How Trump’s tariffs set the stage for ‘confrontational’ economic landscape

Canada, Mexico and China hit with first wave of levies in Trump's second term, as the US President pushes his America First agenda

The US has announced tariffs on some of its key trading partners, picking up from where returning President Donald Trump left off in his first term.

The levies, which will be effective from Tuesday, are part of Mr Trump's tactics to reassert the stature of the world's largest economy under his America First policy, which has riled the country's allies and rivals.

Mr Trump, during his campaign to reclaim the White House and during his first days back in office, had repeatedly threatened to impose tariffs that are expected to result in a string of side effects.

The President made good on his promise and delivered a "muscular inaugural address that marks out a confrontational policy both domestically and internationally", said John Hardy, chief macro-strategist of Saxo Bank.

What are tariffs and how do they work?

Tariffs are taxes imposed on items imported into a country or those that are foreign-made.

There are generally three types: those that are fixed, the most common, that impose a certain percentage on the total value of the products; those that are specific per item; and those that rise if a quota of an item is reached.

Tariffs – which are used by practically every country in some form – are used for a variety of reasons, most notably as an additional source of government revenue.

They are also used to protect and strengthen a country's economy, just as Mr Trump maintains, and, in some cases, as a punishment, a punitive measure or bargaining chip to serve as leverage, such as his threat to Russia last week if Moscow does not end its years-long war with Ukraine.

The downside, of course, is that the imposition of tariffs can prompt retaliation from the countries affected, triggering a trade war and trickling down to consumers forced to pay extra.

“Protectionist policies may score political points but they rarely deliver sustainable economic benefits,” said Nigel Green, chief executive of global financial advisory firm deVere Group.

Which countries and goods are affected?

US neighbours Canada and Mexico, and economic rival China were hit with the first wave of tariffs under 'Trump 2.0'.

Mr Trump declared an economic emergency to place a duty of 10 per cent on all imports from China and 25 per cent on goods from Mexico and Canada – the country’s largest trading partners – except for a 10 per cent rate levy on Canadian oil.

Tariff collections are to start on Tuesday and until then there may be room for negotiations over any exceptions or delays to their imposition. It also remains to be seen which goods will be affected. In his first term, in 2017, Mr Trump imposed tariffs on solar panels, washing machines, steel, aluminium, cars and more than 1,300 goods from China alone, according to data compiled by the Peterson Institute for International Economics.

In addition, Mr Trump has also threatened to impose additional taxes on the EU, claiming the 27-nation bloc has treated the US "very, very unfairly" and "so terribly".

The EU will be ready to respond to any US tariffs, European Trade Commissioner Valdis Dombrovskis told CNBC on the sidelines of last month's World Economic Forum in Davos, Switzerland.

Countries respond with retaliatory tariffs

Immediately after Mr Trump's announcement, Mexico and Canada vowed to hit back with retaliatory tariffs, with the latter imposing a 25 per cent levy on C$155 billion ($106 billion) of US goods, Prime Minister Justin Trudeau said.

Meanwhile, China, which bore a heavy brunt of Mr Trump's tariff programme in his first term, pledged unspecified “corresponding countermeasures” to Washington's levy on Chinese exports, the country's Ministry of Commerce said on Sunday, with the additional threat of filing a case to the World Trade Organisation.

Who bears the brunt of tariffs?

While importers end up paying substantial amounts, most economists say consumers bear the brunt of tariffs, as companies are forced to pass on these extra costs.

In the US in particular, the most affected are industries with small profit margins, with poor Americans the hardest hit, according to the Peterson Institute.

"Still, other studies have pointed to different costs for consumers: with tariffs on their foreign competitors, domestic producers can safely raise their prices," the think tank in Washington, DC said. "Ultimately, consumers share the burden with importers."

How have tariffs affected other economic dynamics?

The stock market and commodities have felt the impact of America's latest wave of tariffs.

Wall Street indexes, after enjoying a tech-inspired run in recent weeks, closed lower on Friday as investors tried to digest the uncertainty of how the tariffs will affect the global economy.

Oil prices, on the other hand, recorded a weekly loss as traders assessed the potential effect of US tariffs on imports from Canada and Mexico, two of its largest crude suppliers.

Meanwhile, gold, widely considered an economic haven, edged past $2,800 an ounce for the first time, "amid growing uncertainty about the path of the US and global economy, the anticipated trade war and potential geopolitical tensions with China", said Samer Hasn, senior market analyst at broker XS.com.

Will other countries follow suit?

Retaliation aside, there are other instances. This week, the European Commission said it had adopted a proposal to impose tariffs on a number of agricultural products from Russia and Belarus, as well as on certain nitrogen-based fertilisers.

The reason is to reduce dependency on imports from the two countries, such as fertilisers, that "make the EU vulnerable to potential coercive actions by Russia and thus present a risk to EU food security", and that "negatively impact Russian export revenue, thus impacting Russia's ability to wage its war of aggression against Ukraine".

The EU also imposed up to 45 per cent tariffs on China-made electric vehicles in October.