What Trump aims to achieve with his tariff plans

WASHINGTON - After promising during his election campaign to put import taxes back at the centre of US economic policy, US President Donald Trump moved swiftly once back in office, announcing significant new tariffs aimed at America’s trading partners.

The tactics – implementing new tariffs and threatening others in an effort to intimidate or gain leverage on other disputes – represent a dramatic shift in a global economy where most major economies have sought to reduce trade barriers.

What has Trump done so far?

Mr Trump kicked off a barrage of tariff announcements in early February with a blanket 10 per cent tax on imports from China. On Feb 27, he declared that

an additional 10 per cent tariff on Chinese goods would be charged from March 4. 

Tariffs of 25 per cent on shipments from Canada and Mexico

– neighbours and cosignatories of a North American free-trade agreement – were also announced in early February, with a lower 10 per cent rate for energy products from Canada. These were paused for 30 days after the leaders of the two countries committed to addressing the demands Mr Trump made of them.

After some confusion over a further month’s postponement, Mr Trump said on Feb 27 that the tariffs would take effect on March 4, unless what he called the “scourge” of drugs coming in to the US “stops, or is seriously limited”, he posted on his Truth Social platform. As Mexico aims to meet Mr Trump’s conditions, it extradited 29 accused drug traffickers to the US in late February.

The European Union could be next after Mr Trump threatened 25 per cent tariffs “on cars and all other things” arriving from the 27-nation bloc, which the President characterised as “formed to screw” the US.

Beyond these sweeping tariffs, Mr Trump announced plans for a 25 per cent levy on US imports of steel and aluminium from March 12. More metals could be targeted after he ordered the Commerce Department to examine potential levies on imports of copper.

Mr Trump also directed his administration to propose a round of so-called reciprocal tariffs customised for each trading partner to offset any perceived disadvantage for US manufacturers. And on Feb 19, Mr Trump said he would likely impose tariffs of around 25 per cent on automobile, semiconductor and pharmaceutical imports.

Another part of his trade initiative, since delayed, is to end tariff exemptions for “de minimis” merchandise from China and Hong Kong, which covers packages valued at less than US$800 (S$1,080). The move would block off a tariff-free shipping route – mainly involving air freight – used by Chinese e-commerce companies that are popular with American consumers.

Together, the announced measures have the potential to reshape global commerce. 

What is Trump trying to achieve? 

During his confirmation hearing as treasury secretary in early January, Mr Scott Bessent told senators that people should expect Mr Trump to use tariffs in three ways: to remedy unfair trade practices, which Mr Trump has said would revitalise American industry; to raise revenue for the federal budget, which would be important to help pay for Mr Trump’s plans to extend tax cuts; and to use as a lever with foreign powers in place of sanctions, which Mr Trump believes have been overused.

Boosting American manufacturing: 

Mr Trump has talked about using tariffs to revitalise manufacturing and stop the US from getting “ripped off” by other countries due to trade imbalances. He has floated the idea of using a mix of tariffs and incentives, such as expedited permitting approval, to entice companies to build their facilities in the US. 

“We’re going to bring the companies back,” he said during an interview with Bloomberg editor-in-chief John Micklethwait at the Economic Club of Chicago in October. “We’re going to lower taxes still further for companies that are going to make their product in the USA. We’re going to protect those companies with strong tariffs.”

Mr Trump imposed several rounds of tariffs on Chinese goods during his first term and said he was just getting started using them to remake the US economy when the Covid-19 pandemic hit and scrambled his plans. 

US Secretary of Commerce Howard Lutnick framed the tariff plan as a means to regain the world’s respect during his confirmation hearing as commerce secretary, telling senators that US allies and adversaries alike “are taking advantage of us, they are disrespecting us and I would like to see that end”. 

Raising revenue: 

The revenue brought in by tariffs could help pay for the tax cuts promised by Mr Trump.

He wants to extend reductions in income taxes that were approved in 2017 during his first presidency, many of which are due to expire at the end of 2025. He has even put forward proposals to expand these tax breaks – for example, by exempting workers’ tips and social security earnings from taxation. Mr Trump also aims to slash the corporate tax rate to 15 per cent, from 21 per cent. 

These tax measures are expected to lead to a loss in government revenue of US$4.6 trillion over 10 years. “Tariffs can easily pay for that,” Mr Peter Navarro, a Trump trade adviser, told CNBC on Jan 31. “President Trump wants to move from the world of income taxes and countless IRS (Internal Revenue Service) agents to the world where tariffs, like in the age of (President William) McKinley, will pay for a lot of government that we need to pay for and lower our taxes.”

Wielding a tool of diplomacy: 

Mr Trump has become sceptical of sanctions because they drive other countries away from the dollar, and sees tariffs as a way to gain leverage in negotiations, according to Mr Bessent. 

A brief stand-off with Colombia in January – in which Mr Trump threatened to impose tariffs over the country’s initial refusal to accept repatriation flights for undocumented migrants – provided a glimpse of the US President’s strategy. Mr Trump pulled back on his threat after an agreement was reached between the two countries and Colombia sent military planes to the US to pick up dozens of nationals.

Mr Trump’s tariff orders on imports from Canada, Mexico and China – the three largest trading partners of the US, which together accounted for about 40 per cent of all merchandise trade in 2024 – are intended to address what he calls a “threat to the safety and security of Americans, including the public health crisis of deaths due to the use of fentanyl”. The decision to delay tariffs on Mexico and Canada for a month came after their governments agreed to step up efforts to address illegal migration and drug trafficking at the US border. 

How radical is Trump’s approach?

Some pre-existing US tariffs on goods from China, Canada and Mexico already approached or even exceeded the levels Mr Trump set. But these apply only to select categories of goods. Levying them across the board is a major departure. 

