Donald Trump’s Tariff Threats Are Already Unravelling

So far, we have heard of United States president-elect Donald Trump’s wide-ranging threats regarding tariffs on imports into the US and varying tariffs on countries like China, Mexico, and Canada.

Trump has also said there will be 100% tariffs on the BRICS countries like Brazil, Russia, India, China and South Africa among others for dreaming of — for lack of any other term for the present — a BRICS currency to take on the dollar.

Countries like India have chosen the wait-and-watch strategy, perhaps the wisest to follow at this point. Others like Mexico and Canada have reached out to Trump and quite likely even won some temporary peace. But businesses and affected industries are beginning to fight back, even as countries like Canada have revealed their strategy.

Tariffs To Tackle Tariffs?

The US agriculture industry has started talks with Trump’s transition team in a bid to advocate for the food business as the president-elect pledges tariffs and mass deportations, Bloomberg reported. It is also becoming clear that tariffs will not be easy to impose particularly since resistance starts building from the point where the rubber meets the road, so to speak.

Groups including the National Grain and Feed Association — which represents agriculture powerhouses in the US such as Archer-Daniels-Midland Co. and Cargill Inc — and the International Fresh Produce Association were among those involved in the discussions. The National Council of Agricultural Employers also has a meeting on the books.

Attention is also being drawn to immigration issues as US agriculture has been increasingly reliant on foreign labour. Some industry advocates are lobbying for the expansion of a visa programme for temporary workers, said Bloomberg.

On the other hand, Canada is examining the use of export taxes on major commodities it exports to the US — including uranium, oil and potash — if Trump imposes his tariffs. But that would be the last resort, according to people familiar with discussions inside Prime Minister Justin Trudeau’s government. Retaliatory tariffs against US-made goods and export controls on certain Canadian products are more likely to come first.

Imposing Tariffs Won’t Be Easy

But here is the interesting part — economies today are exceedingly interconnected. The Bloomberg report said that Canada was by far the largest external supplier of oil to the US with refineries dependent on buying cheaper Canadian heavy crude. There are few alternatives to it.

The US Midwest would be hit particularly hard by higher costs. Fuel makers in the region rely on Canada for almost half of the crude they turn into gasoline and diesel. Canadian uranium is also the biggest foreign source of fuel for US nuclear power plants, and potash from the country’s western provinces is a huge source of fertiliser for American farms.

There is a twist in the tale. The US Department of Defense has been investing in Canadian projects to secure sources of cobalt and graphite to reduce reliance on Chinese supply chains.

Now the belief is that the Trump administration will exempt commodities from his threat to place 25% levies on goods from Mexico and Canada. They will instead focus on using tariffs against their manufacturing industries.

This shows that imposing blanket tariffs as promised a few weeks ago will not be simple and one can expect much resistance along the way, including from quarters least expected.

America’s National Retail Federation last month pointed out that American consumers could lose between $46 and $78 billion in spending power each year if new tariffs on imports to the US are implemented on apparel, toys, furniture, household appliances, footwear, and travel goods.

Retailers feel that they cannot pass on all price increases to consumers and will also lose their margins. The US has already seen very high retail inflation in the last few years.

What Does India Plan?

Back in India, the government is considering a proposal to impose safeguard duties on steel imports. Union Steel Minister HD Kumaraswamy said on Thursday that discussions were on to impose these duties on steel imports. On December 2, the steel ministry in a meeting with the commerce department had proposed for a 25% safeguard duty on certain steel products imported into the country.

A final decision might be a halfway solution, with a lower figure on some types of steel, but it would be a success on the part of the Indian industry in its efforts to sway the government. India’s steel industry has for some time lobbied for import duties as cheap steel from countries like China and Vietnam has flooded Indian markets. But it is also a fact that cheaper steel would benefit end users like the construction and infrastructure industry.

Business leaders have often told me privately that the Indian industry always prefers a higher tariff regime. This combined with the government’s Make in India programme, has seen a rise in import duties in recent years.

The flip side of the argument is also important. While India can slap high import duties on goods like toys and succeed to a large extent, it cannot do the same with mobile phones or mobile phone components if it wants to provide cheap telephony to hundreds of millions of citizens and also encourage a domestic manufacturing industry, including for exports.

So India’s strategy of waiting and watching to see is a good one. Businesses will do their bit as will industry associations like they already are in the United States. Business respects political imperatives but also has shareholders to answer to.

Trump or his advisors quite likely know this and how some of the pulls and pushes work in global trade. But the threat of tariffs has got the world in a forced game of musical chairs not knowing whether there are enough chairs or when the music will stop.