The contradictions in Trump’s trade policies are on display

Donald Trump’s backflip, with a twist, on tariffs on smartphones, laptops, semiconductors and other electronic goods on Friday speaks volumes about the chaotic and seat-of-the-pants nature of America’s new trade policies.

The twist? The reprieve might be short-lived, with those products exempted from Trump’s “reciprocal” tariffs now being subjected to a review of the whole electrics supply chain that is due, according to Commerce Secretary Howard Lutnick, in “probably a month or two”.

Apple has spent decades building a finely calibrated supply chain in China.Credit: Getty Images

So, in less than a fortnight, those same products were subjected to his reciprocal tariffs, with those sourced from China going from a duty rate of 20 per cent, to 30 per cent, to 54 per cent, to 104 per cent, to 145 per cent.

Now, they’re exempt from all but the 20 per cent that Trump announced back in March, citing China’s role in fentanyl imports to the US, but only for a month or so.

One can draw many conclusions from that history, not the least of which is that (as also evidenced by the decision to pause the “reciprocal” tariffs for 90 days) the administration is making this stuff up on the run. Trump launched and escalated the massive assault on global trade with no properly developed or coherent plan.

Where Trump believes trade wars are good and easy to win, this one is proving somewhat more complex than he envisaged, with the volatility and unpredictability of his tariff pronouncements creating confusion and uncertainty that is damaging to the US and global economies.

Among the multiple and competing objectives of the trade war is a desire to reduce America’s trade deficit, raise revenue, punish exporting countries for “unfair” trade practices, attract manufacturing investment to the US and protect America’s manufacturers.

The most basic misconception in Trump’s plan is that the exporting countries will pay the tariffs and that they will have no significant or lasting effects on US inflation. That misconception is underscored by what he has just done with electronics.

If the exporting countries, most notably China, pay the tariffs, why would he suspend them? Why not sit back and take the $US350 billion-plus a year of extra revenue (about $US100 billion of it from China)?

The reality of the tariffs he had imposed on consumer electronics is that it would have priced companies like Apple, which supplied about 90 per cent of the phones it sells in the USA, from factories in China, out of the US market.

US consumers would have been (and still might be) infuriated if the cost of the tariffs showed up in Apple’s pricing or if they couldn’t get their hands on new Apple smartphones. Apple, Microsoft and others presumably convinced the administration that they would lose huge chunks of their revenues in the US and there’d be a backlash from consumers (voters) if the tariffs were maintained.

The only revenue Trump’s tariffs will raise (and they will raise a lot less revenue because exporters will sell a lot less to the US, and consumers will buy a lot less of their products because of the increased prices) is from US companies and consumers.

Will foreign manufacturers set up shop in America? It takes years, up to a decade depending on its complexity, to build a new plant and reconfigure supply chains that were set up to serve a global economy.

Trump’s tariffs also hit some of the key inputs to manufacturing, like steel, aluminium and timber - and intermediate products made from them - that would impact the economics of any new plant.

Yes, there might be some pledges and perhaps some investment, but the potential for regime change and the withdrawal of the tariffs by a future administration makes large-scale investment in the US – a far less competitive environment for global manufacturing than Asia or even Europe - risky.

Will the tariffs attract foreign capital? For the moment, contrary to the historical experience, they’re having the opposite effect, with capital fleeing the US.

Somehow, Trump has turned the US bond market and US dollar, historically havens for capital whenever risks are elevated in the global financial system – even when those risks emanate from within the US – into risk assets.

Dollar dominance and the perceived safety of the US bond market has, for more than half a century, meant lower interest rates and higher standards of living for Americans.Credit: iStock

The dollar has been depreciating and bond yields (which rise when bond prices fall) spiking as capital has flowed out of the US towards the European Union, Japan and Switzerland. It is extremely unusual to see bond prices tumbling even as the dollar depreciates and US sharemarkets fall, but that’s what happened last week.

There was an exodus of capital that suggests investors had lost faith in the US. That’s a big deal.

Dollar dominance and the perceived safety of the US bond market have meant lower interest rates and higher standards of living for Americans for more than half a century.

If foreign capital were to continue to be redirected elsewhere (Europe could be the biggest beneficiary), US interest costs would rise across the economy even as its deficits and debt, and the refinancing task associated with them, continue to blow out to levels that are only sustainable while America continues to enjoy the “exorbitant privilege” the dollar’s global dominance has provided it with.

Trump has also misjudged China’s capacity to both withstand the pain that the trade war will undoubtedly inflict on its export-led economy and its ability to retaliate in an asymmetric fashion.

China responded to Trump’s decision last week to lift tariffs on its exports to 145 per cent by raising its own tariffs on imports from the US to 125 per cent. Effectively, trade between the two has been shut down.

Having earlier restricted US access to some of the rare earths, whose production and processing it dominates, China, at the weekend, suspended exports of key heavy rare earths and rare earth magnets, used in almost everything that requires an electric motor, while it develops a new export licensing system. China produces about 90 per cent of the world’s heavy rare earth magnets.

In dollar terms, exports of those rare earths to the US aren’t substantial, but they play a vital role in US autos, aerospace industry, semiconductor manufacturing and military equipment. For very little cost to China, they can cause significant economic pain and disruption in the US.

Trump might think he can do deals with the 90-odd countries that, separate from his 10 per cent universal tariff, were hit with the now-paused, nonsensically calculated, “reciprocal” tariffs.

That means little if the trade war with China continues at current levels, and Xi Jinping is most unlikely to make the first move to defuse the tensions. China might be hit harder than the US, but it is far less likely to be influenced by domestic pressures.

It is instructive that, even with the pause, the additional tariff on China’s exports lifted America’s effective average tariff, which was about 2.5 per cent only a couple of weeks ago, from about 26 per cent to 27 per cent.

The discussion with the other trading countries will be “interesting,” given that Trump has given his negotiators only 90 days to complete deals that usually take years.

Some of those countries – generally the poorest – have little to negotiate with because they don’t have the wealth to buy US products.

Those that do have the resources to make concessions to the US to avoid, or at least reduce, the reciprocal tariffs are, according to the White House, queuing up to do a deal.

Last week, US Treasury Secretary Scott Bessent said he believed the US could reach an agreement with long-standing partners and allies like Japan, South Korea, India and Vietnam (which have been targeted with the reciprocal tariffs).

“Then we can approach China as a group,” he said.

Hmm. The US had a trade deal, which deliberately excluded China, with most of those countries, along with Australia, Canada, New Zealand, Mexico, Malaysia and Singapore. The Trans-Pacific Partnership (TPP) was negotiated by Barack Obama and signed in 2016.

Within days of taking office in his first term, Trump withdrew the US from the TPP, which continues without it and has been expanded and renamed as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), a free-trade bloc China has been seeking to join.

The trade bloc Trump rejected and has declared a trade war against – South-East Asia faces some of the highest tariff rates, and even a close ally like Australia with which the US has enjoyed trade surpluses is in the gun – looks a lot like the group Bessent wants to create to gang up on China.

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