TIOL - COB( WEB) - 949
DECEMBER 05, 2024

By Shailendra Kumar, Founder Editor

TARIFF is the toast of 2024 holiday season! And this is not only because of the incoming US President but also the outgoing one who last week announced a fresh bout of tariffs on solar panel imports from four Southeast Asian countries - Thailand, Vietnam, Cambodia and Malaysia. And the putatively known ground is - they have been flooding the market with cheap goods. Who lamented? - American manufacturers who had responded to Mr Joe Biden's Inflation Reduction Act-linked clean energy incentives and have made huge investments. The plaint came from Korea's Hanwha Q Cells, Arizona-based First Solar Inc and many others who suspected that the Chinese solar module makers in these four countries have triggered a collapse of global prices by dumping products below their costs of production into the market. I had predicted such grim measures in this Column in the recent weeks when I had analysed how China was plundering undue benefits of favourable trade relations between the US and the East Asian economies. To beat the deathly blow of the decoupling between Beijing and Washington, China liberally incentivised its solar manufacturers to shift production to other Asian economies and keep dumping not only solar panels but also electric vehicles, many electrical and electronic goods in the global markets. Unmindful of its own shrinking domestic economy, demure Chinese President Xi Jinping continues to pursue export-led growth model which has sparked a ripple of change towards harsh protectionism across the globe.

China is partially the real culprit for Donald Trump's hairy eyeballs towards Mexico which has emerged as America's numero uno trading partner in the past two years. The US accounts for 80% of Mexican exports - a large swathe is driven by the Chinese investments in Mexico. In fact, by resorting to screw-driver technology-based plants or simply assembling parts, Chinese companies in Mexico have been reaping tariff benefits under USMCA trade treaty. Though the Biden administration had also warned Mexico of unsavoury consequences but the policy canvas was left untattooed for the President-elect who last week fired his first salvo through his personal social media platform Truth Social. He gruntingly pledged to impose 25% tariff on all goods imported from Mexico and Canada and 10% on China! And it will be his First Executive Order to be signed on 20th January - the day he occupies the Oval Office! Eeek! There is, um, nothing abnormal about such a drumbeat from the 'Tariff Man' if one goes by his tub-thumping pledges made during the election campaigns. The two key foreign policy instruments he is going to weaponise as his first choice, are the sanctions and the tariff. The global economy is going to witness more of it in the next four years.

Tariff is the 'most beautiful' word Donald Trump has heard in his life-time. When he talks about raising tariffs, the geopolitical canvas is left open to experts to interpret it in their own varied ways. Aha! 'Trumpian kidology' in action! He uses tariff instrument to realise two-fold purposes - one is to gain leverage for US trade talks shoelaced with other non-trade issues, and the another is to browbeat a country daring to put US nose out of joint! If one goes by his stated purposes to curb smuggling of fentanyl and unchecked caravans of immigrants through Mexican and Canadian borders, he knows it well that tariff is not a preferred silver bullet to solve immigration crisis but such a talk is quite effective to reduce the political leaderships of both the countries to a bundle of nerves. And this is what happened when the Mexican President lost her calm and blabbered retaliatory measures. After a day, sanity was injected into her, and she then spoke to the President-elect over phone and dubbed her jaw-jaw as very 'constructive'! 'The Titman' in the trio, Justin Trudeau, retained his sangfroid and simply air-dashed at his Florida home - Mar-a-Lago. After his three-hour-long dinner, he told the media that his dialogue was highly 'fruit-full'! From the statements of heads of governments of both the countries, it is difficult to decipher - the 'Tariff Man' really vowed to divorce himself of tariff-skin in both the cases!

