Will Trump tariffs generate significant revenue

Trump's protectionist trade policy has failed to achieve its goals

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After his election, Donald Trump quickly followed up on his announced America First strategy. Aggressive interventions were at the center of Trump's trade policy. His main concern was to bring production facilities and jobs that were relocated abroad back to the USA and to reduce trade deficits. It turns out, however, that the numerous trade policy interventions have only left a limited mark on trade flows with the most important partners. Only in trade with China did the deficit decrease slightly for a short time. The import tariffs on Chinese goods introduced in 2018 have also meant that the US manufacturing sector, which is dependent on imports from China as intermediate inputs, has to contend with higher production costs. China is also the biggest competitor in world trade for the new US President Joe Biden. However, while Trump went it alone, Biden intends to seek international alliances to improve the negotiating position with China. The European Union should seize this opportunity in good time.

A slim majority of Americans voted out President Donald Trump on November 3, 2020info On December 14, 2020, the Electoral College, consisting of the electorate from all US states, will officially elect the President and his vice-president. With 306 voters, Biden is well ahead of Donald Trump. His confirmation as president is therefore only a formality. - and with it his America First strategy. The legacy of the four-year Trump administration is evident not least in the changed trade relations in the USA. Donald Trump made a U-turn in the previous policy of international cooperation: away from an economic policy focused on free trade and back to protectionist trade policy in order to bring back domestic production facilities and jobs and to reduce trade deficits.

In the past four years, for example, the USA terminated numerous multilateral trade agreements and concluded new bilateral treaties. They imposed a large number of tariffs and import taxes on imports from important partner countries and increasingly built up non-tariff trade barriers, for example through regulations that dictate a fixed share of local industry in the added value of the automotive industry.

Many of the measures that were specifically directed against a trading partner sparked spirals of retaliation. Affected economies levied counter-tariffs, to which the US government responded with further measures. Economists continuously warned of the negative economic consequences of this resurgence of trade protectionism for everyone involved. Gabriel Felbermayr and Marina Steininger (2016): How dangerous is Donald Trump's announced trade policy ?. Ifo Schnelldienst, 69 (22), 34–41.

This article analyzes how the Trump administration's trade policy is changing multilateral flows of goods and services and how this has affected the US economy and foreign trade with major trading partners.

USA in world trade: high share of service exports

As the largest economy in the world, the United States also plays an important role in the international trade in goods and services. Around 14 percent of all goods and services traded worldwide are imported from the United States. After the EU with around 25 percent, the USA is one of the strongest import regions in the world. The US share of world exports is, however, somewhat smaller at nine percent.

The United States' imports and exports by product category show that services are also of central importance for US foreign trade, in line with the domestic structure. With a 33 percent share of exports, the USA is one of the top exporters of services (Figure 1). There are some countries such as France or Italy that provide services abroad to a similar extent, but these are mainly tourist offers. The United States, on the other hand, exports a large proportion of information technology, financial and insurance services. In these two product categories, the USA has by far the highest export share worldwide.

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The majority of goods exports are divided between machines, chemicals, vehicles, raw materials, electronics and agricultural products. Half of the imports are goods from the product categories machines, vehicles, electronics and chemical products. Only 20 percent of US imports are services (Figure 1). So, proportionally, fewer goods are exported than imported, suggesting that the United States uses more imported goods for final consumption and less for the production of export goods.

Overall, the USA trades 90 percent with the three regions that are also most important for world trade: Asia, North America and Europe (Figure 2). The United States acquires around 40 percent of its imports in Asia, 30 percent in countries on the North American continent and around 20 percent in Europe. The largest customer region for US exports with 37 percent is North America, followed by Asia and Europe with around 30 and 20 percent of US exports respectively. Canada, Mexico, China, Japan, Germany, South Korea and the United Kingdom are among the seven largest partner countries for trade.

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Overall, the United States imports more from these countries than it exports to them, and has been for a long time. The chronic trade deficit that has existed since the early 1970s (Figure 3) is largely explained by the deficit in trade with China, but also by excess imports from the European Union, Japan and Mexico. The official America First strategy does not explicitly state the reduction of trade deficits with partner countries as a goal. The president himself formulated the goal of "fair" trade partnerships and often referred to the trade surpluses as a central problem. This is why the Trump administration's trade policy agenda began precisely with partner countries with a pronounced import surplus. White House website listing the US administration's official position on America First Strategy, February 24, 2017 (available online, accessed November 29, 2020. This applies to all online sources in this report unless otherwise noted).

