Trade tariffs

The election of Donald Trump as the 47th president of the United States sent shockwaves through the financial markets. To what extent his campaign promises and his actual policies will match remains to be seen. However, Trump was also the 45th president and by now some analyses are clear. Moreover, a fair amount of academic research has been published.

Trump’s announcements of hefty trade tariffs immediately made headlines. Some of these were deployed right away, with some serving as change for other favours Trump wants to obtain, such as a grip on the US southern border. However, examination of the tariffs Trump instituted in his first term by the Peterson Institute showed that they were designed with quite a lot of finesse.

Similarly, at the time, hefty trade tariffs were imposed on China for goods for which it was relatively easy to find suppliers in other countries, and hardly at all for those components and raw materials on which the US is almost entirely dependent. As in recent years many companies have broadened their supplier base across multiple countries, tariffs could well apply to much larger groups of products this time around. After all, alternatives are available. I expect that in sectors such as electronics, countries in Southeast Asia in particular could benefit from this.

Dark clouds

In some sectors, the Americans themselves have manufacturing capacity that is actually not very competitive. Consider the automotive and steel sectors. Protecting these sectors wholesale by imposing tariffs on better and cheaper products from abroad will not be pleasant for US consumers and for these sectors in Europe and Asia. The dark clouds hanging over the European auto industry are getting darker.

And then there are sectors where Americans are very competitive. Right now, these are mainly energy-intensive sectors, due to low energy prices in North America. It will be interesting to see if the influx of petrochemicals to Europe will increase even more.

Bullwhips

There will be a lot of shipping ahead in the coming months to put down some stock on the other side of the tariff walls in advance. And so we see the same bullwhips emerging again as in Trump’s first term. Bad news for supply chain managers, but good news for everyone in the logistics sector who can benefit again after a few years of low tariffs. Thus, even in the same country, there are winners and losers again.

Jan Fransoo, Professor of Operations and Logistics Management at the Tilburg School of Economics and Management