The trade war is heating up and has the potential to harm everyone involved.
In May, the U.S. began imposing broad tariffs on all imported steel and aluminum. And now, additional tariffs on Chinese investment and tech exports, as well as on $50 billion worth of other Chinese goods, are provoking bitter retaliation.
And to make matters more complicated, the U.S. is also actively renegotiating the North American Free Trade Agreement (NAFTA) — a set of contentious trade negotiations that President Trump has previously threatened to scrap altogether.
Both of these circumstances have put a great deal of political pressure on the respective heads of state to come out on top — or at least have the end result perceived that way to the domestic citizenry. Unfortunately, this is the mentality that usually escalates trade wars as each side continues to push the needle in hopes that the other will fold.
It’s not to say that President Trump doesn’t hold some legitimate concerns about U.S. trade relations. NAFTA does include some questionable provisions that seem to put the U.S. at a disadvantage — which once prompted Mr. Trump to call the agreement “one of the worst deals anyone in history has ever entered into.” And China does hold a four-to-one trade advantage over the U.S. and continues to steal intellectual property as what is seemingly a condition for market access.
But even with these less than ideal trade positions, it’s important to note that imposing major tariffs that provoke a trade war never benefits anyone and is a detriment to everyone. It’s easy to see why.
Tariffs are essentially a tax on foreign goods coming into the U.S. — which means the financial burden is first applied to the American business that imports the product and then moves down the supply chain. The outcome is higher production costs, higher prices for customers and dwindling sales for domestic businesses.
Take for example one of the central victims of the 10 percent aluminum tariff, the American beer industry — which fills roughly 36 billion aluminum cans and bottles annually. It’s estimated that rising aluminum prices brought on by the tariffs is expected to cost the industry an additional $348 million per year — putting 20,000 jobs associated with American beer at risk and increasing the price point of beer at bars, restaurants and grocery stores. This is only one example of the tariff induced carnage.
Predictably, foreign retaliation has followed as well — which, in this case, has been swift and calculated.
A number of countries — including European Union member states, China, Mexico and Canada — have already threatened retaliatory tariffs against the U.S. Many of which have specifically targeted goods that will levy additional political pressure on Mr. Trump and Sen. Mitch McConnell, who has the opportunity to restrict Trump’s trade war via Senate vote.
Some of the targeted products include American whiskey — which will burden Mr. McConnell’s home state of Kentucky — and a number of agricultural exports that will largely strain Mr. Trump’s political base in the Great Plains region.
Luckily, we are still in the beginning stages of instituting tariffs and the situation has not yet devolved into an all-out trade war. But if the current anti-trade sentiment continues, we won’t be so fortunate. The White House must now take steps to avoid this outcome and re-evaluate the political chessboard — strategically balancing administration goals and potential economic consequences.
The first step is to wrap up NAFTA negotiations in a way that all three North American neighbors can save face. That way, the threat of additional trade restrictions is no longer hampering continental trade relations and the U.S. only has one impossible war to wage, rather than two.
As for the dust-up with China, the solution is a bit more complex. Mr. Trump must leave his all-or-nothing mentality behind in order to make a deal that both China can swallow and one that remains consistent with his previous calls to reduce the trade deficit. In practice, an optimal compromise will likely include a modest decrease of the trade imbalance in exchange for substantive legislative changes that strengthen China’s loophole-prone intellectual property laws.
Most importantly, this is an outcome both sides can accept.
Going tit-for-tat with tariffs may seem like a geopolitical game of chess, but the end result is not a winner and a loser. In a trade war, all sides lose.
It’s time for the U.S. to walk back these tariffs before the trade war escalates and everyone gets burned.
• Richard Berman is the president of Berman and Co., a public relations firm in Washington D.C.