The Walls and Doorway

Six months in, and we are still discussing wars and Trump’s tariff deals. US President Donald Trump’s tariff pendulum swings from a 500 per cent to a 10 per cent, causing volatility in world markets. Nothing is certain, but one thing: those days are long gone when America would throw open its ports for the pomp and show of its global leadership. This prolonged free-trade strategy drove manufacturers out of the country, leaving Americans out of their jobs. A strong dollar and cheap labour abroad made offshore production very compelling for American capitalists. The distant manufacturing was so lucrative that even vast oceans could not deter the inward flow of inexpensive foreign goods into American markets. American free liberal ports continued to receive a deluge of cheap imports while exporting very little, ultimately undermining the American industries and leading to a troubling rise in unemployment.

President Trump has abandoned a free trade policy and adopted a protectionist stance. He has rolled out tariff-laden schemes that would make it challenging for foreign goods to enter American ports. In the latest US trade deals with the UK, Japan, Philippines, Indonesia and Vietnam, Trump appears to be a tough negotiator and determined to bring faraway producers back into American markets. With these new trade agreements, Trump has ensured unrestricted access for American products in five large markets with minimal or no tariffs. Conversely, he has imposed tariff-rate quotas of 10 per cent to 20 per cent on goods manufactured in these five countries. In essence, countries seeking access to American markets must pay higher tariffs and unconditionally open their markets to the US! Trump describes this as “fair and reciprocal” payback for all past trade abuses.

The new agreement imposes a 40 per cent penalty on transshipped products. For instance, goods manufactured in China but falsely labelled as made in Vietnam/ Indonesia to gain entry into U.S. markets would attract this penalty. These developing countries are now obligated to meet stringent U.S. labour, production, and intellectual property standards for any goods intended for U.S. markets. This requirement will compel the manufacturers to incur additional costs for training, implementation, and auditing. The cumulative effect of high tariffs, penalties and new manufacturing standards would ultimately make foreign goods costly in U.S. markets, which will eventually deter U.S. companies from moving offshore.

Wealthy and technologically advanced countries like Japan can export their high-tech goods to the U.S., but only up to a specified limit. And in return, they may expect an investment clause in their new U.S. trade agreement, like the one Japan agreed upon to gain access to the American market. Under this agreement, Japan is required to invest $550 billion in the United States, despite being allowed to repatriate only 10 per cent of the profits. This means that 90 per cent of the profits generated from this massive investment will remain in the U.S. economy, while Japan gets only 10 per cent for limited access to the American market.

Tariffs are no longer meant only for developing countries to protect their domestic industries, feed their poor citizens and earn some customs money. Rich America is using it to bring in FDIs!

Despite these protective measures, US-made products are likely to incur high production costs and low export profits due to enduring dollar-dominance. Furthermore, Chinese influence would continue to circumvent every trade arrangement, undermining the effectiveness of these safeguards, posing a persistent challenge to American industries.

Trump is wielding tariffs as a strategic weapon to rebalance trade and to induce economic growth. He is trying to leverage tariff threats to tackle illegal migration, curb fentanyl smuggling, end the Russia-Ukraine war and reclaim the oil market at the same time. He expects a tariff wand to awaken America from its slumber and make it toil not just for the domestic market but to cater to the demands of world trade. He may send letters to dozens of trading partners, push countries to sign one-sided trade deals and make massive investments in America. However, he needs to ensure the US expedites H1B stamping and continues printing work permits! While building the tall walls of tariffs and immigration policies, Trump must provide a doorway to allow specialised knowledge and workforce to flow in, for the key partnerships to stay, to make these investments viable and to keep the adversaries at bay.

(The writer is a foreign affairs expert.)