The world economy will wait for the test of Trump’s tariffs

The inauguration ceremony of US President-elect Trump will be held on January 20, and the whole world is on guard against “Trump tariffs”. Although the actual setting and implementation period of tariffs will depend on future negotiations, there are also forecasts that if tariffs are launched, China’s actual economic growth rate will drop to around 1% by 2035, which will have a significant impact on the world economy.

During the campaign, Trump publicly stated that he would impose a 60% tariff on Chinese goods. In November 2024, he announced that he would impose an additional tariff of 10% on almost all imports from China, and a 25% tariff on Mexico and Canada. There is uncertainty in Trump’s remarks, and the tax rate is still uncertain, but many people believe that Trump will take action to increase tariffs.

If tariffs are raised, the impact on the Chinese economy will be great. According to the Japan Center for Economic Research, if the United States imposes an additional tariff of 60% on China and 10% on other countries and regions, and the other side does not take retaliatory measures, China’s GDP growth rate is expected to drop from 4.7% in 2024 to 3.4% in 2025. It will drop to 1.8% by 2035.

If the additional tariff is 10%, China’s exports will decrease by 2.3%, and if it is 60%, it will drop by nearly 14%. If the tariff on China reaches 60%, China’s exports of clothing, shoes and toys, which account for a large proportion of US imports, may drop significantly.

China has not yet proposed countermeasures, but it is not cautious about retaliation. The Chinese Ministry of Commerce countered that “China’s position of opposing unilateral tariff measures is consistent.”

In the Sino-US trade war from 2018 to 2019, China targeted US agricultural products such as soybeans as the first round of retaliatory tariffs. This move is aimed at farmers who have many Trump supporters. In recent years, China has been reducing soybean production in the United States and increasing purchases from South America, promoting the diversification of import sources. If trade friction develops again this time, agricultural products may become the target of retaliation.

Statistics from the U.S. Department of Commerce show that the U.S. trade deficit in 2023 will increase by 44% compared with 2016, before Trump first became president. Although the U.S. trade deficit with China has decreased by 20%, China is still the largest trade deficit country for the United States.

The U.S. trade deficit with the European Union (EU) increased by 42% during the same period, and increased by 2.4 times with Mexico.

Mexico replaced China and jumped to the top of the U.S. imports from various countries. The United States also accounts for 80% of Mexico’s exports, and more than 20% of the total are automobiles and auto parts. Large automobile manufacturers in Japan, the United States, and Europe, including the three major automakers, have been strengthening their production facilities in Mexico in recent years.

These manufacturers have been promoting production increases on the premise of using the “United States-Mexico-Canada Agreement (USMCA)” that can achieve zero tariffs if conditions are met. The Mexican government said that “the United States may lose about 400,000 jobs” (Mexican Economy Minister Marcelo Bismarco), warned that it would have an impact on American companies, and is trying to persuade Trump.

Mexico asked the United States to be cautious, arguing that if the price of cars sold in the United States will rise, it will bring headwinds to the inflation policy that is seen as one of the reasons for Trump’s overwhelming victory in the presidential election. The possibility of a trade war between the three countries that signed the free trade agreement due to Trump’s tariffs is surfacing.

Europe was also troubled by trade issues during Trump’s first presidency. European Commission President von der Leyen showed her intention to actively conduct “deals” with President Trump. Both at the EU level and at the member state level, it is hoped to avoid the situation where friction with the United States has a negative impact on the economy.

Especially Germany. Germany accounts for 40% of the US trade deficit with the EU. As an important trading partner for major commodities such as pharmaceuticals, machinery and automobiles, the United States may have replaced China as Germany’s largest trading partner in 2024. The US’s increase in tariffs will further hit the German economy, which has been in a long-term slump.

Goldman Sachs estimates that if a 10% tariff is imposed on all goods imported into the United States, including those from Europe, the eurozone’s GDP will be reduced by 1%. Germany is likely to be further reduced by 1.1%.

In a speech in December, European Central Bank (ECB) President Christine Lagarde expressed concern that “if the United States turns to trade protectionism, the eurozone’s growth is likely to be hit.” Like von der Leyen, Lagarde called for trade negotiations rather than tariff retaliation.

Trump did not specifically mention tariffs against Japan in this presidential election, but Japan may also become a target. When Trump first took office, he hinted that he would impose an additional 25% tariff on Japanese cars and auto parts.

After the 2019 Japan-US trade negotiations, Japan avoided additional tariffs, but the two sides agreed that Japan would reduce tariffs on beef imported from the United States in stages. Since Trump said that the same tariffs would be imposed on US goods by other countries, Japan may be asked to negotiate again.