President Donald Trump once again caught global financial markets off guard when he suddenly tweeted that he would be restoring tariffs on steel and aluminum exports from Argentina and Brazil. He defended the decision by pointing out that the South American countries are devaluing their currencies, leaving U.S. industries at a disadvantage.
The president also took a swipe at the Federal Reserve, urging the central bank to lower interest rates and loosen monetary policy more than it is doing today. Trump repeated his stance that the Fed needs to mirror the measures employed by other central banks that have reduced the value of their currencies against other pairs on foreign exchange markets.
Brazilian President Jair Bolsonaro confirmed that he is meeting with his Economy Minister Paulo Guedes to discuss the tariffs. Bolsonaro did note that he maintains “an open channel” with President Trump, but it is unclear if he will be able to dissuade the U.S. president.
Both nations received exemptions from the 25% steel tariffs and the 10% aluminum tariffs introduced in May 2018.
What is a Tariff?
A tariff is a tax applied to imports (bringing in) or exports (sending out) of goods and services between two countries. There are many purposes behind tariffs. They can protect a country’s industry from foreign competition, apply political pressure to trading partners, and raise money for the government.
Some economists say that tariffs do not work because they raise prices and therefore hurt consumers and businesses in the country that is imposing these taxes. Those who support tariffs argue that the taxes are needed to prevent unfair trade. Also, depending on the size of the two countries, tariffs can seriously impact global commerce.
In December 2018, President Trump referred to himself on Twitter as a “Tariff Man.” He has used this powerful trade tool as a form of pressure to garner influence over friends and foes. So far, the results from his tariffs have been mixed.
Earlier this year, Trump threatened to apply tariffs to Mexican goods unless that country curbed illegal migration to the United States. Mexico agreed, and the tariffs were suspended indefinitely. For the last 18 months, Washington has slapped tariffs as high as 30% on hundreds of billions of dollars in Chinese goods, and even with a trade deal on the horizon, Trump has not reduced the pressure.
Overall, the president has used tariffs to his advantage more than any of his predecessors. We can only objectively measure the results once the smoke has cleared and the dust has settled.