By David Lawder

WASHINGTON (Reuters) – Donald Trump arrived in Washington eight years ago, promising to reshape U.S. trade relations, reduce the substantial goods trade deficit, and revitalize the country’s industrial base through new tariffs.

The president-elect is set to undertake a more vigorous initiative in his second term, pledging a 10% tax on all U.S. imports and a 60% duty on goods from China.

While how these plans will be implemented remains uncertain, data from his first administration indicate a shift in U.S. imports from China to other nations, particularly Mexico and Vietnam. Nonetheless, the U.S. trade deficit has continued to expand, surpassing $1 trillion in the last four years, and factory jobs have stagnated despite an overall job growth since the COVID-19 pandemic.

STEEL SLIDE

Steel manufacturers in the U.S. experienced significant advantages from Trump’s tariffs, receiving a 25% global charge, while aluminum producers faced a 10% duty. These benefits were somewhat offset after Trump’s initial administration negotiated quota agreements with Mexico and Canada, followed by the Biden administration’s deals with the European Union, the U.K., and Japan.

However, China’s global dominance in these sectors has kept prices low, resulting in lower capacity utilization rates.

Some facilities revived due to the tariffs, like a U.S. Steel mill in Granite City, Illinois, visited by Trump in 2018, have since shut down operations. A Missouri aluminum smelter that received a boost from the tariffs was also idled last year by Magnitude 7 Metals.

Trump’s most significant trade impact during his first term was breaking decades-long political consensus supporting consistently lower trade barriers that enabled China to ascend as the world’s largest goods producer. Upon leaving office in 2021, this theme was adopted and intensified by President Joe Biden.

“Waking the world up to the economic threat from China was one of the top accomplishments of Trump’s first-term trade agenda, as was the renegotiation of some of our major trading relationships,” including a North American free trade deal, stated Kelly Ann Shaw, a trade adviser during Trump’s first term.

“We’re now engaging in a healthy debate in America about which industries we wish to preserve, what supply chains are essential, and where we should concentrate our trading relationships,” remarked Shaw, now a trade lawyer at Hogan Lovells in Washington.

Trump’s 25% tariffs on $370 billion of Chinese imports helped reduce the U.S. trade deficit with China from $418 billion in 2018 to $279 billion in 2023. However, as businesses relocated production, new beneficiaries emerged: Mexico and Vietnam. Their U.S. trade surpluses significantly offset China’s decline.

RETALIATION, PRICING COSTS

This transition came with substantial costs. China retaliated with 25% tariffs on U.S. soybean exports and largely diverted aircraft purchases from Boeing to rival Airbus for several years.

U.S. whiskey producers faced EU retaliation due to metals tariffs, but exports rebounded once those tariffs were lifted, according to Chris Swonger, CEO of the Distilled Spirits Council of the United States.

The 2020 “Phase 1” trade deal intended to conclude the U.S.-China trade conflict saw Beijing commit to increase its purchases of U.S. goods and services by $200 billion over two years. However, this pledge went unfulfilled as COVID-19 impacted the economy.

China’s expected increases in soybean imports from the U.S. were redirected to Brazil and Argentina. Scott Gerlt, chief economist for the American Soybean Association, expressed that this pattern results in a lasting shift.

“We never recovered the volume of soybean exports to China since that trade war,” Gerlt stated. “A significant amount of land was cultivated in Brazil. Brazil has now overtaken us in exports to China.”

This transition may strengthen China’s position in a potential further trade conflict, although soy remains the primary U.S. export to China.

Once a leading export, commercial aircraft have been slow to recuperate. In contrast, motor vehicle shipments to China have decreased as its electric vehicle industry flourishes. Crude oil, previously nonexistent a decade ago, has surged to $13 billion in 2023.

The U.S. continues to rely heavily on China for technology imports including smartphones, laptops, and video game consoles. Many of these items were exempt from Trump’s initial tariffs, but duties of 60% or more would significantly increase expenses.

China’s vast size and efficiencies in electronics and toy sectors are hard to replicate elsewhere, presenting challenging decisions for companies facing steep tariffs, noted Mary Lovely, a trade economist and senior fellow at the Peterson Institute for International Economics.

“These are massive enterprises. How can you recreate that in a country a tenth the size of China? You can’t,” Lovely added.

Trump’s first-term tariffs did not trigger an inflation spike; however, they were limited in scope and led to only one-time price increases, explained Doug Irwin, an economics professor at Dartmouth College specializing in trade.

“Tariffs are effectively a tax, resulting in a one-time levelling up of goods pricing,” Irwin noted. “They don’t cause a continuous rise in general price levels, which is what inflation represents.”

The price implications from additional tariffs will also hinge on elements like U.S. fiscal and monetary policies that may strengthen the dollar, retaliatory trade measures that could lower prices on other domestic goods, and whether importers or exporters absorb some of the tariff costs.

TARIFF REVENUE

Trump has pledged to reduce U.S. debt using tariff revenues. Recently, he declared intentions to establish an “External Revenue Service” to collect tariffs, duties, and all foreign revenue. According to collections from his punitive tariffs since 2018, a substantial increase would be required to make a dent in U.S. deficits nearing $2 trillion annually, especially prior to a projected extension of expiring tax cuts expected to add over $4 trillion in new debt over the next decade.

Total collections from tariffs on China, steel, aluminum, and solar panels have amounted to $257 billion over seven years, a negligible amount compared to cumulative deficits of $12.57 trillion during this time.

The conservative-leaning Tax Foundation estimates that a universal 10% Trump tariff would yield about $1.7 trillion over 10 years, albeit factoring in a possible negative impact on economic growth.