Context:
Trump sets 25% tariffs on steel and aluminum imports, and an additional 10% on Chinese goods, with the threat of measures for Canada, Mexico, India, and the EU. Retaliatory tariffs by other nations are deemed ineffective as they may hurt their citizens and firms more than the retaliating country.
Economic Harms Caused by Trade War
- US tariffs are likely to increase consumer prices, but decrease the trade deficit for goods from China.
- Either the Federal Reserve may postpone cuts to interest rates or increase them. The unrelated interest hike would be a measure against inflation, strengthening the dollar.
- Higher US interest rates could trigger a global liquidity squeeze, making it difficult for firms and governments with dollar denominated debts to repay.
Countermeasures to Offset the Impact of Trade War
- Retaliatory Measures That Would NOT Directly Harm the Global West
- The EU could use its Anti Coercion Instrument to restrict US financial services and intellectual property protections.
- China could play the card of rare earth mineral export limitation considering such commodities as political control.
- Trying to Deal with the Financial Market Volatility
- Emerging markets should cushion their currency to minimize short term foreign debt to help stave off liquidity crises.
- Companies must ensure preparedness for high rates for quite a long stretch.
- Strengthening Alliances for Trade
- Deepen regional economic integration by removing barriers to trade among current trade conglomerates.
- Fast track new trade deals, such as the one between the EU and MERCOSUR, to lessen reliance on US markets.
This world should build strategic partnerships and undertake policy measures against reactive tariffs. Regional trade agreements and stabilization of the financial markets will enable countries to weather the economic storm unleashed by Trump’s trade war.
