By targeting the EU, it will indirectly hurt us (as RSM) the most, because our exports are primarily concentrated toward the EU (Germany) and the automotive industry, which will significantly decline due to the reduction of their exports to the USA.
By Academic Abdulmenaf Bexheti
On April 2, at 16:00 local time in Washington, U.S. President Donald Trump held a public address to justify customs barriers, with a particular emphasis on trade tariffs in monetary terms. It was no coincidence that 16:00 was chosen, precisely after the stock markets closed, to avoid shaking the capital market in just a few minutes! To allow one night of peaceful sleep to at least calm the anxious souls of the capitalists (the wild ones), who live with and for money even during the day! The President’s main justification was based on a philosophy of opposing unfair trade practices outside the U.S. that “impose” the need for reciprocal trade protection. This is a very strange justification, at least for us economists!
In the basic lessons of (macro)economics, even in the first year of studies, when we explain the need to protect domestic economies through customs barriers and non-monetary protective measures (strict quality criteria, health, and environmental standards), one of the main reasons is that small and weak or “infant” economies, as we often call them, cannot compete with cheap imports and need temporary protection until they strengthen a bit. In the case of the U.S., we’re talking about barriers from the world’s strongest economy against the rest of the world!
So, unfounded as a reason!
In support of this, for over 200 years, the Theory of Comparative Advantage (David Ricardo, 1817) has existed and functioned, regarding the absolute and relative advantages of a country’s products and goods compared to other countries. Also, because both sides benefit from free trade. Here’s why, for example, Canada will produce cheaper and better wheat to exchange for rice production from China, because both sides, in this case, will gain if they specialize and leverage their natural and human advantages. From the exchange and free trade between the two countries—Canada with wheat and China with rice—consumers in both nations will benefit due to the higher productivity of wheat in Canada and rice in China.
Debates about “bidding” on tariff levels—why some countries are assigned minimal tariffs of 10%, such as the UK, Albania, or Kosovo—are nothing new, but rather statuses determined long ago for so-called countries with preferential economic and trade relations. About half of the world’s countries have this status, though in our regional social networks, it’s promoted with euphoria as if we’re Trump’s only darlings!
In debates of this kind, there are also irrational optimists who think the U.S. Congress might overturn these decisions by the President. Article One, Section Eight of the U.S. Constitution grants the President stronger powers to protect the domestic economy in extraordinary, urgent circumstances or when trade practices outside the country are deemed unfair to the nation. That’s exactly what’s happening here—the Trump administration believes there are unfair trade practices against the U.S. from other countries, so Congress is unlikely to reverse the President’s measures.
But on what does the Trump administration base its assessment of unfair trade practices by countries exporting to the U.S.?
There are several reasons:
First, oddly, it’s about value-added taxes (VAT)! Because the U.S. itself is one of the few countries in the world that doesn’t apply the VAT system (around 165 countries worldwide use VAT as a multi-stage consumption tax), but instead applies a final sales tax (like our countries had until the early 2000s). So, the concept of a consumption tax—whether single-stage (like the U.S., at the final sales link) or multi-stage (like almost all other countries at each link of value added)—has the same effect, because the end consumer pays the cumulative tax in the final sale price. In this process, rates and tax bases may differ from country to country, but not the ultimate effect of the single-stage or multi-stage system!
The Trump administration believes that through the VAT system, countries exporting to the U.S. “subsidize” their exports and disrupt markets, due to the fact that exports of goods and services are unconditionally exempt from VAT, while all imports are taxed with VAT.
Even as a researcher of fiscal policies, with an emphasis on taxation, I can’t understand where this judgment and logic of market disruption come from when the consumption tax (single-stage or multi-stage) is paid solely by the domestic consumer. Even fiscal theory considers this type of tax the least disruptive compared to other direct taxes. The exemption of every export from VAT is based on the logic that you cannot preemptively tax the importer and consumer of the country where the goods or services will be consumed with a consumption tax. It’s truly astonishing how, in a country like the U.S. with the best universities in the world (of the Top 10, at least 6 or 7 are from the U.S.), such barriers can be justified with this logic? We learn from their books every day and study citing their research, yet today when I read (see more broadly: Peterson Institute for International Economics – Washington) that they themselves are surprised and explaining where the Trump administration’s justifications come from, I can’t comprehend how this is possible!
