US should reflect on its flawed tariff policies

Faced with an onslaught of tariffs from the US, nations are deliberating on their responses. The situation is complex because Trump's accusation of unfair treatment of the US by trading partners evidenced by other nations' trade surpluses is false.

Economists have asserted that trade imbalances often result from structural differences between countries and not from trade barriers. Consider two large economies of similar GDP with free trade - there should be no trade imbalances. Completely wrong. Say, in one, households have a high propensity to consume out of income and low savings - this is a fair description of the US where many homeowners use equity from rising property prices to refinance, making their home into an ATM. According to the US Federal Reserve, the personal savings rate was under 4 percent of income in 2024.

Assume on the other, citizens choose to save much more out of caution and are less happy to take on debt - they would consume much less of all goods including imports and run a trade surplus with the consumption-hungry country. No malicious treatment is involved. China is a good example of such a country with official household savings rates estimated at around 45 percent - hence highly likely to be a net exporter.

Trump has used the medical analogy of a sick patient enduring nasty medicine in order to be healthy in the future. The problem is that if the doctor has made an incorrect diagnosis, the wrong medicine will be given and the patient won't do well. This is the difficulty of responding to "reciprocal" tariffs which bear no relationship to real situations.

Trump has vigorously attacked the EU as "set up to harm the US", but in fact that large grouping of European nations may well have reduced the desire of individual members to seek export growth to America because there is a barrier-free large market locally that they can export to. It is true that the EU is a Customs Union that has a Common External Tariff but how often do we hear the true data on this, listening to Trump one would imagine it runs at 20 percent - official recent European Commission data shows that the true figure on average was just 1 percent tariff rates by both sides. Trump has made a huge distortion and fair-trading nations need to join together to support the true value of free trade.

Regional trading groups will need to enhance cooperation both within members and between them in order to reduce the importance of US exports to their economies - this will take time and will be constrained if a global recession results in the short term. Hence nations need to decide now how to de-rail Trump's tariff train.

China and the EU can lead the way and Chinese Premier Li Qiang earlier this week reached out to the European Commission President, Ursula von der Leyden, to urge both sides to maintain free and open trade. There is clearly an opportunity for more collaboration between these large trading entities.

There seem to be two main options, one of which Trump will likely present as a victory - the many smaller nations he claims are calling him to do a deal. It may make sense for a nation like Malaysia or Vietnam to offer to eliminate their limited tariffs that probably won't lead to large increases in US imports, reflecting the size of their economies, but equally, this won't reduce the balance of trade issue. Governments cannot make their citizens buy more from America, especially when its own citizens may now have a negative view of that country.

Governments can of course redirect their own spending, so possibly a country might re-equip its national airline with new Boeing jet orders - although these would be unfair to Airbus without competitive tendering. It would be a risky step as it is likely to alienate other, more reliable trading partners.

Trump's latest development is an offer to such nations that have not retaliated to pause and lower tariffs against them as a reward, but it remains to be seen what deals can be done.

For large economies and trading blocs, standing up to and the US with counter-measures sends a message that they will not be bullied by the US for baseless reasons. China has already done this and stated they will not hesitate to go further if needed. The US has not paused tariffs on China, nor on Canada and Mexico who have been retaliating.

On Wednesday the EU announced its members have agreed to impose retaliatory tariffs of Euro 21 billion on US imports with 25 percent tariffs on many selected goods. The European Commission stated that US tariffs are unjustified and damaging, causing economic harm to both sides as well as the global economy. This is entirely correct.

More needs to be done and it may be a forlorn hope, but we need to see other actors in the US, including opposition politicians, business leaders, respected academics and even some of Trump's own supporters, stand up and communicate to the American people that his policy is flawed, a false diagnosis and harmful to the US. It is too early to tell if Trump's sudden, temporary rollback of some tariffs is a sign of greater understanding.

Colin Speakman is an economist from the UK and an international educator specializing in China. The opinions expressed here are those of the writer and do not necessarily represent the views of China Daily and China Daily website.

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