Higher Tariffs Can Turn into Regular Trading Terms

After coming to the White House for his second term, President Donald Trump declared a trade war with higher tariffs, inviting severe criticism within and outside the USA.

Alongside criticism, a perception was developed that a higher tariff will end after Trump’s departure, which is now gradually fading.

Many business leaders have already started believing that a higher tariff initiated by President Trump is going to be the new normal in cross-border trade.

However, some people think the other way and opine that the situation may change in 2029 when the tenure of President Trump will end. But some people opposing this idea have said that all politicians, irrespective of party affiliation, need money, for which a very good source has been invented by President Trump.

However, one US business leader was reportedly asked what will happen after Trump goes, and his response was “who knows”. He further said, “Politicians need to raise funds to pay for all the things that they do, and it is hard for them to look at a stream of revenue and turn it down.”

The continuation of Trump’s higher tariff for long and taking the shape of a regular trading term is not only confined merely to discussions. It is now put into action, as many businesspeople have started getting used to the idea of higher tariffs and fluctuation thereof.

Many business sectors have developed strategies to continue business with higher tariffs for an indefinite period even after Trump’s departure from the White House. America’s automotive industry is an example, which is heavily dependent on imports from China but significantly impacted by Trump’s 50% tariff. Both suppliers from China and importers of the USA have developed strategies for sustaining themselves with the pressure of higher tariffs for the longer term. 

When Donald Trump became America’s president for the first time, he also imposed a higher tariff, which was not overturned by Trump’s successor, President Biden, although the tariff rate imposed during Trump’s first term was very low compared to the current rate. As learnt from media, the highest effective tariff rate, which is calculated by dividing the total tariff collected by the total value of imports, was only 3% during Trump’s first term.

On the other hand, the effective tariff rate during Trump’s current tenure reached 11% and subsequently dropped to around 7%. An effective higher tariff rate has compelled many companies to undergo major change/adjustment to their supply chain, which is not going to be reversed. As a part of long-term preparation, many importers have spent money for relocating their supply sources, reducing exposure to higher- tariff-targeted countries, including China, to lower- tariff-targeted countries.

Not only businesspeople, but the consumers have started living with the impact of higher tariffs, and they also believe that higher commodity prices with the impact of higher tariffs are going to be their new living standard. A tariff is different from any other trade barrier, as this one is a direct import duty added to the price of the goods and services, which is eventually borne by the people of the tariff-imposing countries, while other trade barriers do not directly affect the consumer cost. President Trump has declared a trade war with the objective of punishing the countries having an unfavourable trade deficit with the USA, but eventually he is punishing his own people who are getting the pain of higher tariffs. American people have now started believing that this higher tariff will not go away but rather will take the shape of a regular trading norm, so they are mentally prepared to pay the higher price. Since America and even other developed countries have become debt-ridden societies, people are maintaining their same living standard with rising debt. Consequently, the law of demand, which states that demand falls when price rises or vice versa, is not working. Therefore, people’s consumption does not appear to have declined, resulting in the fall in demand, and the same is the situation in business turnover, which has not declined commensurate with the rising tariff.  

The presidential election to be held in 2028 is knocking, but the formal campaign has not commenced yet. However, political leaders have started discussing the election with the higher tariff as a dominant issue. Potential candidates and political high-ups are talking about higher tariffs, without assurance of reversal. As reported in the media, Vice President JD Vance and Secretary of State Marco Rubio are, of course, strong supporters of higher tariffs, which both have described as a tool for bringing fairness to international trade. Democrats’ frontrunners have strongly opposed this concept. California is the state which has sued the federal government over the duties, and its governor has openly termed a higher tariff an illegal cash grab. Former Vice President Kamala Harris has also said that higher tariffs are causing Americans’ cost of living to rise. Another political leader, who was transportation secretary during the previous administration, has alleged that a higher tariff has failed to increase manufacturing employment, which was stated as one prime objective behind imposing a higher tariff. However, the bottom line is that Trump’s higher tariff is pouring an amount between $20 billion and $30 billion into the US Treasury every month, which no government will be able to ignore.

The president’s higher tariff has been severely criticised and opposed but did not reverse. Trump’s tariff decisions have been struck down by the court one after another, but a new ruling with a higher tariff has come into effect. The way higher tariffs are continuing to apply in international trade, it does not seem that higher tariffs will end soon even after the change of US administration.