Wars kill people and wipe out economies. Are tariff wars going to do the same?
How far would the Tariff wars go?
The US president Donald Trump's decision has gone ahead and announced the start of a tariff was. As a weapon this is not a new one however it would have long term effects and the ripples would be felt far beyond the involved countries.
US imposes a tariff on Canada, China and Mexico
With the initial tariff of 25% on Canada
10% Tariff on China
10% Tariff on Mexico
The US President has set the tone for his presidential term.
The tariff war brings in the clouds of uncertainty
Hearing the announcement of the tariffs being imposed on 3 counties The global markets were seen going into a tizzy.
They bled red and a lot of money was wiped out in a day causing the erosion of wealth for investors around the world not only in the stock markets but also in the crypto markets.
Markets do not like uncertainty
If USA levies tariffs on goods and services coming to its shores from Canada, Mexico and China then surely there would be counter tariffs that would be put in place and this could put the global financial markets in a lot of stress.
As tariff wars are not good for the financial health of the world.
The idea behind levying a tariff
Imposing a tariff basically means hiking the import duty for goods and services coming into the country.
So goods and services coming into USA from Canada would see an additional duties or taxes jacked up by 25%
This could make things imported from Canada, Mexico and China more expensive by 25%, 10% and 10% respectively.
As a strategy this would make the imported stuff more expensive as compared to the locally produced goods.
If done right it would boost domestic sales,generate more jobs and give the domestic US economy a boost.
However if there are US products that import parts from Canada, China or Mexico then those domestic products may become more expensive and may lose out to other products being imported from countries which do not face such tariffs.
In the long run 100% made in USA products would get a boost.
However no economy can produce everything on its own. Not only that, what happens to the exports from the USA to these countries?
Since there would be counter tariffs put in place therefore it would impact the exports from the USA as well.
Could the hike in tariffs lead to inflation?
If products from these countries become more expensive then surely it could lead to inflation which would not be a good thing for the US economy.
The rise of inflation in the United States of America would again cause the global economy in general and small economies around the world in particular to suffer.
Practically every country is part of the global economy and the supply chain directly or indirectly therefore the ramifications would go a long way.
Every economy relying on exports would be impacted
In an economy relying on exports there are cases where the raw materials are sourced globally. A tariff war could be unsettling for a lot of economies.
Is this action in line with the election campaign promise?
Donald Trump as part of his election campaign has focused on protecting the rights of its citizens and creation of more domestic jobs.On that count it sure aligns with that election promise.
How would weaker economies suffer?
A direct impact is being seen in the currency market. Since most of the global trade happens in the US dollar we are witnessing a lot of currencies depreciating in value as compared to the US dollar.
As a result their imports would suddenly become more expensive. This would lead to price hikes and inflation.
This would put additional burden on their economies and additionally if these imports are of raw material for making products for exports then these products may become expensive and a lot of these exports may find lesser buyers killing the domestic export oriented industry.
Final Thoughts
It is still early days to see how things evolve however there are going to be ripples in the global waters that can damage countries and economies beyond the shores of the parties that are directly involved.
Main image created with Bing Image creator