Trump, tariffs and trade wars: what’s going on?
US President Donald Trump seems to be caught in a cycle of announcing tariffs and then cancelling them again. His stop-start approach is spooking the markets, angering his allies, and propelling America into a trade war. But what does all this mean for the customers, companies and countries caught in the crossfire?
Global trade might be about to see a major challenge in the form of Trump’s trade war
A quick recap
During his campaign to be president, Donald Trump described tariffs as his “favourite word in the dictionary” - and within weeks of taking office he translated that word into action. His government announced import taxes on Canadian, Mexican and Chinese goods, affecting millions of products heading to US shelves.
Hours before they were due to start, Trump postponed the tariffs with Canada and Mexico after both countries vowed to do more to tackle immigration and drug trafficking. It was a stay of execution that did not last long: on March 3, a 25% tariff on everything crossing the border was implemented.
Then, Trump rolled back the policy again, this time removing tariffs on half the products he had just slapped them on. But not indefinitely - he claims he will reintroduce these on April 4. Further tariffs on all steel and aluminium take affect today regardless of origin. The will-he-won’t-he approach is panicking companies and sending the stock market into a tailspin.
Mexico, Canada and China have all retaliated with tariffs of their own against US imports, igniting a trade war which could send the bills of millions of customers skyrocketing.
So what does all this mean, and why is Trump so committed to a policy which seems to be wreaking havoc on his own country?
What is a tariff, and who pays it?
A tariff is a tax on an imported product, like an entrance fee to another country’s market. In general, it is paid by the company which ships the product into the country.
For example, let’s say you own an American supermarket and you sell apples from Mexico for $1 a bag. A tariff of 25% means you now have to pay an extra 25 cents to import those apples across the border in order to stock them on your shelves. To protect your profits, you pass this cost onto the customer, increasing the price of apple bags to $1.25.
So far, Trump’s tariffs have targeted steel, aluminium, clothes and cars. His 25% levy on Canadian and Mexican goods originally applied to everything that crossed the border (except Canadian energy, which faced a lower 10% rate). All of these affected imports can be expected to see substantial price hikes as the cost of the tariff is passed onto the person buying the product.
One of the most important issues for voters during last year’s presidential election was the economy. Inflation - the increase in the cost of goods - has soared in recent years following Russia’s invasion of Ukraine and the hangover of Covid-19. As with many people across the world, everyday Americans are seeing their costs go up and feeling a lot poorer for it.
It might therefore seem daft for President Trump to be implementing tariffs which might lift prices even further, but there are two big reasons he is committed to this policy.
America First
Trump’s personal brand has been to put the needs of America above the needs of anyone else, and he is presenting tariffs as a long-term win for the US economy.
The rationale is simple: if Mexican apples have gone up in price, but US apples are $1.10 a bag, a budget-conscious customer will buy the homegrown fruits. This is great news for American farmers who will see their profits rise. Increased demand for their produce means they need to hire more workers, buy more delivery vehicles and invest in more land. Every part of the apple supply chain flourishes.
If you apply this logic to every industry, the economy spikes. Companies which manufacture products abroad will start to invest in new plants and factories in the US to avoid tariffs, bringing thousands of jobs stateside and insulating American industry from cheaper foreign competition.
During his first term, Trump introduced tariffs on washing machines to prevent the market being flooded by South Korean models. US appliance manufacturer Whirlpool saw a surge in demand, while foreign companies LG and Samsung moved factories to America (although plans for these were already in place before the tariff announcement). The policy may have helped create up to 2000 jobs.
But such investment in all industries across the whole country might take years to achieve. The short-term looks a little less rosy, something Trump himself has admitted.
Removing cheap imports from shelves or putting their prices up will immediately hit customers. In our previous example, US apples are still 10 cents more expensive than Mexican apples used to be because labour is more expensive in the States. If this is true of every product, inflation will hit 10% - a huge strain for customers.
And because the global market is now so interconnected, American goods might get even more expensive because they need parts from abroad which are now subject to tariffs. This would push inflation up even further.
While those washing machine tariffs were in place, the cost of all washing machines rose by 34% - much higher than the overall inflation rate of 21% - according to the Bureau for Labor Statistics. When the tariffs expired in 2023, washing machine prices dropped 11%, partially because cheaper foreign products could be imported again but also because US appliances cost less to manufacture.
Trump pledges the long-term benefits of a stable economy, low unemployment and limited reliance on foreign trade will offset the rocky road ahead. But, for Americans who are already feeling the pinch, it might be hard to convince them of the perks when their dollar becomes even less powerful.
Pressure
Trump’s tariffs are also part of a wider strategy.
He has recently hit out at his neighbours, Canada and Mexico, and accused them of not doing enough to stop the flows of illegal immigrants and drugs across their shared borders. His Chinese tariffs are in response to the country’s “unreasonable behaviour” and failure to tackle international criminal gangs.
