Today, U.S. President Donald Trump announced sweeping tariffs on almost every country in the world, with a base rate of 10% and higher for some countries. For example, China will be hit with an additional 34% tariff, the EU with 20%, and Vietnam with 46%.
Of course, tariffs are not actually paid by those countries. It is the people in the United States who pay those tariffs when they import goods from those countries. What this means is that, when people in the U.S. want to buy goods from China, EU, or Vietnam, they will need to pay anything from 20% to 46% or more than what they currently pay. If those goods are necessities, it drives up the cost of living, causing inflation. If they are luxury goods, the U.S. will end up importing less of those goods from those countries, resulting in lower demand for those goods unless they have alternative markets.
Vietnam is one of the countries that will likely be terribly affected by the tariffs. When Trump started trade friction with China during his first term, many companies shifted production from China to Vietnam over the years in an effort to avoid U.S. tariffs on Chinese goods. Turning Vietnam into the U.S.'s new offshore factory boosted its economy, albeit at a risk of overly relying on U.S. demand for goods. And now, with a 46% tariff on good from Vietnam entering the U.S., demand for Vietnamese goods is likely to be severely affected, causing Vietnamese factories to suspend operations, close, or eventually relocate.
This is because the U.S. is a major consumer market for global goods. The U.S. switched from manufacturing goods to exporting services and importing the goods it needs. A significant proportion of global manufacturing serves to fulfill U.S. demand. A drop in U.S. demand for those goods will lead to chaos for the global economy. It is not like factories in other countries can just sell their products to other countries because the U.S. no longer wants them.
Trump says these tariffs will help to bring back manufacturing to the U.S. but it takes time to shift supply chains. It takes time to build new factories and recruit people to run those factories. Meanwhile, the result is either higher prices when forced to buy imported goods at higher prices, or abstaining from purchases.
The inflation from higher tariffs will probably be felt in a few months, maybe even weeks. Meanwhile, the return of manufacturing jobs may take years. What this means is that Trump will soon realise that his tariffs are not having the results he wanted. His next move may well be to manipulate the exchange rate in an effort to alleviate the tariff-induced inflation.
Obviously, other countries will also respond to tariffs and exchange-rate manipulation. So, when Trump finds that things are still not going his way, what will he do? What will he do when his domestic support drops? He may do what other leaders have done: go to war. Fighting an external enemy has proven to distract a country's population from internal issues while uniting them behind the national leader. Only this time, the adversary is likely to be China, which means the entire world will likely be drawn into World War Three.
I hope my fears are unfounded. I really do. Because the consequences are just too severe, too dire.
Keeping my fingers crossed. 🤞