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Trade policy: termination of trade agreements and higher tariffs

As announced during the election campaign, the realignment of US trade policy was a cornerstone of the America First program's growth strategy. The Trump administration declared that unfair trade agreements had led to the relocation of production facilities and corresponding jobs in the manufacturing sector, as well as the persistently large trade deficit. By terminating or renegotiating trade agreements, the Trump administration is taking action against those trading partner countries that are damaging the US labor market. White House website listing the US administration's official position on trade deals, Feb. 24, 2017 (available online).

Accordingly, the Trump administration actively reoriented trade policy and triggered renegotiations of existing trade agreements, often with the threat or actual levying of import tariffs (Figure 4). Shortly after taking office on January 23, 2017, Trump decided to withdraw the US from the Trans-Pacific Partnership (TPP). preliminary text of the Trans-Pacific Strategic Economic Partnership Agreement (available online). As part of the TPP, within a seven-year negotiation process, trade barriers, including import tariffs of ninety percent, were significantly reduced among the original twelve countries. The TPP included countries such as the USA, Australia, Japan, Malaysia, but also Mexico and Peru. In addition to the massive lowering of trade barriers, the agreement also served to diminish China's central role in Asia and to strengthen the influence of the United States in this region. After the failed TPP, the remaining countries adopted and ratified a similarly comprehensive agreement among themselves 2018 (Comprehensive and Progressive Agreement for Trans-Pacific Partnership, CPTPP).

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Tri- and bilateral agreements with the largest trading partners were also made available with the same means. The US government threatened to withdraw from existing agreements such as the North American Free Trade Agreement (NAFTA) and the free trade agreement with South Korea. In addition, the United States imposed import tariffs to force partner countries to re-negotiate. In January 2018, for example, the US government resolved import duties of initially 30 and 20 percent respectively on the final and intermediate production of solar cells and washing machines. In March, the US imposed tariffs of 25 percent on steel and 10 percent on aluminum, from which important partner countries such as Mexico and the EU were initially excluded. The EU, Canada, Mexico, Australia, Argentina, Brazil and South Korea were initially excluded. In the course of the renegotiation of trade agreements, such as the successor to NAFTA with Canada and Mexico, the exceptions were repeatedly lifted and reintroduced in order to strengthen the American negotiating position.

The import tariffs introduced up to then were mainly aimed at trade with China, since the US imports of the product groups in the solar cells, washing machines and aluminum sectors come to a large extent from China. This in turn provoked retaliatory measures from the affected partner countries, above all China. In particular, the conflict between the United States and China escalated in 2018 and 2019 (box).

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Five stages of the Sino-US trade conflictkeyboard_arrow_up

One of the stated goals of Trump's trade policy was to reduce the US's foreign trade deficits with its trading partners. At $ 345 billion in 2019, China has by far the largest bilateral trade deficit with the United States, which is why China plays a central role in the Trump administration's trade agenda. United States Census Bureau website.

An investigation by the US Trade Representative commissioned in August 2017 found that China was engaging in unfair trade practices. As a result, President Trump announced tariffs on Chinese imports worth up to $ 60 billion for the first time in March 2018. The United States currently has 25 percent tariffs on imported goods from China worth approximately $ 250 billion and tariffs of 7.5 percent on Chinese goods imports worth approximately 112 billion dollars. Erica York (2020): Tracking the Economic Impact of U.S. Tariffs and Retaliatory Actions. Tax Foundation calculations, September 18 (available online). The tariffs on Chinese goods make up the majority of the total of around 80 billion dollars in tariff revenues at currently 70.9 billion dollars, which impressively underscores the importance of China in US trade policy.

In the ongoing trade dispute, mutual tariff increases on imports represent the most important pillar (Figure). Five phases can be identified since the beginning of 2018. There was only a moderate increase in tariffs in the first half of 2018. During this period, the US increased tariffs on aluminum and steel for reasons of national security, and in return, Chinese tariffs on products worth three billion dollars, such as wine and pork.

