Trump and tariffs: Finally, it's a moment of truth for all

The anticlimax, the Big Bang, finally came, and the US announced a range of tariffs on imports. We did not miss with our 10 percent, the base rate for most countries.

Other countries like China got 34 per cent, Vietnam 46 per cent, Laos 48 per cent, Lesotho 50 per cent and Cambodia 49 per cent. Get the full list online. 

The big board with a list of countries, the tariffs they would pay for exporting to the US and what they charge for American exports animated the White House briefing. It is said to have been prepared by the Council of Economic Advisers.

Countries with a big trade surplus with the US or those that charge America imports higher tariffs got the bigger hit. President Donald Trump talked about the liberation day. The US, in its long-term plan, would reduce the trade deficits while more firms would locate to mainland America to avoid tariffs.

That would create more jobs, expand the economy and make America great again. That is the language of protectionism. How will other countries react?

They could transship, passing through countries with lower tariffs. Firms could relocate to countries with lower tariffs, too. Countries could reciprocate with their own tariffs or negotiate.

That is why the new tariffs caused lots of disequilibrium in world trade, particularly when seen as a lever to exercise political power.

Some reactions were immediate, others long-term. The stock markets lost value; the anticipated increase in costs means less profit and less dividends.

That made the stocks less desirable in our investment portfolio, leading to low prices. The markets factor future information into pricing. We assume the market is efficient.

The fall in price depends on how deep the companies are intertwined with “tariffed” countries through their supply chains. Do the source materials in those countries, do they have manufacturing centres or even research labs?

One victim is Apple Inc. Check the back of your iPhone, designed in California and manufactured in China.

Asian countries bore the brunt. They are big exporters to the US through fast-moving consumer goods (FMCG) or apparel. Taiwan and its semiconductors was a surprise. Why did the UK get a lower tariff rate than the EU? Special relationships with the US? 

Countries will retaliate. Some fast others will take their time.

It’s possible countries had their contingent plans. We all knew US tariffs were coming. Countries’ response also depends on the “fear” that the US will ratchet up the tariffs if they reciprocate. And the size of the economy. The EU can’t respond like Lesotho.  In the long run, the resulting trade war with tariffs and counter-tariffs will reduce the level of global trade. Tariffs will raise the price of goods and services; the reduced demand will slow the economy.

That raises the specter of some countries going into recession including the US itself. History shows that before the Great Depression, tariffs for US imports rose significantly.

Remember the Smoot-Hawley Tariff Act of 1930 which increased import tariffs by about 20 per cent? It seems history has a way of repeating itself. 

There are no winners in a trade, any victory is pyrrhic. Will America’s image as a benefactor of the world trade system, and as the locomotive of the world economy, suffer?

Trade wars with real wars in Gaza, Ukraine, Democratic Republic of Congo, Sudan, Yemen and other countries are the last thing we want.

It’s also possible America could use tariffs to negotiate favourable investment and trade deals with other countries.

Kenya is on the list! Our minister of trade quickly put out a sanguine statement. One stream of thought is that since our tariffs are lower, we can take advantage and expand our markets. Let’s learn from golf: “You don’t expect to win because other golfers are playing badly.”

The reality is that it takes more than lower tariffs to expand our markets. What of other costs like power? Will our productivity go up? Shall our national image and brand improve? What of quality of our goods and services? 

We can’t assume our competitors will do nothing. They could get government subsidies and “lower” their costs. Perhaps a better option is to explore new markets for our goods and services. How diversified are our markets?

Higher value goods

We could be bold and shift to new products or services that attract less tariffs. What of higher value goods like electronics? May such high tariffs is the “shock” we need to think outside the box. 

The world trade system will eventually settle, but there will be economic casualties, not just countries but also ordinary men and women losing jobs.

Even without new tariffs, we have not done as expected on the economic front.  Where is the World Trade Organisation (WTO) in all this? Africa free trade area?

Clearly, whoever said the government has no business in business was not telling the truth. Whoever said your vote does not matter did not tell the truth. 

Let’s watch the economic storm unleashed by President Trump, but do something about it beyond lamentations.

A proverb from central Kenya captures this storm, “Ona íkíhía mwene ní otaga”. If a house is burning, even owner enjoys the warmth. Let’s add that hard-nosed economists are smiling; their theories are being tested with real world data.