Why Trump’s Trade War May End Up Being Directed At His Allies

While much has been written about a trade war between the US and China, Trump’s tariffs could end up being directed at America’s allies. The United States has better natural trade synergies with the BRICS compared to other developed countries and economic pragmatism could ultimately ‘trump’ the rhetoric about the US trade deficit with China.    

European exports to the US tend to be expensive items like cars and machinery, whereas with respect to China, it is often US companies that manufacture their goods in China and then re-export them to the US. With over 90% of Apple iPhones still manufactured on the mainland, China may be considered a more important trade partner to the US than the European Union.

The US can also compete with the EU in terms of labour and energy costs which are crucial inputs into manufacturing. This would make US tariffs on other advanced economies more effective as US firms could benefit from having the scales tipped in their favor. In contrast, China produces a number of products so cost-effectively that tariffs may simply raise prices without necessarily increasing output in the US.   

The expectation that the US should continue to fund Europe’s security while running a trade deficit with the continent could be another potential sticking point in the US-EU relationship under the new administration, with Trump having once again threatened to withdraw the US from NATO during a recent television interview. This is another example of tensions that may arise between the US and allies over whom it has more leverage to extract concessions. 

The precedent exists. During his first term, Trump applied tariffs on steel and various consumer goods sourced from allied nations and the president recently promised a 25% tariff on imports from Mexico and Canada as punishment for the volume of drugs and immigrants crossing into the US via these nations’ borders.

Trump’s deportation plan to remove millions of illegal immigrants from the US will also require there being somewhere for the migrants to go. Canada and Mexico are two ideal candidates for Trump to offload millions of unwanted migrants and the threat of steep tariffs could give Trump the leverage required to achieve his ambitions.     

Since the introduction of tariffs to reduce the US trade deficit with China, Mexico has overtaken China to become the United States’ largest trade partner, although much of these imports still originate in China or represent Chinese manufacturing interests that have set up shop south of the border. As such, if the US is serious about addressing its trade deficit, addressing the deficit with Mexico and other allies will be just as important as the usual focus on China.

Considering 85% of Mexico’s exports head to the US compared to about 15% for China, the in-coming administration may have more leverage in targeting Mexican imports, which will be key to addressing the trade deficit. Similarly, the US trade deficit with the EU is nearly as large as the deficit with China which makes addressing the trade deficit with the EU equally important.

The application of tariffs on Chinese exports could also be met with countermeasures from Beijing. China has already limited the export of rare earth minerals with military applications in an effort to dissuade further trade restrictions. This is an example of how the US relies on China in ways that make disrupting trade with China more costly than it might with other partners.  

According the Council on Foreign Relations, China is the largest source of imports for 26 of the 59 minerals classified as critical by the U.S. government. Chinese supply accounts for 100% of US imports for 12 of these critical minerals. This gives China leverage over the US and is one of the reason the US may be in much stronger position to extract concessions from its allies.

The Chinese government has already banned exports of certain metals with defence industry applications to the US such as gallium, antimony, and germanium, which are all used in the manufacture of advanced semiconductors. Exports of graphite are also being restricted while third parties who re-export these resources to the US could face secondary sanctions.

If Trump takes Taiwan tensions off the table by respecting China’s red lines, there is definitely room for negotiations. Chinese newspapers have run editorials encouraging the US to increase their use of automation to become competitive in manufacturing and as a leading producer of industrial robots China could help the US reindustrialize.

Despite all the talk about competition between the US and China surrounding the production of microchips, both countries still rely heavily on Taiwan for supplies. As such, both countries can be expected to continue striving to achieve self-sufficiency in chipmaking while maintaining the status quo with respect to the island in order to maintain access to this technology.   

Trump’s plan to reduce the budget and trade deficit while growing wages faster than inflation can only be implemented under global economic conditions conducive to low inflation which takes both conventional wars and large-scale trade wars off the table. This suggest that tariffs could end up being used as a bargaining chip rather than a blunt instrument and that relations with China may end up being more predictable than predicted.

Instead of China and other BRICS countries, it could end up being unexpected countries such as Ireland that end up in Trump’s crosshairs. Relative to GDP, Ireland runs the biggest trade surplus with the US in Europe, largely the result of US firms booking profits in Ireland for tax purposes.  Trump’s Commerce Secretary pick, Howard Lutnick, has publicly called for an end to this policy.

Trump has already applied tariffs to allies, often using the threat of duties as an entry point to further negotiations. This time around, the border crisis, budget deficit, and cost of defending Europe have become additional points of scrutiny which could see trade tensions with allies surplus those with China.