Initially, Donald Trump said there would be tariffs on a range of goods imported from Canada, Mexico and China. A levy of 25% on Canadian and Mexican imports as well as an additional 10% tax on Chinese goods would come into force on February 4. Trump had thus set in motion tariffs on $1.4 trillion of imported goods. That’s more than triple the $380 billion worth of foreign goods that were hit with tariffs during his first term, according to estimates from the Tax Foundation, a non-profit, independent, tax policy think-tank based in Washington. Canada quickly responded with retaliatory tariffs against the US. The Canadian Prime Minister, Justin Trudeau, set out “far-reaching” tariffs of 25% affecting 155bn Canadian dollars’ worth of American goods ranging from beer and wine, to household appliances and sporting goods. China meanwhile said it was strongly dissatisfied with the levies and filed a lawsuit with the World Trade Organization against the US for its “wrongful practice”. Then, a few days after

(Continuation)

announcing them, Trump withdrew the threat of tariffs on Mexico and Canada – so we were back where we started. Who knows? Things may change tomorrow, and then back again. In his first term, President Trump imposed tariffs of 25% on steel imports from most nations worldwide. Under their free trade deals with the United States, Mexico and Canada were exempt from those tariffs: and remain so now. However, Trump seems willing to illegally ignore rules and exemptions. At present, Canada and Mexico are critical partners for the US steel industry, ranking as the first and third largest exporters of steel to the US in 2024. Together, they account for 35% of all US steel imports, according to US Commerce Department data. Companies relying on flat steel products may be hit particularly hard, as Canada and Mexico supply 42% of all US flat product imports. Chinese steel imports into the USA are already subject to 25% tariffs under Section 232 and 301 legislations initiated earlier by President Trump. In terms of how all this will “rock the applecart” of world steel prices, it´s important to note that China supplies less than 2% of all the steel imported into the United States.

Trump´s most-often stated economic objective for imposing tariffs has been to safeguard manufacturing jobs in the US. He said as much in 2018. However, by 2020 total employment in the US steel sector had dopped to 80,000 from the 84,000 it had been in 2018. Whether it might have dropped even further without the Trump steel tariffs is open to debate; however, detailed economic studies of their effect on US steel still showed no positive employment impact.

At this point it´s worth reflecting upon how a tariff works. In practical terms, a tariff is a domestic tax levied on goods as they enter the country, proportional to the value of the import. So, a car imported to the US with a value of $50,000 subject to a 25% tariff, would face a $12,500 charge. The charge is physically paid by the domestic company that imports the goods, not the foreign company that exports them. It is therefore a straightforward tax paid by domestic US firms to the US government. Tariffs are thus a source of revenue for the US government and herein may lie one of Trump´s motives for imposing them. The question of where the final “economic” burden of tariffs falls, as opposed to the upfront bill, is more complicated. If the US importing firm passes on the cost of the tariff to the person buying the product in the US in the form of higher retail prices, it would be the US consumer who bears the economic burden. If the US importing firm absorbs the cost of the tariff itself and doesn’t pass it on, then that firm is said to bear the economic burden in the form of lower profits than it would otherwise have enjoyed. Alternatively, it is possible that the foreign exporters might have to lower their wholesale prices by the value of the tariff in order to retain their US customers. In that scenario, the exporting firm would bear the economic burden of the tariff in the form of lower profits.

All three scenarios are theoretically possible. But economic studies of the impact of the tariffs Trump imposed in his first term of office between 2017 and 2020 suggest most of the economic burden was ultimately borne by US consumers. In 2024, the University of Chicago asked a broad group of respected economists whether they agreed that “imposing tariffs results in a substantial portion of the tariffs being borne by consumers of the country that enacts the tariffs, through price increases”. Only 2% disagreed.

As a negotiating tool, tariffs are a blunt instrument. One might also wonder how tariffs on steel products (for example) could stop the flow of the drug fentanyl and/or illegal migrants into the US from Mexico or Canada. (Perhaps simply asking American citizens to stop using fentanyl might be a better idea). Or maybe this is just Trump – the alleged master dealmaker – using financial pain in one area to cause an outcome in another. Either way, the initial imposition of the tariffs drew quick criticism. The Wall Street Journal immediately published a scathing op-ed under the title of “The Dumbest Trade War in History”.

If they come into effect, Trump´s tariffs are likely to alter the global steel trade and will give further credence to an emerging trend in supply chains. Research unveiled by Economist Impact and DP World at the World Economic Forum in Davos shows companies are diversifying their supply chains. The fifth annual study titled Trade In Transition surveyed 3,500 supply chain executives across the world. It found that 33% of businesses based in the Asia-Pacific (APAC) region are creating parallel supply chains to avoid disruptions caused by geo-political risks. Meanwhile, 29% are creating dual supply chains to cater for escalating trade tensions between China and the US. Sounds like a wise idea, given the mixed messages coming from the White House.