Tariffs, trade and Trump – what do recent headlines mean for producers in the Global South?

With trade tariffs dominating the headlines right now, you might be one of the many people wondering what they are and why they matter – and how they might impact producers across the world.  

Tariffs are making the news because President Trump imposed 25% on Mexico and Canada and 10% China, citing an apparent ‘emergency’ of ‘illegal aliens’ and drugs.

Canada and Mexico immediately began talks with the US and were given a reprieve of 30 days. China has instead imposed its own tariffs on US goods and has made a complaint against the US at the WTO (entirely symbolic, because the US has for many years stopped the WTO’s complaints mechanism from functioning).  

What is a tariff? 

• A tariff is a tax paid when goods cross the border into another country.  

• An export tariff is paid by the company making the goods and sending them to another country (these are relatively rare).  

• An import tariff is paid by the company in the destination country.  

Tariffs for the same goods can be different depending on what country they come from. Countries that are members of the World Trade Organisation will charge the same tariffs for goods coming from different countries unless they have a trade deal with that country that sets lower tariffs.  

The US, Mexico and Canada are all members of one of the world’s biggest trade deals: the US, Mexico, Canada Agreement (USMCA – the revised version of the North American Free Trade Agreement or NAFTA). That means that most tariffs are extremely low between all three countries. There is no trade deal between the US and China. 

What would happen if the tariff increase is enforced? 

25% is a big jump in tariffs. For example, under the USMCA deal, textiles and clothing from Mexico were charged a 1.4% import tariff, whilst vegetable products were at zero. President Trump’s announcement would mean a jump to 26.4% and 25% respectively. That could mean that the cost of a jumper would increase from £50 to £62.50, and £20 of groceries imported from Mexico would increase to £25. 

One of the problems created by Trump’s possible tariff hike is that companies may decide not to pass costs on to US consumers. Instead, they will either reduce their own profits or try to negotiate a lower price with their suppliers. If suppliers already have low profit margins and can't reduce the costs of things like business rates or energy, they may have little option but to start cutting labour costs by lowering wages, cutting corners on health and safety or using workers on more insecure contracts. 

Is any of this relevant to the producers Transform Trade work with? 

The short answer: it might be.  

Overall, the predictions are that global trade and investment will slow down significantly if these tariffs are applied for a sustained amount of time. Even if Mexico and Canada avoid tariffs, a trade war between China and the US, the two biggest economies in the world, will have ripple effects everywhere. Countries in the Global South could see their trade and the amount of external investment coming their way shrink. Together with ongoing impacts from Covid19 and wars in Ukraine and Gaza, this could have serious consequences. 

Some countries in the Global South could lose out if they are providing raw materials to impacted countries. Many countries provide things like copper, iron and coal to Chinese industry. These will be in less demand if Chinese industry slows down. 

However, other countries may benefit if trade shifts from the countries affected by higher tariffs to others. For example, when the Mexican garments industry faced increased tariffs during the last Trump trade war, Bangladesh saw exports to the US increase by 15%. Other countries in the Global South might experience similar benefits as companies look for cheaper sources of everything from cars to electronic components. 

How much the partners we work with will be impacted will depend on lots of different things: whether their country is affected as a whole, whether they are exporting at all, where they export to, whether they are impacted by falls in investment and so on.  

But there’s a bigger picture that is important for Global South countries. 

Global South countries have been calling for action on tariffs since the World Trade Organisation (WTO) was set up nearly 30 years ago. Their primary concern has been in the agriculture sector.  

When the Agreement On Agriculture was set up, countries agreed to ‘convert’ non-tariff supports that they offered to their domestic sectors, including subsidies, into tariffs, and then reduce them. The process for this was so confused and Global South resources so limited that they had no way of understanding the impact of different tariffs on their industries. The net outcome was that barriers to trade in agricultural produce have remained high, and differences between tariffs for raw materials and processed products have contributed to trapping the Global South into the production of lower value goods. 

A further injustice came in the form of the ‘Special Safeguard Mechanism’ which allows countries to raise tariffs to protect their domestic industries from being undercut by cheap agricultural imports. Bizarrely, the mechanism is only available to 39 countries – none of the world’s poorest countries (Least Developed Countries/LDCs) is part of the list and South Africa, Namibia, Swaziland and Botswana are the only sub-Saharan African countries that benefit from it. 

Outside of the WTO, wealthy countries have been pursuing bilateral deals with a range of partners. In these deals, they seek to reduce tariffs as much as possible. For LDCs, this poses a particular problem: many wealthy countries were allowed by the WTO to reduce all of their tariffs for LDCs to zero - but as they reduce tariffs to other countries, LDCs lose their advantage. For example, if the UK agrees a trade deal with India, it could impact on producers in Bangladesh because they will have to compete with lower-cost exports from India. 

Trump's tariff war doesn’t seem to have anything to do with trade. It’s not clear that any thought has been given to the trade impacts. However ,if the US did want to take action on tariffs in the trade system, sorting out the unfairness for the Global South at the WTO  mightbe a better place to start.