United States, explained.
hen campaigning for president Trump promised to hit China with higher tariffs than everyone else (60% for China, 10-20% for others). But now he has done the opposite Al Drago/Bloomberg via Getty Images)
Developing countries and global supply chain resilience will be damaged by Trump’s “softer on China harder on others” approach.
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Trump’s second trade war risks unwinding the benefit of his firstTrump’s second trade war risks unwinding the benefit of his first
Donald Trump has launched his Trade Wars 2.0 over the weekend, hitting Canada, Mexico and China with big new tariffs. Trump has imposed 25% tariffs on all imports from Mexico and Canada (though a lower rate of 10% applies to Canadian oil imports). China will be hit by 10% tariffs.
There is little doubt that the tariffs are needlessly damaging. Even the otherwise Trump friendly Wall Street Journal editorial board has called this the “dumbest trade war in history”. All three countries are also retaliating, magnifying the economic costs.
That the new US tariffs apply immediately and across the board to America’s biggest import sources make them far more destructive than those imposed during Trump’s first trade war with China – which ratcheted up slower over the course of 2018 and 2019 to 19% on average (and remain in place). A particularly pernicious aspect of the new tariffs is also that Trump is effectively treating China, a strategic rival, better than close US partners.
Perhaps less worthy of news headlines but no less important, by going relatively soft on China but harder on others, Trump’s trade war also risks derailing the diversification of global supply chains away from China and towards other developing economies – removing a crucial growth opportunity for the latter and working against Western geostrategic efforts towards greater supply chain resilience.
A silver lining of the tariffs Trump imposed on China during his first term is that this helped kicked start a significant process of shifting supply chains away from China towards others such as Mexico, Vietnam, Thailand, and India. Many other developing countries have also been benefitting or hoping to do so after decades of being crowded out by China’s global manufacturing dominance (plus rising automation).
Supply chain shifts haven’t been solely about US tariffs. It also reflects rising labour costs in China and diversification efforts by multinational firms following the Covid-19 pandemic and rising geostrategic tensions. However, the tariffs provided an important jolt and a much-needed competitive edge for developing countries otherwise struggling to compete with China.
A particularly pernicious aspect of the new tariffs is also that Trump is effectively treating China, a strategic rival, better than close US partners.
To be sure, China remains embedded within the supply chains running through these countries as a key source of parts and components as well as via investments by Chinese firms. Nonetheless, as I and colleagues show in forthcoming research, most of this supply chain shift has reflected genuine diversification towards non-China sources of production and investment, especially due to the involvement of firms from advanced Asian and Western European economies.
That opportunity could now evaporate depending on how Trump pursues his trade wars. When campaigning for president Trump promised to hit China with higher tariffs than everyone else (60% for China, 10-20% for others). But now he has done the opposite, with Mexico and Canada facing average US tariffs only marginally lower than China. Against hyper-competitive Chinese manufacturers, it is unlikely to prove much of an advantage.
The risk is this dynamic gets repeated with other developing countries. Vietnam, for instance, has been the other big beneficiary of shifting supply chains besides Mexico and runs a massive trade surplus of U$110 billion with the United States. The Trump administration could also find fault with any number of developing economies over a host of economic issues – e.g. trade barriers, weak intellectual property rights, low labour standards – but also random bilateral political disputes given Trump’s use of tariffs as an all-purpose sledgehammer.
Trump might still raise tariffs even further on China. But it is also possible that Trump reaches a deal with China that avoids or limits this. Meanwhile tariffs on other countries could rise dramatically, as specific countries are targeted but also as the Trump administration considers introducing a “universal tariff”. That would disadvantage all countries vis-à-vis China, but it would be developing economies competing in low-to-medium skill manufacturing that could be worst affected.
Even if things ultimately play out more positively, the uncertainty created by Trump’s trade threats and unpredictable approach creates damage of its own. The less certain firms are about future market access to the United States, including relative to China, the less willing they will be to make the investments in other countries that are needed.
Of course, much worse is also possible, including a spiralling descent into global protectionism that simply damages everyone.
About the author
Roland Rajah
Roland Rajah is Lead Economist and Director of the Indo-Pacific Development Centre at the Lowy Institute, focusing on economic development challenges across Southeast Asia, the Pacific Islands, and South Asia. His research spans macroeconomics, aid and development finance, geoeconomics, and regional integration.
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