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The trade conflict began to escalate in July 2018 and led to a sharp increase in tariffs on both sides by September 2018: In this second phase, the US average tariffs rose from 3.8 percent to 12.0 percent, and the average tariffs in China from 7.2 Percent to 18.3 percent. The starting point for this was the implementation of Trump's announcement to impose punitive tariffs of 25 percent on Chinese products, such as toys and electronic devices, worth around 50 billion dollars. The tariffs were implemented in two stages on July 6 and August 23, 2018 for Chinese imports valued at $ 34 billion and $ 16 billion respectively. In response, China also imposed a 25 percent tariff on a $ 50 billion bundle of American products, from agricultural products to automobiles.

The third phase covers the period from September 2018 to June 2019, during which the signs were pointing to relaxation. In December 2018, on the sidelines of the G20 summit in Buenos Aires, the two states agreed to refrain from further tariffs in order to defuse the trade conflict. During this phase of relaxation, for example, China lowered tariffs on American motor vehicles, while the US waived the threatened increase in tariffs to 25 percent at the beginning of 2019.

From June to September 2019 there was a further series of tariff increases, as a result of which the US average tariff rose by nine percentage points to 21 percent and the Chinese tariff by 4.6 percentage points to 21.1 percent. InfoChad P. Bown (2019): US-China Trade War Tariffs: An Up-to-Date Chart. PIIE Chart, Peterson Institute for International Economics (available online). In August 2019, the US government announced that it would introduce a new tariff of ten percent on additional Chinese goods worth around 300 billion dollars from September 1, 2019. This should be done in two stages with a ten percent tariff on imports initially valued at 112 billion dollars from September 1, 2019 (stage 4a) and a further 160 billion dollars on December 15, 2019 (stage 4b).

Before stage 4b ​​could be implemented, however, the US government negotiated the so-called phase one deal with China and agreed to postpone these tariffs indefinitely and to postpone the stage 4a tariffs from 15 percent to 7.5 in early 2020 Halve percent. The agreement thus prevented a further increase in tariffs, but, with a few minor exceptions, did not lead to a significant reduction in tariff rates. Therefore, the current fifth phase with average tariffs, which seem to have leveled off at an elevated level despite the agreement, represents a kind of new normal.

Despite the conflicts, the Trump administration was able to conclude four major agreements with important trading partners within four years: the NAFTA successor, United States-Mexico-Canada Agreement (USMCA), the phase one deal with China and the free trade agreements with Japan and South Korea. Even when the agreements were signed, it was questionable whether the US would actually improve its trading position. In the agreement with South Korea, for example, higher car imports from the USA are agreed, but imports of US automobiles to South Korea in recent years have hardly reached the lower import limits of the old agreement. The trade agreement with China was not so much aimed at reducing the Chinese trade barriers that had built up in recent years, but rather to increase the export of US-American products from the agricultural, energy and manufacturing sectors until 2021.

The Trump administration's aggressive trade policies also increased tension between the US and the World Trade Organization (WTO) in Geneva. The relationship has not just been shattered since the election of Trump, however. Keith Johnson (2019): How Trump May Finally Kill the WTO. Foreign Policy dated December 9 (available online, accessed November 26, 2020). As early as the Obama administration, the USA took the position that the WTO exceeded its legal powers, especially in arbitration proceedings in the second instance (Appellate Body). That is why both Obama and Trump blocked regular appointments from infoJohnson (2019), op. Cit., Which means that this instance has no longer had a quorum since December 2019.

In the Sino-US trade dispute, this blockade meant that China's objection to the US punitive tariffs introduced in 2018 was granted in the first instance in September 2020, but it is on hold in the second instance. In addition, the US is blocking the nomination of Nigerian development economist Ngozi Okonjo-Iweala as WTO Secretary General, which is accepted by all countries, and is pushing for reform of the WTO. InfoBBC (2020): US tries to block Ngozi Okonjo-Iweala, who would be first African WTO head, October 28 (available online, accessed November 26, 2020).

The effect of US trade policy has so far been manageable

A look at US trade with the most important partner countries since 2016 shows that the numerous trade policy interventions have only left a limited mark on the aggregated trade flows. Since 2018, only US exports and imports of goods to and from the Chinese People's Republic have fallen significantly (Figure 5). Except here are the effects of the Covid-19 pandemic, which this year led to a significant slump in the global Trade flows led.Goods exports to China fell by around 18 percent between 2017 and 2019 and goods imports from China by 32 percent. However, given the scale of tariffs between the United States and China, changes in trade flows are quite small.

