Tariff wars: what to do

Tariff wars generally go against the basic principles of the market economy, laid down by David Ricardo in the 18th century, but some still believe in them, like Donald Trump and his economist Peter Navarro. The countries affected by this war are going to fight back, and to do so they have many means at their disposal, sometimes contradictory, often complementary.

Helping affected companies

The first way is to help affected companies that risk closing down or putting some of their employees out of work. The idea is not to do this on a long-term basis, but to give these companies time to find new markets or redirect their production to other products.

The other way is to provide aid to help companies train to compete abroad.

Export missions

The export missions are organized by the government and are made up of politicians and businessmen. The idea is to establish cooperation agreements and open doors to people who would previously have been inaccessible to companies.

It’s then up to the businessmen to use all the means at their disposal to increase sales.

Tax all products from the target country in return

Taxing all the products of the “aggressor” country is the solution often used, and the arguments become the same as those of the protectionists:

• We punish the companies of the country that attacks us economically
• We replace imports from this country with our local market
• We defend our local industry and allow it to develop tax-free
• We protect our jobs
• We develop strategic independence.

On the other hand, this policy requires:

• the natural resources needed for the country’s autonomy

or

• trade agreements with other countries.

Remove all import taxes from the target country

Another theory is that all tariffs on imported products, even in retaliation against the “aggressor” country, are bad because it’s the consumers who will pay them and this will create inflation and reduce our competitiveness.

The advantages of not retaliating are as follows:

• Limiting inflation
• Protecting consumers
• Protect companies from a rise in the price of their raw materials, so that they can export to foreign countries at a good price.
• Limit possible retaliatory measures by the protectionist country.

Basically, their argument is: let the protectionists punish themselves, but we won’t do it for ourselves.

Selective product taxation

In fact, in my opinion, this is the best way to fight selectively and intelligently, penalizing the protectionist country while minimizing the consequences for us.

The principles are as follows:

• Exempt from import taxes the products we need, those for which we have no substitutes, for consumers and industry, so as not to penalize ourselves.
• Enter into agreements with other countries to limit the number of products on which we are dependent.
• Tax all products from the protectionist country that we are able to substitute with our own local production in order to protect and develop our industry.
• Target certain strategic sectors for taxation, such as Tesla or Starlink. The objective is both economic and political.

Simply check out the products that are taxed little or not at all, because they need them for their strategic businesses, such as health or arms, and target these products with export taxes. This is the way to hurt them most immediately, and it pays off too.

Of course, these taxes are not to be spent unnecessarily by the government, but returned to help local businesses grow.

Export taxes

It’s the strongest weapon, and the one most likely to anger the target country, which will itself threaten further retaliatory measures. Here are the steps:

• List the goods or raw materials needed by the other country, e.g. for the USA: rare earths for electronics, uranium, graphite, cobalt for electric vehicles, electric power, certain types of oil.
• Tax them heavily on exports, or even ban them. But beware, as we have seen with Russia, sanctions are circumvented by purchasing through non-target countries.

Non-tariff barriers

Non-tariff barriers are even more prohibitive, complementing customs duties:

• Import or import quotas
• Standards based on locally produced products and blocking others
• Licensing requirements in specific territories
• Administrative red tape: in some countries, this is a deterrent or requires the payment of bribes to obtain authorizations.

Combining quotas and tariff barriers

The combination of quotas and import duties is generally applied as part of an agreement between two countries to regulate trade in a flexible manner: a certain quantity of products is accepted, and above that a duty is imposed. For example, the United States and Canada reached an agreement on dairy products, allowing the Americans to export a certain quantity to Canada duty-free, but above a certain threshold a 300% tariff is imposed.

On the other hand, it is untrue to say, as the White House has asserted, that 300% rights exist, since in reality they are not applied, or only very rarely.

Local or country-specific product labels

There are three labelling options:

• Requiring retailers to visibly label products originating from targeted countries so that consumers avoid buying them is a fairly rare occurrence.
• But retailers who have tried this in Canada have been criticized by consumer organizations as a way of justifying price increases.
• Visibly labeling local products, as seen in many Canadian stores, is the most positive and effective way.

Boycott

The boycott of American products is even more effective than tariff barriers, since it is carried out voluntarily by consumers.

Boycotts are generally carried out in addition to import duties.

Agreements with other countries to protect themselves and hit the other country

Agreements between countries are the most effective way for small countries to retaliate against a big player.

These countries will work together to :

• List substitute products within the customs union
• Tax products that compete with these substitutes.
• Identify strategic products in the target state and impose export taxes.

Canada, for example, could risk seeing its economy collapse by fighting alone against the United States, which accounts for 80% of its exports, but an alliance with Europe would change all that. Canada could then :

• Exporting its rare earths, ores, aluminum and steel to Europe.
• Implement export taxes on these U.S.-bought products, with revenues earmarked for the construction of a pipeline to export oil and gas to Europe, and for the development of Canadian cars in Ontario.

In the same way, Europe would become independent of Russia and the Middle East for its oil, gas and rare earths.

Improve efficiency and productivity

The previous means are useless if we don’t take advantage of them to increase our government efficiency and productivity, which is the most important part.

To do this you need :

• Cut government spending with a DOGE-type project, but applied less harshly and more flexibly than in the U.S.
• Remove regulations that block business, with laws such that for every new regulation, ten have to be removed.
• Lower taxes for businesses and individuals
• Facilitate transport and internal competitiveness.

If Europe and Canada do this, they’ll be able to stand up to the U.S. If not, Trump will succeed in his gamble and attract investment and big business back home.

In conclusion

The easiest way to defend yourself is to check which products are not taxed by the United States, knowing that it’s because they need them, and that they’re the ones you need to put export taxes on.

Generally speaking, tariff wars aren’t good for anyone, apart from the short-term ones aimed at developing an industry; in the long term, they lead to inflationary unemployment.

On the other hand, it’s an extraordinary opportunity for Europe and Canada to stimulate their defense, pharmaceutical, digital and AI industries, to develop their strategic independence, and to renew themselves.

 

Jean-Pierre Mercier