Trump Tariffs and the impact on global trading patterns

The post ‘Trump Tariff’ world: -since 2nd April, will be immeasurably different in format and scope from the international trading landscape of the last 60 plus years. A global trading dynamic that was in effect moulded and sculpted under US leadership.

Even though a 90-day pause has been announced for all countries except China, and only a 10 per cent tariffs is presently in place for the rest of the world, it is inevitable that we will witness the emergence of new international patterns.

Even though a 90-day pause has been announced for all countries other than China, and only a 10 per cent tariffs is presently in place for the rest of the world, it is inevitable that we will witness the emergence of new international patterns.

Notwithstanding personal reflections regarding the need or the indeed the economic and geo-political wisdom of the Trump Tariffs, it's important to gauge the forces that will shape international trading patterns of tomorrow.

Because it’s Trump Tariffs

This is President Trump’s second term, and he has been dominating American conservative media for a decade at least. Because of the very character and the mercurial modus operandi of President Trump and rapid shifts in rates and applicable product categories for the tariffs, it is almost inevitable that countries would now look to limit reliance on the US market at least for the short term. They would instead seek regional and bilateral trade agreements and minimize wholesale dependance on the US economy.

Most countries will attempt to limit reliance of the US economy, even if Trump resets all tariffs to pre ‘Liberation Day’ levels, at least for the duration of the Trump presidency.

US – China tussle

While most other countries have been offering conciliatory statements, the Chinese response is more foreboding and without any conciliatory overtures.

China reciprocated to Trump tariff hikes and in response to 145%, raised US tariffs to 125%, declaring that higher rates would not yield additional gains. The Chinese state also imposed bans on selected products including rare earth exports and against specific US companies. Additionally, the Chinese Ministry of Commerce has in very stark terms stated that "China firmly opposes any party reaching a deal at the expense of China's interests’ stating that China will ‘resolutely take reciprocal countermeasures’ in such cases.

China has also, within this period, used its weight and influence on their companies to shun and in specific cases return US goods. They have returned 2 Boeing jets, and a 3rd is due to be returned soon, while 50 more planes are in line for delivery. Other trading goods including ‘sacred’ farm goods, are also being affected with 12,000 mts of pork now having been rejected, with commentators quite inescapably referring it to as bringing home the bacon. Analysts are also confirming that China companies are slowly divesting from US equities.

The Chinese President Xi have also in short order, travelled to 3 Southeast Asian countries; –Vietnam, Malaysia and Cambodia, countries with a high industrial and production base, seeking partnerships and trading alliances. He has also initiated trade related discussions with Korea, Japan and the EU.

Chinese media and commentators, not to mention social media activists belittle and parody US policy. Meanwhile officials and state related media calls for tightening of the belt, until victory is achieved.

The ‘Trumpian’ view of malevolent intentions of the Chinese state and its economy is an almost existential call for the present US presidency.

But the American ship of state is designed with many and varied links to the government, through local, state and national elections, through markets, think tanks and the uber rich. Therefore, the Zeitgeist of US national policy, today is determined more by prevailing economic and political trends rather than on an over abiding nationalistic or cultural callings.

In contrast, the Chinese ethos, shaped as it is in the context of Chinese nationalistic underpinnings, harken to more cultural values including the essential need to save face.

While it is more likely, as least for now that the Chinese can bear pain and hurt longer than the US, there is no doubt that both the US and the Chinese economy will be adversely affected because of the Trump Tariffs.

While it is more likely, as least for now that the Chinese can bear pain and hurt longer than the US, there is no doubt that both the US and the Chinese economy will be adversely affected because of the Trump Tariffs. ...In this context tensions between China and the US will continue to prevail and indeed affect and shape the contours of not only international trade and commerce, but of geopolitics as well.

In this context tensions between China and the US will continue to prevail and indeed affect and shape the contours of not only international trade and commerce, but of geopolitics as well.

Shifting Landscape of International Trade

It is important to again note that China has officially announced that it will take offensive measures against countries looking to appease Trump at the expense of the Chinese economy.  

Larger and smaller nations, therefore, are caught in a flux, caught in the middle. Much like the Roman god Janus, forced to look simultaneously towards both directions, literally East and West.

