Global Trade Impact: a Look at Donald Trump's Tariff Scenarios

CGTN Europe

CGTN Europe spoke to Professor Kimberly Clausing, Nonresident Senior Fellow at the Peterson Institute for International Economics.

Transcript

00:00Professor Kimberly Clausing is from the Peterson Institute for International

00:04Economics. Thank you for coming on the program. In a nutshell, what's the best

00:08case and the worst case scenario here for global trade? I think the best case

00:14scenario is that the Trump administration backs down from the more

00:18ambitious versions of their plans and does the most narrow version possible. I

00:23think this is a huge self goal for the United States. It's going to hurt our

00:27consumption, our investment, our macroeconomy, and U.S. consumers and

00:34workers, but it also hurts some of our closest partners and allies

00:38disproportionately. So Canada, Mexico, Korea, Japan, these are all examples of

00:44countries that have worked really well with the United States on a host of

00:48problems. So I think the best case would be to ratchet that down. Worst case

00:52scenario, they do something very aggressive like a broad 20% tariff on

00:57all of the trading partners. That could be quite harmful on the consumption side.

01:01That's the largest tax increase in more than a generation, so that's going to

01:06hurt consumers and households in the U.S. economy. It's also a pretty regressive

01:11tax that'll hurt poor people more. On the production side, it will create waves of

01:16retaliation that hurt our exporters, and it will put a big monkey wrench into U.S.

01:21supply chains, which rely on imported intermediate goods. The majority of our

01:26imports are intermediate goods, and one thing you see in that manufacturing

01:30report that was just alluded to on your show is a much increased price of these

01:36intermediate goods in manufacturing, indicating that that's a big cost shock

01:40for U.S. production and industry. So a ripple effect, not just in the United

01:44States though, but around the world. And as you say, some countries are more at

01:48risk than others in terms of the impact that this is all going to have. You know,

01:52as patterns shift to avoid tariffs, does anyone stand to benefit from the trade

01:58diversion effects? If you look at some of the modeling, it looks like some

02:03countries, like perhaps Australia, could benefit from some elements of this if

02:08trading partners reorient some of their trade towards others. You know, and I

02:14think many countries in the world aren't that exposed to U.S. trade because we

02:20account for only about 13% of worldwide merchandise imports. So for many

02:24countries, they might be able to weather this by building stronger trade

02:28connections with each other, and we've seen some efforts in that direction in

02:32the past. Europe, for instance, opened many new trade agreements during the

02:37first Trump administration, partly to counter the threats of trade wars from

02:42the first Trump administration. I have less positive outlook for Canada and

02:47Mexico, who unfortunately are much more deeply dependent on the United States,

02:51but they'll be doing their best to reorient towards other countries of the

02:55world if this trade war occurs in its full glory. You mentioned Europe there. I

03:03mean, what are the implications of EU retaliation? So Europe and other

03:10countries will retaliate. That's certainly going to hurt U.S. exporters

03:13even more than the tariffs will, but the tariffs hurt them too, of course, because

03:17U.S. exporters are also big U.S. importers. Those are often the same firms.

03:22For Europe, there's a lot of new trading relationships that they can try to build,

03:26not just with each other and with the UK, but with Canada and Mexico and

03:33countries throughout the world. I suspect that, you know, this will also push the

03:38European Union, Japan, Korea, and others closer to China as they seek new trading

03:44partners that can be more reliable than the Trump administration at this

03:48particular time. But again, I think it depends a lot on the form that these

03:53tariffs take, and as you've noticed in your own reporting, you know, there's a

03:58lot of uncertainty right now about whether this is the light version or the

04:01heavy version of these tariffs, and I think the rollout of these policy plans

04:05has been very chaotic and uncertain at all levels. As you say, a lot hinges on

04:11what is actually announced on that so-called Liberation Day, but how and

04:16how soon will this trade and tariff turmoil reshape global trade flows as we

04:22know it? I think that if, you know, the tariffs end up being quite broad, we're

04:29gonna see a big impact right away, but I think the big impact is mostly gonna

04:33come in the form of a recessionary headwinds for the United States because

04:39this is such a large shock, it's such a large tax increase, and it's such a large

04:43supply chain disruption. That's gonna reduce US demand in addition to the

04:48tariffs reducing US demand, so that puts a big, you know, cloud over the whole

04:54world economy because the United States is, you know, a large economy that's gonna

04:57have a big impact. So I'm hoping, like many, that the tariffs end up being

05:03smaller than some of the advertisements ahead of time have suggested. Look, Trump

05:09says it's all about protecting US jobs, protecting US industry, but won't this

05:14tariff escalation lead to higher prices and fragmented supply chains, no matter

05:20how wide or narrow they end up being? I agree. I think this is a negative policy

05:29for the United States, whether it's small or large, right? We saw, in fact,

05:33during the first Trump administration trade war, the full costs of those extra

05:40tariffs, which were mostly on Chinese products, but the full costs were borne

05:44by US buyers of imports, right? So it was a big shock to US consumption and it

05:49also hurt US production. Very careful analysis of that trade war episode showed

05:56that we lost more jobs in the exporting industries that were threatened with

06:00retaliation and due to supply chain disruption than were created by the

06:04protection from the tariffs. If we move to Trump 2 and imagine the same sort of

06:09experiment, but with the much bigger tax base where you're hitting now all of

06:14trade, you know, all of trade is roughly 10 times the size of trade that was

06:18tariffed in the first Trump administration. So we'd expect, you know,

06:22a much, much larger shock, both in terms of the tax, which would be

06:27thousands of dollars for the typical household, but also in terms of the

06:31disruption, which could easily provoke a steep recession.

06:35Kimberley Clousing from the Peterson Institute for International Economics.

06:39Thank you very much.

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