reduce its ties to the U.S. so that its domestic firms can become insulated from the threats of trade reprisals and restrictions.
Another concern is the agricultural sector. The Chinese import a significant amount of U.S. farm products. However, there are other countries that have the potential to meet China’s agricultural needs.
Undoubtedly, the Chinese will move to help develop alternative agricultural suppliers. That could lead to a potentially large decline in U.S. farm exports to China. It might take an extended period, but it will eventually happen and that would greatly harm the U.S. farmer.
The key point is that the U.S., which has been traditionally viewed as a dependable trade partner, is losing that reputation because tariffs are now considered to be weapons to secure behavior outside the normal trade relationships. And countries are no different than companies: When a business partner stops being dependable, the relationship sours and often ends.