- Tariffs have been used to address an ever-expanding list of issues.
- They range from trade imbalance to domestic job creation.
- Investment in the US and purchase of US products on the agenda too.
- Tariff revenues are being sold as a means to reduce the fiscal deficit.
- Non-economic objectives, as far as conflict resolution, are also being pursued through tariffs.
Commentary: Persistence of tariff turbulence
August 1 has come and gone, but uncertainty related to trading with the US persists. From Canada (35%) to India (25%), more back and forth is likely. Sectoral tariffs on semiconductors and pharmaceuticals are pending. The China-US truce, with an extension needed by August 12, could go either way.
Global markets were largely sanguine leading into the August 1 deadline. But the idea that there is ever an endgame with tariffs is completely off-the-mark, in our view. President Trump enjoys the power and leverage of wielding the threat of tariffs. As long as he is president, we believe that there will be no end to associated uncertainties.
The original rationale for the tariffs was around trade, the argument being countries running large goods trade imbalances vis-à-vis the US must be doing so due to unbalanced trade policies. By increasing tariffs on imports, the US was expected to see a decline in imports and a corresponding improvement in its trade deficit. Ancillary elements of the trade deal were to include other nations buying more US products and investing more in the US. It’s a zero-sum narrative; others have benefitted at the expense of the US, now it will be the other way round. US jobs and investments must be underwritten by the rest of the world.
In recent months this narrative has been reinforced but also expanded. Two elements have begun to play out more prominently. First is the fiscal angle. With the US running budget deficit of over a trillion dollars, and the recently passed Big Beautiful Bill projected to add several trillion dollars to the US national debt in the coming decade, the fiscal position is increasingly precarious. Since the Republican party appears to be loath to be associated with tax increases, and there is only so much spending cuts they can push through, with interest payment, defence, and social security spending rising, tariffs might be their only panacea. Trump has already been flagging the rise in tariff revenues as a sign of success of his trade policies, and his wider circle is justifying the revenues as a source of fiscal improvement. This line of argument entails high tariffs becoming a permanent feature of the US fiscal agenda. As the fiscal situation worsens, they can only go up.
The second element is the use of tariff threat to cajole nations to all sorts of non-economic concessions. Trump has lately asserted the threat of tariffs in the context of Russia-Ukraine, India-Pakistan, and Cambodia-Thailand conflicts. His recent salvo has been on India, threatening an unspecified penalty for importing oil from Russia.
The fact that nations have blinked in most cases, taking US impositions without retaliating, will only embolden Trump to keep using tariffs as a weapon. Even as South-East Asian nations breathe a little easier, it needs noting that whether the tariff is 10% (Singapore) or 15-20% (the rest), these are increases of unprecedented nature, and they may well change at any time. The ongoing widening of the tariff weapon is a marker of more to come.
What about after Trump? Will tariffs come down? We are sceptical. History shows that local businesses, once they get to enjoy protectionism, lobby politicians hard to keep them. American businesses and politicians are no exceptions, we’re afraid.
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