As trade wars roil markets, what do retaliatory tariffs accomplish?
This week the tariff wars have been heating up 鈥� and the stock market has been going down.
The United States imposed a 25% levy on steel and aluminum imports Wednesday, implementing a February order by President Donald Trump. The European Union and Canada, America鈥檚 largest steel supplier, responded quickly by raising tariffs of their own. China had already retaliated Monday against other new U.S. tariffs, with higher fees on American farm products.
It鈥檚 classic trade-war behavior. Tariffs act like taxes on imports, making it more expensive to purchase products. Economies on all sides of the transactions can end up being hurt financially, but the risks may be highest for the nation escalating import taxes the most. Wall Street鈥檚 S&P 500 stock index is down 10.1% from its Feb. 19 peak, while the Dow Jones global index of non-U.S. stocks is down 1.3% in that time.
Why We Wrote This
When President Donald Trump hikes tariffs, should other nations fight back? That鈥檚 what many are doing, with retaliatory moves designed to put pressure back on the U.S. Australia is one country choosing a different path.
President Trump has several stated goals for his spate of tariff hikes: to strengthen U.S. manufacturing, to reduce the trade deficit, and to push other nations to do more to halt illegal immigration and the cross-border flow of fentanyl. He also views his strategy as a revenue-generator for the federal government.
But the aggressive tax increases denote a sharp shift in America鈥檚 relationships with other countries, which for 80 years have been aimed at supporting free and open trade. The about-face, economists and trade experts say, has the potential to transform international trade, reducing global connections while creating incentives to produce more goods in the U.S.
What are the goals of retaliatory tariffs?
Retaliatory tariffs are just that: tariffs imposed by a country in response to tariffs imposed on their products. And the aim is generally to force nations to negotiate.
This is not a new strategy, points out Frances Burwell, a distinguished fellow at the Atlantic Council. 鈥淭his has been a way of responding in trade talks, trade disputes,鈥� she says. 鈥淭he objective is almost always to get the other party to the bargaining table.鈥�
Already since he took office in January, there are signs that Mr. Trump鈥檚 position isn鈥檛 set in stone. In early February, Mr. Trump announced on all imports from Canada and Mexico. These were paused after outcries from both countries, and then implemented March 4 鈥� with a reprieve until April 2 for certain goods, notably cars and car parts. The U.S. also levied new tariffs on China, 10% across the board in early February, which was doubled to 20% a month later.
In response to this week鈥檚 U.S. steel and aluminum tariffs, the 聽countermeasures designed to be equal in value 鈥� tariffs on U.S. exports totaling about $28 billion. EU President Ursula von der Leyen said this escalation is regrettable, and 鈥渢hat in a world fraught with geopolitical and economic uncertainties, it is not in our common interest to burden our economies with tariffs. We are ready to engage in meaningful dialogue.鈥�
The EU response might also have a political motive, according to Dr. Burwell: a show of unity among EU nations.
鈥淭rump has been very, very critical of the European Union itself as an institution,鈥� she says. In addition to hopes that retaliatory tariffs will encourage the U.S. to reengage in negotiations, the European Commission seeks recognition of the EU as a primary trade authority, rather than its member states.
U.S.-levied tariffs have been relatively low in recent history: on average, 2.5% last year. The nonpartisan, nonprofit that will more than triple this year to 8.4%, the highest average since 1946 (10%). Tariffs in the US peaked in the late 1800s, before the federal government to taxes on citizens as opposed to imports.
What are the benefits or risks?
The White House says the president is wielding tariffs to counter 鈥渢he posed by illegal aliens and drugs,鈥� invoking the International Emergency Economic Powers Act. Tariffs are a bargaining chip in Mr. Trump鈥檚 war on unauthorized immigration. These economic sanctions are intended to hurt 鈥� enough to force America鈥檚 neighbors to take action against the flow of migrants into the United States.聽
In recent decades, many Americans grew worried about the outward flow of manufacturing to countries like China and Mexico, with lower-paid workers. Taxes on imports can be a way to discourage consumers from choosing foreign-made products.
But by and large, economists say tariffs, including retaliatory ones, lead to higher prices, fewer consumer choices, and job losses if targeted sectors are hit hard enough. Tariffs can also discourage innovation by buffering industries from global competition.
Based on that logic, some nations resist the idea that retaliation should be an automatic response. Australia this week said it will not impose tariffs on the United States, calling escalation of trade tensions 鈥渁 form of economic self-harm.鈥�
That harm doesn鈥檛 have to be inevitable, says Andrew Greenland, a research economist at the National Bureau of Economic Research. If nations carefully target their retaliation, he says, they can avoid self-harm.
鈥淚f you鈥檙e not putting blanket tariffs down like the U.S. has been doing 鈥� you could strategically put tariffs on things that won鈥檛 hurt your own economy,鈥� he says.
For example, in 2018, European countries retaliated against an earlier wave of Trump tariffs by targeting U.S. alcohol exports like bourbon. Dr. Greenland said that strategy worked in Europe鈥檚 favor because U.S. whiskey wasn鈥檛 indispensable 鈥� consumers could purchase alternatives like Irish whiskey 鈥� and they tended to target Republican states like Kentucky. That鈥檚 a strategy these countries may be looking to repeat.
鈥淲hen Canada was listing their retaliatory tariffs 鈥� and the EU is doing the same thing now 鈥� they鈥檙e looking at Republican strongholds,鈥� says Dr. Greenland. 鈥淭hey鈥檙e looking at places that are politically sensitive, and where political pressure might be enough to convince stakeholders in those states to reach out to the president and try and shift his perception.鈥�
What鈥檚 the recent history of retaliatory tariffs?
Dr. Burwell points to the sweeping steel and aluminum tariffs President Trump implemented during his first term. The EU responded with retaliatory tariffs. When Joe Biden became president, his administration reached an agreement to let the EU import a certain amount of steel and aluminum duty-free. In exchange, the EU suspended their own tariffs.
鈥淪o one can say that perhaps the retaliation worked,鈥� says Dr. Burwell of the Atlantic Council. 鈥淏ut you鈥檇 also have to take into account that the Biden administration came into office determined to repair the relationship with Europe.鈥�
America鈥檚 current trade war with China when the U.S. International Trade Commission found America鈥檚 washing machine and solar power industries had been injured by cheaper imports, opening the door to 鈥済lobal safeguard鈥� restrictions by then-President Trump. , the U.S. levied tariffs on $350 billion in Chinese imports. China retaliated with 聽on $100 billion in American products, which included a 178.6% tariff on sorghum.
The countries agreed to stop volleying escalations in 2020, but tariffs remained in place through the Biden administration.
Trade relationships may change longer term if the cost of doing business is too great. In today鈥檚 global marketplace, countries could increasingly shift to new markets to avoid dealing with the U.S., notes Dr. Greenland.
鈥淭here鈥檚 less bite when it comes to the U.S. threatening tariffs on Australia if they can turn around and sell all their stuff to China,鈥� says Dr. Greenland.
