Trump's trade war returns America to the 1930s

Telegraph

2 days ago

Like many small American business owners, Beth Benike started the year with high hopes about America's improving economy. But in June, she stopped paying herself a salary, a sign of the dark turn the US economy has taken since Donald Trump launched his trade war.
'I'm going to have to cash out my retirement just to stay operational,' says the 48-year-old owner of Busy Baby, an infant products company. 'I am paying my mortgage with my savings.'
A string of trade deals struck by Mr Trump in recent days have been hailed by his supporters as major wins for the US economy –and serious humiliations for America's trading partners, such as the European Union.
But try telling that to ordinary Americans. The trade agreements, which include 15pc tariffs on the likes of the EU, Japan and South Korea, masks a brutal reality for many businesses.
As these new deals come into effect on Friday, US charges on imported goods are about to hit their highest level since the 1930s. And the toll on any company that imports goods will be huge, with many already fighting for their lives.
Like many US companies, Busy Baby had been booming before Trump's April 2 tariffs announcement. It was selling around 200,000 products a year and securing shelf space at retail giant like Target and Walmart.
But the president's tariffs hammered companies like Busy Baby, which imports goods from China.
Benike had two containers of stock that were just about to leave China, just before Trump hit the country with a 145pc tariff. Benike held her goods in China until the tariff rate fell to 30pc, when she finally took the hit.
The tariffs on that shipment cost her $35,000 (£26,000). And she is not alone. Before Trump took office, America's effective tariff (the average rate charged across all goods imports) was 2.3pc, according to Capital Economics.
As of Thursday, this figure had multiplied six times over to 14.6pc. On Friday, it will hit 16.3pc.
This is roughly half the 31.6pc effective rate that was briefly in place under the 'liberation day' tariffs of April 2 that Trump quickly suspended, but it will still be the highest level on record since 1936.
Tariffs on goods imports from China are still charged at 30pc under a temporary reprieve that is due to expire on Aug 12, with no sign yet of a new deal.
Benike raised money through GoFundMe to cover the cost of her China shipment, but this did not make up for the fact that she had been out of stock for six weeks, which meant no cash flow.
As things stand, her shipment for the Christmas season will incur a $52,000 tariff fee. 'It is a huge chunk of money. That is not at all sustainable for us,' she says.
Small businesses will bear the worst of the tariffs blow because they do not have the cash reserves or economies of scale to absorb the new charges, says Richard Trent, executive director of the Main Street Alliance, a small business industry group.
'They have to eat the losses, pass them onto consumers, or shutter altogether. The outlook is bleak on Main Street,' he says.
Big business is hurting too. And for some of America's biggest companies, the tariff bills are not tens of thousands of dollars but multiple billions.
Carmaker Ford made a $36m loss between April and June, compared with a $1.8bn profit during the same period a year earlier, because it had to pay $800m in tariff costs.
It warned that it expected to pay at least $2bn on tariffs over the full year.
Although Ford manufactures its cars within the US, it imports many of the parts and materials – many of which are subject to Trump's 50pc tariffs on steel and aluminium.
General Motors, another major US carmaker, said last week that tariffs had knocked $1.1bn off its operating income in Q2. Household goods giant Procter & Gamble similarly warned this week of a $1bn hit to its profits from tariffs and said it will begin making price rises on a quarter of its products from next month.
'There isn't any getting away from the fact this is a huge, huge increase in the US tariff rate,' says Brian Coulton, the chief economist at Fitch Ratings.
The real economic toll is still yet to come, says Coulton.
Over the next six months, businesses will pass on much more of the cost of tariffs onto consumers, he says.
This will drive up inflation, and dampen real wage growth. In turn, it will drag on consumer spending, the engine of the American economy. 'It's certainly a pretty sharp slowdown,' Coulton adds.
The impact of the trade war is harder to detect. Big swings in trade because of Trump's tariffs have created wild swings in data on US economic growth.
As businesses raced to stockpile before Trump's tariff announcements, imports soared. This was the main reason why US GDP fell by 0.5pc in the first three months of the year. When imports slumped after tariffs were introduced, the opposite happened and GDP rose by 3pc.
Underneath these two figures sits a clearer picture of the state of the US economy. Growth across the first six months of the year averaged 1.2pc, less than half the 2.5pc recorded last year. As American consumers and companies count the cost of Trump's tariffs, countries around the world are also weighing up who won and who lost in the dash to make deals.
According to David Henig, from the European Centre for International Political Economy, one of the surprise victors has been carmakers such as BMW, Volkswagen, Kia and Toyota.
'Everyone assumed that if Trump was going to go for anything, it would be cars. But the carmakers of the EU, Japan and Korea did far better than they were probably expecting,' he said.
Trump initially levied a punishing 27.5pc tariff on the sector, and demanded to see more manufacturing brought to American shores.
But in his deals with Japan, South Korea and the EU, the auto sector was included in the broad 15pc tariff.
That could be a smaller hit than US carmakers such as Ford and General Motors are facing from Mr Trump's 50pc levy on imported steel and aluminium.
Ben May, from Oxford Economics, says some countries with relatively punishing tariff rates could end up doing better than expected, if their exporters diversified away from the US into new and more profitable markets.
And some countries with higher tariff rates, including India, relied less on exports to the US than others such as the EU and Vietnam – so they might take a smaller hit to their economies even with that higher rate.
But nobody knows for sure, especially as the deals are largely just in-principle agreements, 'Because there are no legal obligations being drawn up, what's to stop Trump, for instance, from turning around and demanding something different in a few days or weeks or months?' May says.
As for Benike, she spent months looking at whether she could manufacture her goods in the US but found it would be impossibly expensive.
Instead, she is shifting to overseas sales in different markets. Next week, she will launch her products in South Korea and she is exploring selling in the EU, Canada, Mexico and Australia.
'There's babies all over the world,' she says. 'Hopefully we can sell enough products globally to stay in business.'