Trump’s tariffs impact on global trade – How to sail the winds of change?
On 2 April, US President Donald Trump added to his growing list of executive orders. This time, his focus was on the trade deficit the US faces with other countries. Declaring a state of emergency, he exclaimed that the US manufacturing base had been hollowed out because of a steady increase of trade with other countries – and that those countries not only place higher tariffs on US products than the US does in return but also impose non-tariff barriers. He announced “reciprocal tariffs” of between 10% and 49% on all countries with whom the US trades – and within days, the tariff against China had increased to 125%. This is his solution to redress the trade imbalance and return production in critical sectors to the US.
Disruption on the horizon
The only thing it is likely to achieve is disruption. US businesses that import consumer products and components that go into the manufacture of products are now faced with unpredicted and additional costs that they (not the sourcing country) will have to pay. In many cases, sourcing domestically is not a solution, not because the domestic product is too expensive, but because it simply does not exist; the manufacturing is no longer US-based. To stay afloat, these businesses will have to pass this extra cost to the consumer.
It is, perhaps, possible that re-sourcing – NB: not re-shoring – could result in businesses looking to alternative countries with lower duty rates, but those alternatives will be few and far between. Firstly, the (Asian) countries where most consumer products are sourced are those hit with the highest tariffs, and so costs will remain high. Secondly, there is the matter of capability and capacity; are other factories in other countries able to produce the products, and the quantity, required?
And here is where the other danger lies, one that has the potential to negatively impact the lives of people in sourcing countries.
Balancing trade and ethical standards
There is already the risk that countries producing products at a low cost do so at the expense of workers’ rights, human rights, and the environment. In more recent years there has been an effort to counter these negative effects by placing sustainable development conditions in free trade agreements and ESG due diligence requirements on companies. It is difficult to point to concrete results, and certainly, violations continue to exist, but there is evidence to suggest that sourcing factories are reacting and changing for the better.
Now, there is a risk that faced with increased costs resulting from the tariffs, businesses could be incentivised to put their ESG due diligence efforts to one side and ignore conditions in their supply chains to concentrate on sourcing as cheaply as possible. This would have a devastating impact on workers in sourcing countries.
How to respond to these changes?
At this stage, the situation is very volatile and is changing on an almost daily basis. Despite President Trump’s threat of tariff escalation in response to countries who raise their own tariffs, we have already seen that some exemptions have been granted on specific (critical) products coming from China. At the same time, countries willing to negotiate with the US have had their increased tariffs paused.
Since it appears there is room for negotiation, it is important to remind the actors involved of a basic fact: it takes more than tariffs to ensure fair trade amongst countries. If the Trump administration wants trade with other countries to be on an equal footing, it should ensure there is a level playing field on how social standards are applied; otherwise, “social dumping” will continue or even increase.
In the current climate, where it seems that the one thing we can predict is unpredictability, businesses should take care not to follow suit; by acting in an unpredictable and reckless way (such as cancelling orders or shifting supply chains from one day to the next).
On the contrary, companies should continue to exercise ESG due diligence and take the long-term perspective. Now more than ever, it is essential to continue on assessing business risks in a holistic manner and engaging with suppliers so that human rights and the environment are considered alongside profit. In this way, businesses can ride out the storm and stay resilient.
