Donald Trump’s proposal to increase customs duties on imports, particularly targeting a 60% rate on Chinese goods, could lead to trade wars and economic repercussions. While he has the authority to implement these changes, experts warn that such indiscriminate duties may violate WTO agreements and provoke retaliatory actions from other nations. The potential economic impact includes higher consumer prices and job losses, raising concerns about escalating trade tensions and global economic fragmentation.
During his campaign, Donald Trump famously stated, “For me, customs duties are very nice words.” His enthusiasm stems from the desire to reinstate these duties on all imports, potentially igniting trade wars on multiple fronts.
In addition to imposing a 10 to 20% increase in duties on all imported goods to the United States, Trump aims to specifically target China with a staggering 60% customs duty.
Can He Implement These Changes?
U.S. laws equip the president with the authority to enact customs duties through executive action, a power Trump exercised multiple times during his initial term, notably on steel and aluminum imports from China and Europe.
President Joe Biden has similarly applied this approach to select Chinese products.
For Trump, the potential to gain further leverage exists if he secures an absolute majority in the House of Representatives, in addition to his already established majority in the Senate.
How Will Other Nations Respond?
Jeffrey Schott from the Peterson Institute for International Economics warns, “Applying customs duties indiscriminately, targeting both allies and adversaries, could lead to significant issues.”
He emphasizes that such actions could violate World Trade Organization (WTO) commitments or free trade agreements, likely prompting retaliatory measures from other countries, similar to past responses from Beijing and Brussels, which aimed for proportionality. However, the repercussions of a blanket increase in customs duties remain difficult to predict.
What Are the International Remedies Available?
The WTO’s primary role is to ensure fair market access and gradually reduce trade barriers, with customs duties recognized as a significant impediment.
While the WTO features a dispute resolution mechanism where countries can lodge complaints, Schott notes that “the system is broken.”
He clarifies that although procedures can be initiated, they are often stalled by appeals from the United States, with no appellate body available to address such cases.
What Risks Does This Pose for the American Economy?
The introduction of customs duties on all imported products is expected to incur substantial costs, with the Tax Foundation estimating that American consumers could face an annual tax increase of $525 billion.
Jonathan Gold, vice president of the National Retail Federation, explains that businesses heavily depend on imported goods to provide consumers with a diverse range of affordable products. He warns that “this tax will ultimately come out of consumers’ pockets in the form of higher prices.”
According to the Tax Foundation, this policy could also lead to a 0.8 percentage point dip in GDP and the loss of 684,000 jobs.
Are Trade Tensions Set to Escalate?
During his previous term, Trump’s introduction of customs duties was mainly a strategy to gain leverage for new negotiations with various trade partners. He consistently portrayed himself as a negotiation expert, with his primary objective being to secure favorable deals.
In this context, he touted a trade agreement with China that was designed to rebalance trade relations between the world’s two largest economies in exchange for gradually lifting imposed duties. However, this rebalancing has not fully materialized, even though the American trade deficit with China has largely stabilized.
This time, the proposed customs duties are intended as an alternative to additional tax cuts that Trump seeks to implement, potentially giving them a more enduring nature and heightening the risk of global economic fragmentation, a concern highlighted by the International Monetary Fund (IMF).