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Trade in goods with other important trading partners such as the EU, Japan, Canada and Mexico has continued to grow over the past four years, albeit at a slower pace in 2019 than before. In particular, US exports of goods seem to have stagnated from mid-2018 to the end of 2019. In contrast, trade in services does not seem to have been affected by trade interventions.

The development of the US trade balance overall and with selected partner countries in recent years shows that the US deficit only decreased slightly at the end of 2019, which is probably explained by a simultaneous reduction in the trade deficit with China (Figure 3). This year, however, the trade deficit has increased significantly again, since in the course of the global corona crisis, US exports, especially to Europe, fell significantly more than US imports.

The picture changes, however, when different sectors are considered. The tariffs introduced in 2018, which were supposed to reduce the import of Chinese goods, have achieved their goal in places. Although they were partially lifted, these tariffs mainly affected steel, aluminum and electronics imports. There they had a noticeable effect on the volume of imports from China (Figure 6), which has decreased noticeably since the introduction of the tariffs.

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At the same time, however, this also means that the increased import costs caused by the tariffs will be passed on to other sectors that are dependent on foreign goods for their production. In these sectors, import prices in particular have risen. An example of this are imports of household appliances and electric motors (NAICS Sector 335: Electrical, Equipment, Appliances & Components), where the additional 25 percent surcharge is reflected in import prices. Bureau of Labor Statistics show a significant increase in import price indices from January 2018 (available online).

In this case, therefore, the question arises as to how these additional costs are distributed among different states and populations. In particular, the manufacturing industry, which is dependent on imports from China as intermediate inputs, has to contend with higher production costs as a result. This applies above all to the so-called Rust Belt states as well as Mississippi and Alabama and thus states in which support for Trump was particularly strong in the 2016 election. In addition, China's retaliatory tariffs are having a negative effect, especially in these republican states. Theories of international macroeconomics suggest that import tariffs, but also export subsidies and quantitative restrictions on imports, lead to macroeconomic production and welfare losses. It is to be expected that a higher tariff on an imported good will increase the price in the importing country. The calculation and stated goal of the America First strategy is that this will increase the relative profitability of domestic production and that more of the goods will be produced domestically. In fact, it is not just the prices of imported goods that are increasing. The prices of domestic goods also remain higher than before the imposition of the import tariff, as a result of which the demanded quantity of these goods as a whole and thus also the welfare of domestic households decrease. In addition, production capacities are being withdrawn from the area of ​​tradable goods, since domestic resources are diverted to the less productive sector by customs. Overall, the macroeconomic level of production falls with the introduction of trade restrictions. A distribution and repayment of these additional costs via the American tax system can only be assumed to a limited extent here.infoEmmanuel Saez and Gabriel Zucman (2020): The Rise of Income and Wealth Inequality in America: Evidence from Distributional Macroeconomic Accounts. Journal of Economic Perspectives 34, no. 4, 3–26.

Trade policy has hurt the US economy

The aggressive trade policy in the USA has had a negative impact on the economy as a whole, as the prices of goods subject to import duties have increased significantly. Eugenio Cerutti, Gita Gopinath and Adil Mohommad (2014): The Impact of US-China Trade Tensions. International Monetary Review 82; Aaron B. Flaaen, Ali Hortaçsu and Felix Tintelnot (2020): The production relocation and price effects of US trade policy: the case of washing machines. American Economic Review, July. Studies put the welfare losses of US consumers as a result of the import tariffs levied until December 2018 at more than 50 billion euros annually. Mary Amiti, Stephen J. Redding and David E. Weinstein (2019): The impact of the 2018 tariffs on prices and welfare. Journal of Economic Perspectives 33 (4), 187-210; Pablo D. Fajgelbaum et al. (2020): The return to protectionism. The Quarterly Journal of Economics, 135 (1), 1-55.

In addition to macroeconomic losses, studies suggest that up to 75,000 jobs were lost in the U.S. manufacturing sector due to the retaliatory tariffs and measures. In particular, estimates assume a loss of jobs in unprotected sectors such as textile production or chemicals. Job gains can be expected in the tariff-protected sectors. However, due to the chaining of the value chains, macroeconomic damage can be assumed. See Cecilia Bellora and Lionel Fontagne (2020): Shooting Oneself in the Foot? Trade War and Global Value Chains. CEPII Working Paper No. 2019–18 (available online); Lydia Cox and Kadee Russ (2020): Steel Tariffs and U.S. Jobs Revisited. Econofact, February 6 (available online); Fajgelbaum et al. (2020), op. Cit. So the goal of the America First strategy of bringing back or protecting jobs has not yet worked out. The turbulence in trade policy has also led to upheavals in the financial markets and fueled uncertainty. Lukas Boer, Lukas Menkhoff and Malte Rieth (2020): The multifaceted impact of US trade policy on financial markets. VfS Annual Conference 2020 (Virtual Conference): Gender Economics, no. 224529. Association for Social Policy; Massimo M. Ferrari et al. (2020): Do words hurt more than actions? The impact of trade tensions on financial markets. ECB Working Paper Series, no.2490.