The pre-existing, relatively high tariffs cover such a small portion of US trade that the country has had a trade-weighted average tariff rate of 2 per cent for imported industrial goods, according to the Office of the US Trade Representative. That’s calculated by dividing the total value of imports by the total tariff revenue. These goods make up 94 per cent of US merchandise imports by value, and half of them entered the nation duty-free.

And on top of Mr Trump’s proposed blanket tariffs are all the others he has threatened.

Is Trump’s approach new? 

The US taxed imports heavily for much of its history before largely abandoning the policy beginning in the 1930s, as government leaders embraced the idea of free trade. 

A big reason for that was the reaction to the Smoot-Hawley Tariff Act of 1930, which led to an estimated increase of roughly 20 per cent in average import duties. The law provoked retaliatory tariffs from foreign governments, resulting in a drop in global trade and a deepening of the Great Depression. That debacle kicked off a multi-decade period that saw the rise of free trade, culminating in the creation of the General Agreement on Tariffs and Trade in 1947 and eventually the formation of the World Trade Organisation (WTO) in 1995. During that time in Washington, the Republican Party steered clear of tariffs.

They made a comeback during Mr Trump’s first presidency, when he turned to tariffs in an effort to revitalise American industry and counter what the US regards as China’s unfair trade practices. President Joe Biden kept the trend going.

How does China figure into all of this? 

For decades, the belief in free trade was backed by bipartisan consensus in the US and by multinational corporations that wanted access to cheap and efficient supply chains overseas. China’s ascension as a global economic power broke that consensus. 

Admitted to the WTO in 2001, China gained greater access to global markets even as its critics say it violated the letter and spirit of free-trade rules – for example, by subsidising its industries and compelling foreign companies operating in China to hand over their know-how. A number of researchers have concluded that competition from China helped keep inflation across the world low for years but triggered a decline in factory employment as the East Asian nation became the world’s dominant producer. 

During Mr Trump’s first term, his administration imposed new tariffs on Chinese imports that were worth about US$380 billion in 2018 and 2019. Mr Biden maintained those levies and raised more of them in 2024 on goods worth an additional US$18 billion. 

The new enthusiasm for tariffs has spread to the European Union. In October 2024, it introduced duties as high as 45 per cent on electric vehicles from China. 

Can Trump raise tariffs without congressional approval? 

Yes. Through a number of statutes, the US Congress has empowered the president to modify tariffs to address a variety of concerns. These include a threat to national security, a war or emergency, harms or potential harms to a US industry, and unfair trade practices by a foreign country. 

While companies can try to fight higher tariffs in court, because of past deference given to presidential powers, such challenges “would face a steep uphill climb”, according to an article posted by the Centre for Strategic and International Studies and co-authored by Mr Warren Maruyama, a former general counsel for the Office of the US Trade Representative. 

How do tariffs work?

A tariff, also known as a duty or levy, is usually calculated as a percentage of a good’s value (as declared during the customs clearance process) and assigned according to the item’s country of origin. That gets complicated when a product is assembled from parts that cross multiple borders, such as a car with US-made components that has put together in Mexico and reimported to the US. A tariff can also be levied as a fixed amount on each item. 

Goods that cross borders are given numeric codes under a standardised nomenclature called the “international harmonised system”. Tariffs can be assigned to specific product codes relating to, for example, a truck chassis, or to broad categories, such as electric vehicles. Customs agencies collect tariffs on behalf of governments. 

Who pays tariffs? 

Tariffs are paid by the importer, or an intermediary acting on the importer’s behalf, though the costs are typically passed on. Mr Trump argues that, ultimately, it’s the exporter who effectively ends up shouldering the cost of a tariff. Studies have shown that the burden is more diffuse. 

The foreign company that makes the product may decide to lower its prices as a concession to the importer, or it may invest in building a factory elsewhere to sidestep the tariff. Alternatively, the importer – such as Walmart and Target, two of the biggest importers in the US – could raise the price of the item to protect its profit margin, meaning the consumer shoulders the tariff cost indirectly.

How do tariffs affect the US economy?

It can be difficult to sort through the economic effects of tariffs. They can stimulate employment by attracting investments as companies try to get around tariffs by moving factories to the taxing country. At the same time, they can provoke retaliatory tariffs that cost jobs in other parts of the economy. 

Moments after the first new US tariffs on China took effect, Beijing blacklisted a handful of American companies, imposed import levies on some US oil and other goods, and placed export controls on a selection of critical minerals. China vowed to take further action after Mr Trump threatened to double the blanket levy on imports from the country. Canada and Mexico have said they would retaliate against tariff hikes on their exports. 

When a country imposes import tariffs, domestic manufacturers do not necessarily leap in to start making the products affected. And if the nation has no alternative domestic supply of the goods concerned, then prices of those goods can go up. 

Economists are still untangling the inflationary effects of Mr Trump’s first-term tariffs from a much bigger shock to supply chains and economic activity that started not long after the US-China trade war began: the Covid-19 pandemic.

In February 2019, the Federal Reserve Bank of San Francisco estimated that the tariffs were adding 0.1 percentage point to consumer price inflation and 0.4 percentage point to a metric that measures the costs for businesses to invest. Ms Erica York, senior economist at the non-partisan Tax Foundation, estimated that the higher tariffs imposed by Mr Trump and Mr Biden increased annual costs for the average US household by US $625. 

In addition, Ms York said that the hikes would eliminate 142,000 full-time jobs and, over the long run, would reduce gross domestic product by 0.2 per cent, on average. Critics of Mr Trump’s further tariff increases say they will have the same kinds of effects at a greater scale. BLOOMBERG