Whatever may have cooked between them, it is a harsh ground reality that the US would suffer damages in equal measures, if not more, if it launches any tariff war with the two of its immediate neighbours which are home to jumbo investments originating from the post-COVID near-shoring and friend-shoring phenomena. A large number of American MNCs have set up greenfield plants in Mexico to reap the benefits of trade agreement, cheap manpower and massive nearby market. In particular, already-market-bruised automotive sector biggies from the US like Ford, GM and Stellantis besides the Japanese and German car-makers, would be severely impacted more by the proposed Trumpian tariff. Mexico is home for 25% of North American vehicle production. The trade-size among the three is about 1.88 trillion. The US imports energy, electrical, chemical and many other goods besides a large range of fruits and vegetables. Imposing tariff would not only hurt US companies (Tesla has also been scouting to set up a plant in Mexico) but also American consumers. Though the US is having a boom time for energy production but it still imports 4 million barrels of crude a day from Canada. Secondly, Trump's tariff talk has nudged retailers across America to ratchet up import volumes before Trump assumes power. America's National Retail Federation has reported 14% jump in imports for the November month. The side-effect of Trump's social media post has been a sudden fall in the Mexican currency peso and the Canadian dollar.

As regards Beijing, Trump's announcement of 10% tariff may sound pusillanimous but his team of China hawks is definitely blueprinting something monstrous of sort! A hike of 10% is likely to be just the first shot without 'bullet'! Although direct import from China has been on the slide during the Biden regime but indirect imports have been on the rising curve which Trump administration will have to deal with. Trump's current 'hangxiety' is the smuggling of fentanyl into America. The synthetic drug overdose has taken a serious toll of life of over 4,00,000 Americans in the recent years. Although some of the domestic measures and cooperation from the neighbouring countries have tangibly truncated its volumes which have, in turn, reduced the number of opioid deaths in 2024 but the flow of precursor chemicals required to produce illicit drugs by the mighty Mexican drug cartels continues unhindered. And since China is the mother source of such precursor chemicals, Trump is keen to pile up tariff pressure on Beijing to do something more 'leg-breaking' against the syndicates. Since diplomacy has proven to be a low-yield 'crop', China hawks in his party favour sterner measures such as sanctioning Chinese banks and other financial institutions which help drug syndicates in laundering money. A blend of sanctions and tariff would definitely make the global trade much more murkier for the Global South. To overcome the impact of Trumpian tariffs, Beijing may simply lower the value of its currency and it would bode ill for the stability of the global currency market. Voila! A currency war cannot be ruled out!

While on the currency page, let's talk about the fussilade of Trumpian tariff missiles fired against the mere tete-a-tete initiated by the BRICS about floating a new currency vis-a-vis the US Dollar, which dominates the global trade. The President-elect has plaintively issued a stern warning of imposing 100% tariff against the 9-member BRICS for even making any bid to challenge the supremacy of the greenback. He has warned BRICS to keep off the currency course and also against backing any currency to replace the US dollar. If it does so, he would impose punitive tariff, and added that just forget about the US economy - no access to it at all! At BRICS's last summit in Russia, the host had floated a proposal to contain the arbitrariness of American sanctions and discriminatory regime of US-dominated international financial system a la SWIFT. Russia favoured a sort of new BRICS currency for intra-group trade and also its promotion among the Global South countries. Although there were not many keen takers for this China-backed proposal at the summit but predictably, Trump was chasing its shadow, and after sussing out its baneful consequences, he could not wait till his formal coronation to uncork his threat. Tut-Tut!

Going by his belligerent talk on use of tariff and sanctions, as I had prognosticated in the past, it is now crystal-clear that the global economy is heading for the bumpiest time ever recorded in the recent history! The transactional approach of mercantilist Trump is bound to throw up many devil's knots for his partner as well as neutral nations. His understanding of the prevailing geopolitical markers is definitely going to reduce many well-settled global institutions to carcasses and may also wallop widely-accepted principles of bilateral and multilateral trade during his second term! India may also suffer along with other countries - only the degree may be less severe for PM Modi! Indian students have already been given advisory to reach their university campuses before 20th January as 'Mr Unpredictable' driven by anti-immigration virus, may do something appalling! Yuck! Time for the global community to buckle up for a four-year-rough ride and a byzantine era ahead! Plus ça change!