In this video, Shang-Jin Wei, the N.T. Wang Professor of Chinese Business and Economy at Columbia Business School, explains how the Trump administration's tariffs are expected to harm businesses and consumers by driving up the costs of goods and services.
However, like a natural disaster, their impact can be anticipated, allowing for preparation to mitigate the most harmful effects.
Watch the video here and read an edited transcript of the interview below.
CBS: Why do you compare Trump’s proposed tariffs to a Category 5 hurricane?
Shang-Jin Wei: Trump’s tariffs are like a hurricane because they harm firms and households by raising the cost of living, or cost of production, both in the U.S. and in other countries. At the same time, they are also very harmful to the functioning of a global trading system. But just like natural disasters, one can also prepare for them to mitigate their harmful effects.
CBS: Are retaliatory tariffs a smart strategy for U.S. trading partners?
Wei: The retaliatory tariffs considered by other countries are not very attractive for two reasons.
Number one, most countries rely on their trade surplus against the U.S., meaning they export more than they import from the U.S. So there's a narrower range of goods to choose retaliatory tariffs from, relative to what the U.S. can do. That makes it less attractive.
Number two, higher tariffs imposed by partner countries are also harmful to their own citizens and firms. For those reasons, retaliatory tariffs are not the ideal things to go for.
CBS: What impact could China’s mineral export restrictions have on the U.S.?
Wei: If a country does not impose retaliatory tariffs, it has to look for non-tariff ways to respond. In the case of China, because it has a near-monopoly over rare earth and some other mineral resources, it can choose to restrict exports of those resources to the U.S.
That's more attractive than retaliatory tariffs, because on the one hand it raises cost of production for U.S. firms. At the same time, it raises profit for those mineral exporting firms in China. That makes it more attractive than retaliatory tariffs. Other countries may also look for similar non-tariff tools.
CBS: How else might other countries counter the effects of U.S. tariffs?
Wei: The European Union is also exploring non-tariff responses to Trump’s tariffs. Under its anti-coercion clause, the E.U. has the authority to temporarily suspend protections for U.S. intellectual property rights. For example, it could halt royalty payments to companies like Netflix, Microsoft, and other U.S. firms that rely on intellectual property protections.
Additionally, the E.U. could restrict market access for U.S. investment banks, credit rating agencies, and other financial services firms. Since the U.S. has a stronger financial services sector than many other countries, such restrictions would likely have a greater negative impact on U.S. firms than on their European counterparts.
CBS: Is President Trump overestimating the leverage the U.S. has in trade negotiations?
Wei: President Trump's tariffs are also counterproductive from the point of view of the U.S. Other countries' retaliatory measures can clearly hurt the profits of U.S. exporting firms, but higher U.S. tariffs also mean higher costs of living for American households and higher production costs for U.S. firms. On top of that, by undermining the global trading system, they could eventually harm U.S. firms as well, since global trade rules are designed to protect everyone.
CBS: Could tariffs influence interest rates?
Wei: The Trump tariffs can also affect the world economy through an interest rate channel. Higher tariffs in the U.S. tend to raise goods prices more than they otherwise would if the U.S. Federal Reserve chooses to do nothing. However, the Federal Reserve is unlikely to remain passive.
If the Federal Reserve responds by raising interest rates, it could trigger a global retrenchment of liquidity, potentially leading to a wave of bankruptcies for firms and governments with high levels of dollar-denominated debt. Even countries with low dollar debt could be affected if their central banks follow the Federal Reserve’s actions, as they often do. As a result, households and firms in those countries may also suffer due to this interest rate channel.
CBS: How might tariffs impact U.S. households?
Wei: Trump tariffs are harmful to U.S. households, and many households have already started to notice that the prices of products coming from Canada, Mexico, and China are higher than before, in grocery stores, or in department stores. Once the 25 percent tariffs on Canadian and Mexican goods are in place, we'll see very clearly high prices of products coming from those places.
In addition, even for products made in the U.S., prices can also go up due to the Trump tariffs. That's because in today's world, American firms use globally sourced inputs. So even for a product that carries a “made in U.S.” label, the underlying inputs, parts and components, could come from Canada, China or some other country. Therefore, the Trump tariffs can also make production costs for those products higher.
And households will, sooner or later, see higher prices, or a higher cost of living, from the Trump tariffs.
