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As the latest presidential election in the United States draws closer, those watching from Europe are looking for signals of what the Republican candidate Donald Trump will do if he returns to office. Beyond trading insults with rival Kamala Harris, he is saying much the same as he did during his run in 2016.
He and his running mate JD Vance are determined to reinstate the "America First" trade strategy, a protectionist programme under which the US not only withdrew from the Trans-Pacific Partnership, a huge 12-country pact that would have covered 40 per cent of global output, but also renegotiated the North American Free Trade Agreement (Nafta) into the United States-Mexico-Canada Agreement.
Pen in hand in the Oval Office and claiming they would undo "unfair practices" and bring down the deficit, Mr Trump signed off on a raft of tariffs, essentially sparking trade wars with China and the European Union. The resulting retaliatory tariffs led to higher consumer prices and job losses in certain US industries that are dependent on imported components. But even as some sectors benefitted from the tariffs, farmers had to be subsidised as their export markets crumbled.
'Pay a big price'
Several years and the Biden Administration later, Mr Trump is neck and neck with Ms Harris in the race to be elected the 47th US president on Tuesday. In fairness, Joe Biden kept in place many of the tariffs Mr Trump instigated, especially on steel, aluminium and Chinese goods, but as election day approaches the rhetoric from the Trump camp has been ratcheted up.
"I'll tell you what, the European Union sounds so nice, so lovely, right? All the nice European little countries that get together," Mr Trump said during a rally in the battleground state of Pennsylvania, after promising to pass the "Trump reciprocal trade act".
"They don't take our cars. They don't take our farm products. They sell millions and millions of cars in the United States. No, no, no, they are going to have to pay a big price," he said.
That "big price" looks like being a tariff of at least 10 per cent on all imports into the US, regardless of where they come from. Indeed, Mr Trump has mentioned a figure as high as 20 per cent. In addition, Mr Trump has vowed to slap 60 per cent in duties on goods coming from China. He has also spoken of a 100 per cent tariff on all imported cars, and earlier this month told Fox News that he was prepared to put a 200 per cent tariff on cars from Mexico.
"All I'm doing is saying I'll put 200 or 500, I don't care. I'll put a number where they can't sell one car," he said. A jump in the prices of numerous goods would result as supply chains take another battering, and, of course, when retaliatory tariffs are put in place. A trade war would loom.
The stakes are high for both the US and the EU. According to Eurostat, in 2023, the US was the largest partner for EU exports of goods (19.7 per cent) and the second-largest partner for EU imports of goods (13.7 per cent). The Netherlands was the largest importer of goods from the US in 2023, and Germany was the biggest exporter.
As far as Britain is concerned, US goods exports to the UK in 2022 were worth $76.2 billion, a rise of 39 per cent over the 10 years from 2012. UK exports to the US rose 16 per cent over the same period to $64 billion. US exports to the UK accounted for 3.7 per cent of overall US exports in 2022.
“History suggests no one really wins a trade war, although thankfully examples of them are pretty rare," Russ Mould, investment director at AJ Bell, told The National. "The conventional wisdom among economists and historians is that America’s introduction of Smoot-Hawley in the 1930s made an already difficult situation worse than it would have been otherwise."
Smoot-Hawley, formally known as the United States Tariff Act of 1930, which was originally intended to help American farmers, raised already high import duties on a range of agricultural and industrial goods by some 20 per cent and by most estimates made the Great Depression even worse.
Nonetheless, Jonas Goltermann, deputy chief markets economist at Capital Economics, feels some of Trump’s tariff promises could end up becoming watered down or delayed, although he could enact them pretty quickly were he to win. "It is unclear whether his tariff threats are intended to elicit concessions from trade partners, or whether he actually intends to follow through, but he could use executive orders to introduce tariffs soon after taking office," Mr Goltermann said.
Research by the Grantham Research Institute on Climate Change and the Environment at the London School of Economics and Political Science (LSE) claims Mr Trump's proposed tariffs would not only adversely affect all the countries involved, including the US, but could hinder action on climate change, not least because electric vehicles imported from China would be a particular tariff target. The LSE's number-crunching predicts a fall in the GDPs of the US, China and the EU if Mr Trump follows through with his tariff threats, by 0.64 per cent, 0.68 per cent and 0.11 per cent respectively.
