Explainer: What across-the-board tariffs could mean for the global economy

Former US president Donald Trump blames the global trading system for inflicting a long list of ills on the American economy, including lost jobs, closed foreign markets and an overvalued dollar.

The remedy, he insists, is simple: tariffs.

Trump, the Republican nominee for US president, has repeatedly said he would raise tariffs if elected. China, a geopolitical and economic rival, would face an additional 50 per cent or 60 per cent tariff on its exports to the United States. He has also floated the idea of a 10 per cent surcharge on exports from the rest of the world.

Although smaller than the percentage proposed for Chinese exports, an across-the board tariff has the potential to deliver a much more devastating jolt to world trade, many economists warn.

Such a surcharge would not distinguish between rivals and allies, critical necessities and non-essentials, ailing industries and superstars, or countries adhering to trade treaties and those violating them. (Democrats have also embraced tariffs as a policy tool, but Vice-President Kamala Harris, the Democratic presidential nominee, has criticised Trump’s universal approach as inflationary.)

Here is what you need to know about the idea of a universal tariff on all imports.

What are the historical precedents?

Trump’s broad-brush tariffs frequently evoke comparisons with the destructive global trade war that the US helped to initiate in the 1930s with the Smoot-Hawley tariffs passed by Congress. The Senate Historical Office has called that law “among the most catastrophic acts in congressional history”.

There is another relevant example, according to Professor Douglas A. Irwin, an economics professor at Dartmouth College.

In 1971, then President Richard Nixon levied a 10 per cent surcharge on all taxable imports.

Mr Nixon, an ardent internationalist, was operating in a global economy very different from today’s. Many of the defining features of the system created after World War II still governed finance: Foreign governments could immediately trade their dollars into gold from the US Treasury, and many of the world’s currencies were exchanged at fixed rates. Currencies now move largely because of market forces.

By the start of the 1970s, those inflexible rules had left the dollar overvalued compared with the currencies of many key US trading partners. That, in turn, made American goods sold abroad more expensive compared with imports.

The US had too much money going out and not enough coming in, raising the risk that America could run out of reserves to pay its foreign debts.

The Nixon administration’s 10 per cent surcharge on imports was meant to pressure other countries to devalue their own currencies and to goose American exports, while making imports more expensive. When the unfair exchange rates ended, the President declared in a televised address, “the import tax will end as well”.

They did. And after four months, the surcharge was lifted.

What was notable about the 1971 episode, Prof Irwin said, is that “Nixon had a very specific purpose in imposing that and had explicit conditions for how and when it would be removed”.

By contrast, Trump has never articulated “what the purpose of that tariff would be and under what conditions it would be removed”, Prof Irwin said. His policy lacks a specific goal and timetable.

That makes the likelihood of success more remote, he added.

Would an across-the-board tariff make a good bargaining tool?

Trump has said he would dangle the threat of major tariffs as a negotiating tactic to force concessions from trading partners.

“And man, is it good for negotiation,” he said of tariffs in an interview with Bloomberg Businessweek. “They would do anything.”

Yet during his term in office, some of the biggest US trading partners responded to his tariffs with tariffs of their own, including the European Union, China, Canada, Mexico and India.

A similar cycle of retribution would most likely play out again.

If Trump imposes a 10 per cent surcharge on all imports, “each country, including Japan, will take retaliatory measures of the same degree”, said Mr Shigeto Nagai, head of Japan economics at advisory firm Oxford Economics.

That could result in the worst possible outcome for both the US and its allies, economists said: a combination of recession and higher inflation.

“Nobody is excited about a trade war,” said Professor Kimberly Clausing, an economist at the Peterson Institute for International Economics, who served in the Treasury Department under President Joe Biden.

“But nobody is excited about bullying from the Trump administration.”

What would be the economic consequence of the tariff?

The US imported US$427 billion (S$558 billion) worth of goods from China in 2023, Prof Clausing said, while imports from the rest of the world totalled nearly US$2.7 trillion. “So I would expect this to be a bigger shock, both to the US economy but also abroad.”

Trump’s 2018 tariffs on China caused a rebalancing of trade, the International Monetary Fund found. China exported more to other countries, and other countries exported more to the US.

“When you’re putting a tariff on everybody, that reshuffling gets shut down, and it just becomes a big price shock to the world,” Prof Clausing said.

Trump and economists who support him have argued that tariffs would increase production at home, create high-paying jobs and decrease inflation. And, he says, it would bring in additional revenue.

Most economists, though, agree the overall downsides outweigh the gains. Rounds of tit-for-tat tariffs would ultimately hurt every country by limiting trade, disrupting global supply chains, slowing growth and pushing up prices. NYTIMES