Second, again in tax policies! This time with the minimum corporate tax (on profit) of 15%, introduced by former President Biden and adopted by most developed countries, including those in development like ours (RSM, since January this year), which the Trump administration immediately repealed.
The concept of this tax, conditional on an annual consolidated corporate turnover exceeding 750 million USD, on the so-called untaxed profits of multinational corporations, is based on greater global tax fairness. Multinational corporations operating in developing countries, where the profit tax rate is lower than 15% (as is the case with many Southeast European countries), are required to pay a minimum tax rate of at least 15%. If the rate in their home country is higher, they’ll pay the difference there. For better understanding, take the McDonald’s corporation, which operates everywhere (in over 150 countries worldwide), including Macedonia—instead of paying 10%, which is our legal rate, it would have to pay the minimum global tax rate of 15%. Thus, a smaller difference would remain for it to pay in its home country—in this case, the U.S. The least the Trump administration could do is not worry about this, since they can set the profit tax rate based on their fiscal sovereignty at a level they deem useful and necessary for their country.
Where’s the reason for unfair policies by other countries toward the U.S. when profit tax rates are lower than there?!
Third, with digital taxes—just like VAT—the tax burden falls on domestic consumers and doesn’t distort market equilibrium. Why should the U.S. attack foreign taxes that affect foreign consumers?
I understand the concern for the most powerful American tech companies, but their unmatched strength isn’t at risk from digital taxes paid by domestic consumers, because digitalization has no alternative—even the poorest countries need it, and it’s just a matter of time! These very aspects are contested by their aforementioned Washington Institute.
So, this basis isn’t logical either, let alone sustainable!
Fourth and most importantly, foreign trade barriers, which at first glance seem entirely logical because they’re based on the U.S.’s high trade deficit, don’t mean they’ll economically benefit the U.S. Tariffs, beyond some short-term monetary gain and easing the fiscal deficit, will mostly hurt American consumers and distort the U.S. economy, which is primarily consumption-based. It seems the Trump administration believes tariffs will bring American manufacturers and their production capacities back to the U.S. from abroad (from China, Mexico, or elsewhere), but that’s unlikely to happen, due to significantly higher labor and income tax costs in the U.S. compared to, say, China or Mexico.
And, not to drag on, the Trump administration’s tariffs, primarily justified by the unfair trade policies of other countries toward the U.S., are unsustainable also because they hit countries that mostly practice very low trade tariffs on imports from the U.S. For example, the EU, according to World Trade Organization (WTO) reports, applies an average tariff rate of about 3% on imports from the U.S., while the U.S. retaliates with tariffs ten times higher. By targeting the EU, it will indirectly hurt us (as RSM) the most, because our exports are primarily concentrated toward the EU (Germany) and the automotive industry, which will significantly decline due to the reduction of their exports to the U.S. From the mere fact that we produce parts for the automotive industry—and, for example, every fifth BMW and every sixth Mercedes is exported to the U.S.—with the new tariffs, their prices will increase by about 14,000–15,000 USD above the previous price, which will certainly significantly reduce demand. It’s possible that these production capacities in the EU might start shifting toward weapons production (e.g., military vehicles and tanks), and we’ll hardly be able to quickly adapt to those new opportunities.
Still, these are considerations that need to be monitored to see what the effects will be, but all the above justifications seem illogical to me, and even less typical even for the most extreme right-wingers. Even former President Ronald Reagan, one of the most prominent Republicans in the last forty years, was a fierce opponent of tariffs, and I don’t know what’s gotten into today’s Republicans with this logic of the “America First” motto! Why seek something that’s already existed for over a century, unless it’s yet another grand deception of the insufficiently informed masses—because, hand on heart, it really sounds nice!