Mexico and Canada, because of geographical proximity, long established ties of commerce and trade, anchored by several FTAs, not to mention academic and family links, perhaps find themselves in the most complex of scenarios. They are trying not to be locked into a Faustian bargain, trying to balance national interests, and access to the US market without depriving themselves of the benefits of the Chinese economy.

They are trying not to be locked into a Faustian bargain, trying to balance national interests, and access to the US market without depriving themselves of the benefits of the Chinese economy.

Smaller economies like Sri Lanka, Vietnam and Philippines are using every channel to gain more competitive access to the US market. However, because China has implicitly warned other economies of their actions to appease the US, they too find themselves in difficult and tentative grounds.

Countries, with FTAs with China, including the Maldives, face complicated terrain trying to seek a middle path between the 2 biggest economies of the world.

Traders are, meanwhile, especially in the US minutely examining 'rules of origin' requirements; to figure out exactly which level of intermediate goods can be shipped to which country for value addition and thereby escape the label of ‘made in China’.

One thing is for sure, where there are profits to be made, markets will inevitably find a way and in short order.

What’s ahead for Maldives?

Meanwhile in the Maldives, ‘Trump Tariff’ landed us, at least presently, at 10%, the floor rate, for all other countries.

Because our competitors in tuna exports do not enjoy a lower rate, at least today, the nature of our competitiveness in the US market does not change with Trump Tariffs. However, the future, and the magnitude of tariffs that will later come into play, are uncertain at best.

Because our competition in tuna exports does not enjoy a lower rate, at least today, the nature of our competitiveness in the US market does not change with Trump Tariffs. However, the future, and the magnitude of tariffs that will later come into play, are uncertain at best.

Last year our exports to US were only 333mt for an FOB value of MVR 12,8m. If indeed, as originally announced on April 2nd, we continue to enjoy a lower rate than our competitors in the tuna export market, it is highly likely that our exports to the US can indeed expand.

A probable global economic slowdown

Commentators are now unanimous in predicting a global economic slowdown.

European countries account for 58.9% of our tourism sector. The Asia-Pacific region, including China, accounts for 30.8 per cent.

China is our biggest market for tourism. The percentage of Chinese tourists last year was 12.9% and was 13.5% till February this year. Trump's tariff war focused primarily on China. And unlike most countries in the world, China insists that they will retaliate in kind.

Trump Tariffs, if maintained will indeed negatively impact the global economy, including the Chinese and the US economy as well.

Gross expenditure on holidays and entertainment are among the most negatively impacted during an economic downturn. The financial crisis of 2008 resulted in a negative growth of 7% on our economy. Therefore, dependent as we are on tourism and related industries, a global economic slowdown will hit our already weak fiscal bedrock hard.

Gross expenditure on holidays and entertainment are among the most negatively impacted during an economic downturn. The financial crisis of 2008 resulted in a negative growth of 7% on our economy. Therefore, dependent as we are on tourism and related industries, a global economic slowdown will hit our already weak fiscal bedrock hard.

Reactions to the Trump Tariffs hat not only hit the bond and equities market, it has also hit the US $ market with the greenback losing value against other currencies and Gold hitting world records.

Conservative economists whisper about a deliberate effort to devalue the dollar in order to make experts more competitive, thereby spur manufacturing, which will also reduce budget deficits. Referred to as ‘The Mar-a-Largo Accord’, in cheeky reference to 1985 Plaza Accord; designed to lower the value of the dollar for much the same ends, might only be stuff of wishful thinking, but the implications remain momentous.

But for the moment 90% of global exchange transactions, 60% of foreign exchange reserves, 54% of global trade is undertaken in US $. Therefore, the sharp fall in the value of dollars have important consequences for the world and for a dollarized economy like ours, especially to tourism earnings and investments.

And therefore?

It is very evident that our policy makers have to take off their blinders and acknowledge that what happens to the world economy, especially in the case of a slowdown, will necessarily and inevitably, impact on our tourism dependent economy.

It is very evident that our policy makers have to take off their blinders and acknowledge that what happens to the world economy, especially in the case of a slowdown, will necessarily and inevitably, impact on our tourism dependent economy.

Our policy makers have to therefore adjust their economic plans and re-evaluate Plan B, perhaps even Plan C options.