German cars
Of course, the effect of the tariffs would vary from country to country and from sector to sector. Germany’s car industry would be particularly badly hit, because the US is its biggest customer with German cars worth $23.87 billion driving into the US market in 2023. Indeed, the LSE's research shows Germany faces a 0.23 per cent drop in GDP, which would be more than twice as large as that for the EU as a whole.
France and Italy would be hit to a much smaller degree, drops of 0.15 per cent and 0.01 per cent respectively, while the UK might see a negative GDP impact of 0.14 per cent. Within the EU, Morgan Stanley estimates only about 6 per cent of the weighted revenue made by the companies in the MSCI Europe index relate to goods exported to the US, with the most exposed sectors being medical tech, aerospace, life sciences, pharma and luxury goods.
Meanwhile, simulations by the UK National Institute for Economic and Social Research (NIESR) contend that global GDP would be 2 per cent lower in five years' time if Mr Trump follows through on his tariff threats. The US's closest trading partners, Mexico and Canada, could see their respective GDPs fall by 5 per cent and 3.5 per cent within the next five years.
"Global trade has already been under pressure due to escalated geopolitical tensions and a trend towards protectionist policies in recent years," said Ahmet Kaya, principal economist at the NIESR. "Any shift towards even stricter protectionist policies following the upcoming US elections could further strain global trade, reduce growth potential and harm the disinflationary progress achieved over the past year.”
With 4 per cent of EU GDP tied to exports to the US, if Mr Trump were to go through with his tariffs threats, growth in the EU could be hampered by 1.5 per cent over a three-year horizon, according to analysts at ABN Amro. "Germany is especially vulnerable," ABN Amro's analysts said. "Its three biggest exports to the US – chemicals, machinery and transport – are still experiencing demand shortfalls following recent shocks. The US tariffs could be the blow that tips the German economy into a more serious downturn."
Congress vs the president
In his campaigning for this election, Mr Trump has often referred to tariffs as his "favourite word". Earlier this month, he told the Economic Club of Chicago that “the most beautiful word in the dictionary is tariff". It's thought one of the reasons that tariffs are the most favoured tool in his trade relations kit is that they can be activated through presidential decree relatively quickly, with no need to refer to Congress or the courts.
Essentially, the US Congress has delegated some of the power to implement tariffs to the executive branch through a series of laws. When Mr Trump was president in 2018, he used section 232 of the Trade Expansion Act of 1962 to impose tariffs on steel and aluminium imports, by arguing they constituted a threat to national security. While an investigation by the Commerce Department was mandatory, the move was able to pass without the approval of Congress.
It's a legislative situation that many in the US are keen to reverse and return the power to impose tariffs solely to Congress. Senator Paul Rand from Kentucky introduced a bill last month that seeks to do just that. After all, the US Constitution is quite clear that it is Congress, not the president, that has the power to impose taxes and tariffs and to “regulate commerce with foreign nations”.
Although Congress is not known for the speed of its legislative process, Clark Packard and Scott Lincicome at the Cato Institute in Washington feel there may be a window to pass a law immediately after the election. "A time in which a lame-duck President Biden might be more willing to eschew a veto and sign a law that enacts an important reform that would not apply to him personally," they said. "Should Congress fail to act, US trade law will continue to be ripe for abuse that would cause enormous economic and geopolitical damage."
Many economists, however, feel Mr Trump's tariff rhetoric is part of his campaign, and if elected there would be several barriers to him carrying through his threats in full, not least from within the US business community itself, given that a 10 per cent blanket tariff would constitute a supply-side shock to the US economy. Nonetheless, Mr Trump has already proved that he's more than willing to make good on many promises where he can.
"We know from the previous Trump administration that he does tend to follow through with a lot of what he campaigns on," former Bank of England economist Stuart Cole told The National. "But at the same time I think there is an element of grandstanding too at the moment, and the final outcome will not be as severe as Trump is suggesting at the moment. It is easy to promise things when you are not actually in power; the reality is that he will come up against some vested interests that will probably temper what he can ultimately do, to a degree."