In addition to higher import prices, the threat of tariffs or a trade war puts pressure on planning security in international trade. Exporters and importers therefore have a harder time assessing their costs over the long term and postpone investments. During the Trump presidency, the uncertainty factors in world trade increased noticeably, as can be seen from the Trade Policy Uncertainty Index.infoScott Baker, Nicholas Bloom and Steven J. Davis (2020): Measuring Economic Policy Uncertainty. EPU indices (available online). Since Trump took office in January 2017, the index has regularly reached new highs.

Biden will re-strengthen international alliances to keep China in check

The election campaign of the now elected Democrat Joe Biden and his government program provide a first indication of the future direction of US trade policy. This will be characterized by less uncertainty and a return to traditional partners such as Canada or the European Union. In the short term, this means that his government should be primarily interested in a further normalization of trade relations with Canada, Mexico and the EU. But Biden is not a proven advocate of free trade. He shares Trump's basic attitude towards China - even if his tone and style differ significantly. For Biden, too, China is the biggest competitor in world trade, which must be resolutely opposed. However, while Trump went it alone, Biden intends to seek international alliances to improve the negotiating position with China.

Biden is increasingly relying on the positive effect of an ambitious infrastructure and investment agenda on the US foreign trade balance. He wants to invest primarily in education, research and development, telecommunications (5G), road expansion and power grids in order to improve the competitiveness of US exports. Although these goals are ambitious and sensible, his agenda will take time to achieve concrete effects. The effect of a certain amount of public spending on economic performance is measured in multipliers. The size of these multipliers is a key question in the national economy and has been discussed regularly and controversially in academic literature for a long time. However, there is a relatively broad consensus that multipliers are small in the short term. See Olivier Blanchard and Roberto Perotti (2002): An empirical characterization of the dynamic effects of changes in government spending and taxes on output. The Quarterly Journal of Economics 117, no. 4, 1329-1368.

There is a big difference to the line of the Trump administration, especially when it comes to tax issues. Regardless of whether tariffs are lifted, Biden announced in the election campaign a fairer distribution of the profits from global trade. The democratic government intends, among other things, to tax high incomes over 400,000 dollars in addition and also to raise corporate taxes again. Biden is therefore relying on a stronger role for the tax system in order to distribute societal profits and costs more equitably, for example by maintaining tariffs on Chinese imports. Joseph R. Biden (2020): Why America Must Lead Again. Rescuing U.S. Foreign Policy After Trump. Foreign Affairs in March / April (available online, accessed November 26, 2020).

Conclusion: the EU should seize the opportunity for a new partnership

With its America-first strategy, the Trump administration has made a U-turn away from a foreign trade-oriented economic policy back to protectionist trade policy. In the past four years, for example, the United States imposed a number of tariffs on its most important partner countries, especially China, terminated the multilateral trade agreement TPP that had just been passed and intensified the renegotiation of existing trade agreements such as NAFTA. The aggressive action on the part of the USA triggered a spiral of intervention and many countries also imposed import restrictions. In particular, the trade dispute between China and the USA escalated. At the end of the Trump administration, new trade agreements were signed with five major trading partners - China, Canada, Mexico, South Korea and Japan. However, it is questionable whether the United States is also doing better economically as a whole.

A look at aggregated trade flows shows that trade policy had hardly any effects on US imports and exports and thus on the foreign trade deficits. Trade with China is an exception, but it only fell slightly in 2019. The Trump administration's trade policy has failed to achieve its goals of reducing the trade deficit and strengthening manufacturing. On the contrary, trade interventions are costly to households and businesses in the United States.

With the new democratic government and Joe Biden as president, a diplomatic and polite tone should return to the trade talks, but it is unlikely that the Biden administration will seek a quick removal of trade barriers. The EU should seize this opportunity and support Biden's search for international partners against China's supremacy.

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