Since assuming office on January 20, President Trump has upended the international order and made the world more unpredictable. Increasing tariffs on Mexico and Canada does not invalidate the 2020 United States-Mexico-Canada Agreement, which replaced the North American Free Trade Agreement (NAFTA). However, it violates the spirit and terms of the agreement, which was intended to eliminate most tariffs and trade barriers between the countries.
Having paused the implementation for 30 days, on February 10, he announced the implementation of tariffs on all steel and aluminium imports, raising them from ten per cent to 25 per cent with effect from March 12. These appear to be only the first steps.
On February 13, President Trump directed his advisers to come up with new tariff levels that consider trade barriers and other economic approaches adopted by US trading partners. This has set in motion a plan for new tariffs on other countries globally, an ambitious move that could shatter global trading rules and is likely to set off furious negotiations.
Already, the prime ministers of India and Japan have visited President Trump. This is a dramatic overhaul of the global trading system developed over the last 60 years. Tariffs have been set by negotiation (whether bilaterally or multilaterally) within the framework of the World Trade Organisation (previously GATT).
The WTO framework is built on the most favoured nation principle, meaning that whatever member A agrees with X extends to all members. What is now being proposed is one that is determined solely by US officials based on their own criteria.
What is being proposed is a unilateral increase in tariffs, country by country, product by product. Applying different rates to different countries violates the “most favoured nation rule,” destroying the principle of non-discriminatory treatment. Further, if the US raises tariffs beyond the maximum rate it has negotiated with other trade partners, that would also violate WTO rules, in effect destroying the basis of a rules-based trading system that has developed since 1947.
To say that this is alarming is to put it mildly. If the US is successful in making this change, it would represent a return to the era of mercantilism and the negatives associated with that development. By mercantilism, we mean that a country seeks to obtain positive trade balances with all of its partners. This is achieved by protectionism through tariffs or its negative list.
We can infer that Trump sees tariffs as having a multipurpose effect. First, it is a coercive device to bring trading partners to the negotiating table. Second, as a form of economic protection for domestic industry. Third, as revenue-raising devices. These are all important in the larger exercise of “making America great again.”
In this formulation, the European Union, China and any other potential peer competitors need to be brought to heel. Trade and the size of the US economy are weapons that dynamise the importance of tariffs.
In this context, trade and foreign policy are two sides of the same coin. This is exemplified by the comments on the EU’s need to increase its military spending and for NATO to become self-reliant. This is buttressed by Peter Hegseth’s (US Secretary of Defence) comments on the Ukrainian situation last week, saying that Ukraine will have to lose territory to end the war with Russia.
These are early days, and countermeasures are yet to be fully formulated by China and the EU. Globalisation has meant that supply chains are integrated across countries, and it will be difficult to quantify the trade-offs implied by Trump’s new proposals.
Why is this important, and what does it mean for a small island developing state such as T&T? First, the US position suggests that trade agreements do not matter. If the US is prepared to rip up its trade agreements with Canada, Mexico, and the EU, then why would T&T matter? Secondly, T&T’s negotiating leverage is weak as its export volume is not large enough to matter in a trade war with the US.
T&T does run a balance of trade surplus with the US, which is important to T&T, though relatively small in the scheme of things. Ironically, the product that has been the starting point of this latest tariff issue is steel. ISCOTT, T&T’s steel producer at the heart of its diversification effort in the 1980s, was a victim of the US effort to protect its declining steel industry. The US argued that ISCOTT was subsidised and imposed countervailing duties. That episode did not work well for T&T.
Now that Russia is subject to sanctions, T&T has become the world’s largest exporter of ammonia by volume and value through the Point Lisas’ plants. Many of these plants are owned by US corporations, who may obtain some relief if our trade surplus attracts US attention.
LNG is different as the US is a net exporter, and we could be deemed to be a competitor. But these preliminary thoughts address keeping what we have if things get complicated on the trade tariff front. A key issue remains our relationship with Venezuela and whether US sanctions will affect the Dragon gas deal. Survival demands that we adapt and reposition.
Mariano Browne is the Chief Executive Officer of the UWI Arthur Lok Jack Global School of Business.
