The Return of the Trade War: A New Chapter with Deeper Risks
In 2017, during his first term as president, Donald Trump launched what became the most significant trade war since the 1930s, imposing tariffs on U.S. trading partners. His approach, characterized by impulsive threats and import taxes, created global economic drama and drew sharp criticism from mainstream economists who favored free trade. However, the impact of the first trade war was surprisingly limited. Inflation remained under control, the economy continued to grow steadily, and while Trump targeted America’s large trade deficits, they proved resilient to his measures, even growing in size. But now, in his second term, Trump has escalated his trade policies, introducing a sequel that promises to be far more disruptive and risky.
A Wider and More Ambitious Trade War
The stakes are higher this time around. Trump’s latest plans include slapping 25% tariffs on goods from Mexico and Canada and doubling existing 10% tariffs on Chinese imports, effective this week. He has also signaled his intention to expand these measures to other countries. These actions could have far-reaching consequences, threatening economic growth and driving up prices for American consumers. The tariffs would be paid by U.S. importers, who would likely pass the increased costs onto consumers through higher prices. This could undermine Trump’s campaign promise to tame inflation, which was a major issue during President Joe Biden’s term.
For now, some of these measures have been delayed, but the clock is ticking. Trump postponed tariffs on Canada and Mexico until later this month and has already implemented a 10% tariff on Chinese goods, with plans to double it soon. China retaliated by imposing its own tariffs on U.S. coal, luxury cars, and other products. Trump’s belief in tariffs as a solution to economic problems remains unchanged. He sees them as a tool to restore American factories, raise government revenue, and pressure foreign countries to comply with his demands. However, the results of his first-term tariffs were underwhelming. Prices on some items may have risen, but overall inflation remained stable, and factory jobs saw little to no growth.
The Risks of a Wider Trade War
Economists warn that this second trade war could be far costlier than the first. During Trump’s first term, his trade team carefully crafted tariffs to minimize the impact on consumers, targeting industrial products rather than everyday goods. This strategy limited the damage, but the new tariffs are broader in scope, affecting a wide range of products, including toys, clothing, and food. For example, the CEO of Basic Fun, a toy company that imports 90% of its products from China, including Tonka trucks and Care Bears, predicts that prices will rise significantly. Toys were previously exempt from tariffs, but this time, the company expects a substantial hit to its profits.
The potential for retaliation adds another layer of risk. If other countries respond with their own tariffs, Trump has threatened to escalate further, which could spiral into a cycle of retaliatory measures. Economists fear this could lead to a full-blown trade war, disrupting global supply chains and driving up prices even further. At a recent conference of the National Association for Business Economics, experts expressed concern about the potential impact of the tariffs on economic growth, with one economist estimating that they could reduce growth by as much as half a percentage point.
The Broader Economic Context
Another key difference between the first and second trade wars is the economic environment. During Trump’s first term, inflation was low, and the Federal Reserve was even concerned about deflation. This time, inflation is a much bigger challenge. Following the post-pandemic economic boom, prices surged, reaching a 40-year high in mid-2022. While inflation has eased somewhat, it remains stubbornly above the Fed’s 2% target. Trump’s tariffs could reignite inflationary pressures, forcing the Federal Reserve to reconsider its plans to cut interest rates. This could keep borrowing costs higher for longer, making loans and mortgages more expensive for consumers and slowing down economic growth.
The Changing Goals and Tactics
Trump’s motivations for this second trade war also appear to have shifted. While his first-term tariffs were largely aimed at addressing trade imbalances and pressuring foreign governments, this time, he has emphasized the role of tariffs in raising revenue for the federal government. He and his officials have even suggested substituting tariff revenue for income taxes. This approach could mean that the tariffs are more permanent, even if trading partners agree to Trump’s demands on issues like immigration. Additionally, the new tariffs are more comprehensive, targeting multiple countries simultaneously, which increases the likelihood of widespread retaliation.
The Consumer Impact and Contradictions
For many American consumers, the impact of the tariffs will be personal. From the price of toys to the cost of fresh produce like avocados imported from Mexico, everyday items could become more expensive. At a grocery store in Raleigh, North Carolina, one shopper pointed out the contradiction between Trump’s promise to control inflation and his policies that could drive up prices. “If tariffs go up by 25%, it’s not the government or the Mexican people who pay for it,” he said. “It’s us.” As the trade war unfolds, this sentiment is likely to resonate with many Americans, who may end up bearing the cost of Trump’s ambitious trade strategy.
In conclusion, while Trump’s first trade war had limited consequences, his second-term approach carries far greater risks. The combination of broader tariffs, a tougher economic environment, and the potential for retaliation poses a significant threat to economic growth and consumer wallets. As the tariffs take effect, the question remains whether Trump’s policies will achieve their intended goals or if they will simply inflict pain on the American economy and its people.
