President Trump’s Executive Order 14257, imposing “reciprocal tariffs” on virtually all U.S. trading partners, has raised tariff rates to levels that have not existed in over a century. Despite the current 90-day postponement for all countries except China, the measures have undoubtedly thrown a wrench into the works when it comes to international cooperation. The Order stipulates that all articles imported into U.S. customs territory will be subject to an additional ad valorem rate of duty of 10%. In addition to this universal baseline tariff, the Order imposes individualized increased duty rates on trading partners within Annex I to the Order. China and Hong Kong have been even harder hit, as the US government has raised tariffs on Chinese goods to 145%.
The Chinese Response
China’s Finance Ministry recently stated that “The U.S. side’s imposition of excessively high tariffs on China seriously violates international economic and trade rules, runs counter to basic economic principles and common sense, and is simply an act of unilateral bullying and coercion.” China has responded to the tariff increase by raising additional duties on US goods to 125%. The tit-for-tat measures have made trade between the world’s two most powerful economies impossible, say analysts. The high rate of import duties imposed by both countries effectively erode manufacturers’ profit margins, making their offerings unaffordable. After Canada and Mexico, China is the third-largest consumer of US goods. China has further declared that it would no longer retaliate against any further tariff increases since there was no point. By this stage, trade between the two countries has essentially been terminated.
The EU’s Response
Other countries have responded in kind. The EU bloc stated it would be launching counter-tariffs on about €21 billion worth of U.S. imports as of Tuesday, April 15, in response to Trump’s 25% tariffs on steel and aluminum. It is also assessing how to respond to U.S. car tariffs and the wider 10% levies still in place. The EU’s countermeasures have also been put on hold for 90 days. European Commission President Ursula von der Leyen has stated that the pause is a key step toward stabilizing the global economy, but warned that if negotiations proved unsatisfactory, the EU’s countermeasures would kick in. European Central Bank policymaker Francois Villeroy de Galhau, meanwhile, deems the tariff pause “less bad news” than before but notes that there is still a significant threat to international trade, cooperation, and trust.
The Impact on Future Business
Clearly, the tariffs are not only impacting existing companies with offshore operations but also foreign companies whose founders may, in the past, have considered setting up in the U.S. The U.S. has historically been hailed by entrepreneurs for its relatively low corporate tax rate compared to many other countries. States like Delaware, Nevada, and Wyoming provide additional tax advantages, such as no sales tax and lower franchise taxes. With an EB-5 visa, entrepreneurs and investors were able to set up LLCs, C-Corps, or other forms of management. The U.S. offers companies access to one of the largest global consumer markets. It offers a host of pro-growth policies, such as reduced corporate taxes and a relatively low corporate tax rate (which was reduced from 35% to 21% by the Tax Cuts and Jobs Act). The U.S. is additionally known for its strong research and development and for its interest in educating budding startup founders and entrepreneurs. Many institutions have traditionally helped both national and international entrepreneurs set up LLCs and other structures via initiatives such as LLC University’s free coupon code for Northwest Registered Agent. The latter is an entity that helps businesses navigate each step of registration. However, the cost of setting up as it stands is less of an issue for national and international companies at this point in time than issues such as the cost of labor and materials.
Alternative Options
Academics at the University of Pennsylvania’s Penn Wharton School note that many current trade models are failing to take into account the full damage caused by tariffs. Their Penn Wharton Budget Model (PWBM) projects that Trump’s tariffs would reduce the GDP by approximately 8% and wages by 7%. They modelled a comparison with a corporate tax increase, albeit noting that raising corporate tax is generally seen as highly economically distorting. The comparison was undertaken because tariffs are estimated to raise around the same amount of revenue as increasing the corporate income tax from 21% to 36%. Even if only domestic capital prices fall as a result of the tariff increases, the reduction in economic activity would be more than twice as large as a tax increase on capital returns raising the same amount of revenue.
Challenges Involved in Revitalizing U.S. Manufacturing
Many experts argue that it will be very difficult or impossible for the U.S. to revitalize its manufacturing industry to the extent that it is no longer dependent on China. Raw material procurement, energy costs, and productivity could all become major issues. As stated by Modern Diplomacy’s Professor Murray Hunter, “The work ethic of Americans is now very different from 30 years ago. Many may not want to work within an industrial environment.” There are many other impediments, including the eradication of “company towns” that once supported mass production corporations and a lack of experienced, skilled manufacturing engineers. Hunter notes that although the main aim of the tariffs is to convince American companies to return to the U.S., the challenges are immense. The cost base of moving their home base to the U.S. could be two or three times higher for these companies than they are now. A look back at history will reveal that the last time the U.S. imposed such high tariffs (in the 1930s), other countries responded by increasing their own tariffs, and the economic situation dramatically deteriorated.
History shows that there are no winners in a global trade war. The U.S. has traditionally been an attractive country with which to do business, owing to its large consumer market and financial advantages. However, the current tariff conundrum is putting a stop to both international trade and foreign companies wishing to establish their businesses in the U.S. Whether the Trump government will push through with current tariff rates remains to be seen. Many experts deem urgent negotiations with China and other countries to be of the essence.