Trump’s Tariff Warfare

August 21, 2018
Editor(s): William Chen
Writer(s): Divya Marwaha, Maggie Tan, Nathan Peters

Since his 2017 inauguration, Trump’s diplomatic affairs have been controversial at best, with the 45th President using the dominance of the North American economy as a heavy bargaining chip in his affairs, whether they be economic or political.

Political Motivations for a Trade War

With tensions seemingly flared between Turkey and America due to the detention of American pastor, Andrew Brunson, Trump responds not with political negotiation but instead with economic warfare as America’s trade war expands towards Turkey.

On the surface level, Trump is eager to point at Brunson’s captivity as the catalyst for America’s attacks upon Turkey, however, there are many more issues below this façade. Since President Recep Tayyip Erdogan came into power, increasing involvement with the Russians and Iranians has caused U.S.–Turkish relations to deteriorate. Erdogan’s grasp over Turkish military has blossomed and has thus allowed him to theme his speeches around Anti-Western and anti-NATO ideologies, shifting Turkey further and further into Islamism. These issues provide Trump with reasons far greater than the need to rescue a Presbyterian pastor under house arrest, an issue which Trump ignored for the past 18 months.

Jumping at the opportunity, Trump has imposed harsh tariffs on both steel and aluminium in their first strike towards Turkey. However, this tactic has been criticised by many economists due to the repercussions involved. A world of free trade is an ideal which many economists believe in due to the potential of creating highly specialised economies of scale that allow for efficient resource allocation. Trade wars hamper the potential of this possibility as they reduce economic output for both countries.

The greater problem at hand is the potential blend of political and economic aspirations. Unlike the trade war against China, which was decided upon greatly due to economic issues and the goal of returning the means of production back to America, this trade war seems to heavily revolve around political reasons which indicate that there will be little if any benefit for the U.S. economy. The goal of these tariffs are not to reduce the trade deficit, or increase American employment, but instead to demonstrate their hegemony on a global stage. Put simply, it is a double-edged sword swung by Trump in the hope that the sharper edge is pointed towards Turkey. Political trade wars inflict damage upon all parties involved, creating unemployment, disturbing exchange rates and increasing market volatility.

Tariff Battle

On the 10th of August, Donald Trump announced that tariffs on Turkish aluminium and steel will be doubled, bumping the tariff on aluminium to 20% and steel 50%. Erdogan retaliated by imposing hefty tariffs on American products, such as 120% on cars and 140% on alcohol, and President Erdogan has also promised to boycott all electronic goods imported from their fellow NATO member.

The trade war between the United States and Turkey that is rapidly unfolding is extremely detrimental to both parties and the global economy. In the long run, trade wars cost jobs, reduces international trade, boosts inflation on imports and dampens economic growth for all countries involved.

The Trade War and the U.S. Economy

The enormous tariffs on steel could hurt the 6.5 million workers in U.S. industries that import steel as it raises the production costs of steel users, such as Trump’s own beloved automotive manufacturers. In fact, since its initial introduction in March 2018, steel tariffs have already lowered the second-quarter earnings of the U.S.’ three largest car manufacturers: Ford, General Motors, and Fiat Chrysler, all of whom issued downward revisions on in their financial forecasts for the rest of the year, citing rising commodities costs that stem in part from the steel and aluminium tariffs imposed by the Trump administration. If profits continue to plummet for the car manufacturing giants, the added costs may have to be passed onto consumers, the multiplier effect of the outward suction caused by the tariffs.

The Trade War and the Turkish Economy 

Under President Erdogan and his AKP party, Turkey averaged 5.4% economic growth between 2003 to 2013. Despite these favourable statistics, an economic crisis is looming for Turkey. The strong growth was only made possible by rigorous fiscal policy fuelled by U.S. dollar denominated loans, and with the Turkish lira having fallen by more than 40% against the dollar since the start of the year, and this fall magnified by Trump’s trade war, Turkey’s debt pile has rocketed, making it harder for the country to repay its debts.

Prior to the unfolding of the trade war, the lira faced a history of struggles, including high current account deficits, high level private sector debt, and an inflation rate reaching a concerning 15.9% in July. There is a mist of fear surrounding the Turkish economy which has had a bearish effect on the lira. With Trump doubling tariffs on two of their driving exports, concern has only solidified, driving the lira down further.

Latest reports from ANZ estimate that Turkey’s foreign debt is at around 88% of GDP, more than double that of large economies in Asia. The amount of debt Turkey owes in foreign currencies is now equivalent to almost the entire size of the Turkish economy.

Debt of countries in Asia relative to their GDP

Without a change in direction, the unfolding trade war and impacts of the tariffs will soon set-in, and with it, the devastating effects on economic growth, the lira and ultimately the welfare of the Turkish population.

Flow-on effects for the Australian Economy

The flaring economic and political climate has had a “Domino Effect” on the world economy. Whilst the lira reached a low of 7.24 to the dollar before a slight recovery, the effect has been felt across global markets too. In the week following Trump’s decision to double tariffs on Turkish aluminium and steel, the Australian dollar fell by almost 2 cents against the dollar, a reported 18-month low. In other markets, the euro fell by 1% against the dollar, and Asian markets are also struggling. Whilst Turkey ranks 33rd on the list of Australian trade partners, several media outlets such as The Australian Financial Review have blamed rising U.S.–Turkish tension for the global market fragility which saw mining conglomerates Rio Tinto and BHP fall. It does not come as a surprise that any economic concern of the U.S. becomes a concern of ours.

Who wins?

With no resolution to Brunson’s captivity and the myriad of underlying political landmines, global economic pain will continue to be the compounding outcome of this trade war. There is little confidence that any win, political or otherwise, will be a convincing one.

The CAINZ Digest is published by CAINZ, a student society affiliated with the Faculty of Business at the University of Melbourne. Opinions published are not necessarily those of the publishers, printers or editors. CAINZ and the University of Melbourne do not accept any responsibility for the accuracy of information contained in the publication.

Meet our authors:

William Chen

Divya Marwaha

Maggie Tan

Nathan Peters