Trump's tariff threats loom over global economic landscape

On Tuesday, 5 November, after long months of a campaign full of invective, Kamala Harris stands in the Democratic blue corner. In the red corner for the Republicans is Donald Trump.

The rivalry is so fierce that predicting an assured favourite is difficult. However, if you believe bookmakers and financial markets, Trump will move into the White House for the second time in January 2025. One of his main ideas to "make America great again" is to launch a wave of tariffs on imported goods.

According to the Republican candidate, these tariffs would affect exporters, forcing them to lower margins to compete with domestic products. This would result in reduced earnings for exporters, benefiting companies producing in the U.S. and the federal budget.

The Republican believes tariffs are a disciplining tool. He claims he can end conflicts with "one phone call" because any leader with plans for conflict will "chicken out at the prospect of losing the American market." Trump threatens China with imposing tariffs on Chinese exports of up to 150%, or even 200%, if they invade Taiwan.

Trump not only wants to use tariffs as an alternative to sending troops. It is also his fundamental plan to strengthen the U.S. economy. He has promised to impose tariffs of 60% on Chinese goods imported to America, perhaps even higher, regardless of whether there is an attack on Taiwan.

The introduction of tariffs is not surprising and is not a move used only by the U.S. The European Union also intends to impose tariffs on Chinese cars due to the substantial "financial doping" Beijing employs in this sector, which is already perceived as unfair competition for car manufacturers in Europe.

However, Trump does not intend to stop with China, which he sees as the main enemy of the U.S. and enriching itself on the American market. He also accuses European countries (effectively allies) of exploiting the U.S. because, in his view, they buy too little from America. Therefore, he also plans to introduce tariffs of 10-20% on practically all imports, including from Europe.

It should be noted that Democrats have not shied away from tariffs either. For instance, the administration of President Joe Biden, who defeated Trump in the previous elections and replaced him in the White House, decided to impose higher tariffs on a range of products from China. This includes electric cars (an increase from 25% to 100%) and semiconductors (an increase from 25% to 50%).

The American think tank Tax Foundation estimated that the tariffs imposed by Trump and Biden will reduce the country's GDP by 0.2% in the long-term and eliminate 142,000 full-time jobs. Furthermore, as the U.S. Trade Representative's Office reports, about 94% of U.S. imports are industrial goods, half of which enter the country duty-free.

Tax Foundation estimates that fulfilling Donald Trump's election pledges will reduce GDP by at least 0.8% and employment by 684,000 full-time jobs. "Our estimates do not account for retaliation or additional harm that could result from the onset of a global trade war," the analysis states.

The European Union does not intend to stand idly by in the face of potential moves by the Trump administration. "The Wall Street Journal" reported that in Brussels, officials are holding frequent meetings in preparation for an economic confrontation with Washington, especially if Trump follows through on his promises to impose 10% tariffs on imports. A high-ranking European diplomat told the newspaper that the bloc plans to impose tariffs on American goods produced in Republican-controlled districts. - But of course, everyone here primarily wants to avoid a trade war between the EU and the U.S. - he emphasised.

- Higher tariffs are obviously not good news for the world. China, whose products Trump wants to subject to tariffs of up to 60%, should be particularly concerned. But Europe will also feel the impact, as it already struggles with economic downturns. Available estimates indicate that both would have to reckon with a GDP decline of between 0.5% and 1.5%. The decline in the competitiveness of European goods could affect the volume of exports to the U.S. and particularly affect Germany, Italy, and Ireland, which have significant exposure to the American market - comments for money.pl Prof. Dominik Kopiński, senior adviser from the world economy team of the Polish Economic Institute.

It's possible that the trend of moving production to the U.S. to avoid tariffs, which began to materialise somewhat after the U.S. administration's adoption of the Inflation Reduction Act (IRA) in 2022, will strengthen. In fact, Trump has openly declared that he wants to take away jobs from other countries through reindustrialisation. These negative effects might be partially mitigated if the dollar appreciates, which cannot be ruled out. This could be facilitated by increasing demand for American products, potential tax cuts and deregulations, as well as interest rate hikes if Trump's policy boosts inflation - the expert adds.

Regarding a potential response from Brussels to the Republican administration's tariffs, Prof. Kopiński responds: - If we take 2018 as a point of reference, when Trump imposed tariffs on European steel and aluminium, Europe may lean towards de-escalation. On the other hand, European officials probably now know that Trump only understands the arguments of force, and his radical proposals could just be a prelude to tough negotiations.

Interviewees for money.pl predict that in response to restricted access to the U.S. market, companies from the Middle Kingdom will act more aggressively in other markets, including Europe.

Even now, there are tensions between the European Union and China over electric cars. The EU intends to impose tariffs on them for the same reason Joe Biden cited when raising tariffs in the United States - massive state subsidies used by Chinese manufacturers that make competition with them "unfair."

So far, the Chinese have targeted French brandy in retaliation, but as we have reported in money.pl, Polish vodka producers and the dairy industry may suffer in future exchanges of blows.

- On the other hand, in the longer term, one could consider a scenario where, despite the growing isolation of the U.S. – which is nevertheless doubtful, as the U.S. is heavily dependent on trade – Europe and China get closer - notes the PIE expert.

A third scenario suggests a lack of unity in Europe on tariffs on electric vehicles. It turns out that the political establishment of the EU may want to de-risk, but the European industry does not necessarily. This may suggest that Europe will tighten relations with China in some areas while seeking greater strategic autonomy in others. At the same time, this all highlights the internal contradiction of Trump's policy, which on one hand wants to isolate China, but by imposing tariffs, could push Europe more into the arms of China - comments Prof. Kopiński.

- But regarding Trump's announcements, the most important thing is whether this is merely a form of negotiation pressure or a real readiness to start a trade war. If it's the latter, the whole world will feel it significantly - summarises Prof. Orłowski.