Further threats are aimed at the EU, which Trump claims was “formed to screw the United States”. He points out the US is at a trading deficit: it imports more goods than it exports, and therefore foreign companies are benefiting from American money more than domestic business is. Or, to put it in his terminology - the US is being ripped off.
Tariffs are a bargaining chip to address these issues: Trump is hoping his allies will do what he is asking of them in exchange for them being lifted.
Trade with the US accounts for a major proportion of both Canada and Mexico’s income, so their companies could lose a lot of money if there is less demand for their goods across the border and they might have to make cuts to remain in business. Higher unemployment and lower trade can cause major damage to a country’s economy.
To avoid this economic pain, tariffed nations might be willing to do a deal with Trump - he lowers the tariffs or lifts them altogether if they give him something he wants. This could mean tighter drug controls, an increased presence at the border, or what he concludes to be a ‘fairer’ trade deal. It’s essentially blackmail.
It’s already worked. After Colombia refused to let a plane full of deported migrants land, Trump called the President and threatened he would tariff the country. Shortly after, the plane was granted permission to touchdown in Colombia. No taxes were introduced.
But some leaders are refusing to bend to Trump’s will. Canadian Prime Minister, Justin Trudeau, believes Trump is trying to crash his economy to weaken his country so much that America can annex it and make it the 51st state. He imposed reciprocal tariffs on the US.
These are the starting shots of a trade war.
What is a trade war?
A trade war is where countries introduce their own tariffs on the US in retaliation. Trudeau and the Mexican President, Claudia Sheinbaum, have vowed to put 25% tariffs on billions of dollars worth of US goods. China also introduced its own levies, targeting American agriculture.
On the one hand, these countries are trying to protect their companies by pushing citizens towards domestic products, in order to plug the gap which may be left by a smaller American market.
But there is also a clear element of vengeance in these counter-tariffs. The message is that if America hurts their economy, they will hit them right back.
US companies which export goods are at a pronounced risk. For example, if you are a car manufacturer with a huge market in Canada, but Canada has now tariffed your vehicles, you will lose customers and profits. If you can’t replace those sales with American custom, you might have to consider laying off workers, closing factories and scaling back operations to save money.
That’s the core issue of a trade war. The washing machine industry might prosper and add 2000 jobs to the market because there is so much domestic demand, but export-heavy industries might falter and make cuts of 5000 jobs. Overall, the job market has lost 3000 people.
These newly-unemployed see themselves increasingly priced out of essentials because of inflation, setting a miserable deprivation spiral in motion. A trade war might be a race to the bottom, and it is everyday customers who end up caught in the crossfire.
We’ve seen it play out before. In 1930, the Herbert Hoover administration introduced the Smoot-Hawley Tariff Act, placing levies on over 20,000 imported goods and sparking retaliations from trade partners. The bill is widely blamed for the surge of inflation which followed, with imports dropping by 66% and imports by 61%. Export-reliant industries went bust, and the unemployment rate nearly doubled to 16% in just one year. Economists remained convinced the tariffs and the resultant trade war prolonged and worsened the Great Depression.
Is Trump losing his own trade war?
Trudeau and Sheinbaum are holding their ground, and their voters are backing them in the battle. Trudeau’s Liberal party has gained significant momentum ahead of the Canadian election because of his response to Trump. Canadians and Mexicans seem willing to feel some heat in the shopping bill if it sends their neighbour a clear message: they will not be bullied into submission.
Meanwhile, the US economy has taken a massive hit, with stock markets tumbling as investors become worried companies could see their order books slim down.
With his plan essentially backfiring, Trump postponed tariffs on around a third of Canadian and half of Mexican products. His reasons for this U-turn were not made clear, but he has vowed it is only a temporary relief and most tariffs will resume on April 4.
Perhaps it is a tactical retreat now he realises his opponents will not back down, before he tries again harder next month. He is still pointing out Canada and Mexico are far more reliant on the US for trade than the US is on them, and so forcing renegotiated deals remains in his best interests. Putting tariffs up even higher to engage these discussions could be a move he is considering.
Or perhaps the man who presents himself as the king of the economy cannot let his own stock market nosedive, especially as a result of his flagship policy. Maybe he is reassessing whether this is the best path forward or giving investors more time to digest the new world before he goes again. But the uncertainty is making it very hard for companies to plan - and the stock market continues to slalom through a volatile phase of the jitters as investor confidence plummets.
To his supporters, Trump can still argue his tariffs will support the economy in the long-run when American products see an increased demand. If the negatives of inflation and job loss are overstated, it will definitely be a win for the US.
But as we have seen, there is a dismal history of tariffs for economies, and any country isolating itself from the arteries of trade is playing a risky game. Before there are any winners of a trade war, there will be losers. Millions of them.