Tariffs, Trade Wars and Fear America declares war on the world

By The Institute of Contemporary Economics

“In many countries controls and restrictions were set up without regard to their effect on other countries. Some countries, in a desperate attempt to grasp a share of the shrinking volume of world trade, aggravated the disorder by resorting to competitive depreciation of currency. Much of our economic ingenuity was expended in the fashioning of devices to hamper and limit the free movement of goods. These devices became economic weapons with which the earliest phase of our present war was fought by the Fascist dictators. There was an ironic inevitability in this process. Economic aggression can have no other offspring than war. It is as dangerous as it is futile. – Henry Morgenthau, Jr. US Secretary of the Treasury (1934 – 1945), Address at the Bretton-Woods Conference

The Fear Index

The announcement of the tariffs imposed by the United States on dozens of countries deemed as retaliatory and the rest of the world with 10% base tariffs has created a significant degree of uncertainty and volatility to the world economy. The Chicago Board of Exchange’s Volatility Index (VIX) (see chart) graphically illustrates the tumult that the unilateral imposition of these tariffs has caused. For context, the only other events which caused a higher level of anxiety were the 2008 financial crisis and the beginning of the covid pandemic.

A brief history of post-World War 2 international trade agreements

It is indeed ironic, in this age of Trump, to recall that the formulation of the pre-Trump world economic and international trade order was originated by America itself. The quote ⁽¹⁾ above from Sec. Morgenthau is notable for having linked economic aggression with the origin of actual wars.

The idea of international free trade as alluded to by Morgenthau was further buttressed by former US Secretary of State (1933-1944) Cordell Hull who said, “unhampered trade dovetailed with peace; high tariffs, trade barriers, and unfair economic competition, with war … if we could get a freer flow of trade…freer in the sense of fewer discriminations and obstructions…so that one country would not be deadly jealous of another and the living standards of all countries might rise, thereby eliminating the economic dissatisfaction that breeds war, we might have a reasonable chance of lasting peace”. ⁽²⁾

The seeds of our contemporary system of international trade was laid at the United Nations Monetary and Financial

Conference in 1944. Better known as the Bretton-Woods Conference, the meetings were held to find ways to regulate monetary and financial order in the post-World War 2 world. It was at this conference that the International Monetary Fund and the

International Bank for Reconstruction and

Development (now a part of the World Bank) were established. Among the other recommendations at this conference was the formation of the International Trade Organization (ITO) which was never formalized.

A more tangible act in the evolution of international trade came at the United Nations Conference on Trade and

Employment. The discussions at this conference led to the creation of the General Agreement on Tariffs and Trade (GATT) in 1947. The idea behind the GATT was the promotion of international trade by eliminating or reducing barriers to trade such as quotas and tariffs.

The GATT’s principles were eventually subsumed into a more robust and expansive organization which we now know as the World Trade Organization (WTO). The WTO was established in 1995 to regulate and facilitate international trade. Beyond being more than just an agreement (which the GATT was), the WTO is a permanent organization which oversees the rules, the system and provides for dispute resolution for international trade. It also has expanded the components of international trade beyond the trading of goods to the trading of services and trade-related intellectual property rights.

The Trump Tariffs

As this paper is being written, President Trump announced via his social media account that he was pausing the tariffs imposed this past week for 90 days except for that of China which has now been since increased to 104%.

What are tariffs?

Tariffs are a schedule of duties (taxes) imposed by one country on the goods of another country from which it is importing those goods from. Tariffs can be described as a tool in international trade to essentially make the imported goods more expensive.

Tariffs can be imposed by a country for a variety of reasons. It is resorted to primarily to protect domestic industries from international competition and/or for geopolitical reasons.

The tariff is paid for by the importer of the good or service. The importer then has the choice of absorbing the additional cost of the product (thus lowering his profits) or passing it on to the end users or consumers in the form of higher prices.

Trump’s reasons

The (often conflicting) reasons that Donald Trump has cited in imposing the tariffs include (1) to reciprocate (retaliate) for the tariffs on US goods being exported to other countries; (2) to bring back manufacturing to the United States by making the imported products more expensive thus inducing the manufacture of these products in the United States; and (3) as a negotiating tactic.

Reciprocal (?) tariffs

The basis for reciprocal tariffs to retaliate for the tariffs being imposed on US goods is misleading, at best, and an outright lie in most (if not, all) cases.

In his announcement of the tariff measures on April 3^rd at the Rose Lawn of the White House, Trump held a poster showing a table which outline the tariffs being imposed by different countries on US goods on one column and the US tariffs being imposed on these countries in the neighboring column (see graphic on this report).

The calculation for the “Tariffs Charged to the U.S.A.” is spurious and has nothing to do with the tariffs being imposed on US goods. It is instead a calculation based on this formula:

x = Trade Deficit of US with a country ÷ Total US imports from that country

The number derived is then divided by two (or multiplied by 50%) to get the reciprocal tariff imposed by the US on that country.

“x” is the percentage of the US trade deficit relative to the total imports from a country. It is not the tariff (+other non-tariff measures) being imposed by a country on the US.

As an example, the US exported $9.3 billion of goods to the Philippines in 2024 and imported a total of $14.2 billion. This leads to a trade deficit with the Philippines of $4.9 billion ⁽³⁾. Using the formula above:

x = $4.9 billion / $14.2 billion x = 34%.

Then this number is divided by two:

Reciprocal tariff = 34% * (1/2)

Reciprocal tariff = 17%

Voila! 17% – the reciprocal tariff imposed by Donald Trump on the Philippines.

The 17% is likely nowhere near the over-all tariffs imposed by the Philippines on US goods. While it has been difficult to sift through specific tariffs on US goods, an indicator is that Philippines imposes a trade-weighted MFN (Most Favored Nation) tariff of 5.4% ⁽⁴⁾.

The 34% representing the duties imposed by the Philippines on US goods also (supposedly) includes non-tariff measures

(NTM) such as dumping. Even with that,

WTO data ⁽⁴⁾ shows that the Philippines was only investigated once in 2023 for an alleged violation of anti-dumping rules.

To conclude, while the Philippines has a trade surplus with the United States this has not come about as a result of high tariffs nor non-tariff measures. Second, the basis for the calculation of the tariff imposed on the United States has no relationship to any tariff and is thus, untenable as a justification for the tariff imposed.

Manufacturing in the United States

Manufacturing has been declining as a share of the US economy since the 1950s. It peaked at between 21% to 25% in those years and has been closer to 10% in recent years.

Like many other countries, services are now the biggest component of the economy accounting for over 80% of GDP.  There is nothing unique or malevolent of this transition.

To endeavor to return to the levels seen during post war years is wishful thinking. The evolution of the global economy has, in many ways as it has morphed from the days of the Industrial Revolution to the Knowledge Economy.

The justification for onshoring manufacturing back to the United States is now only foolish from a strategic and historical perspective but even more so from a practical perspective.

At the very least, the blunt and abrupt use of tariffs to push this narrative does not give time for new manufacturing capacity to be established. It is also worth mentioning that the United States may no longer have the skilled labor of the type that these tariffs are targeting.

As an example, Vietnam, which was one of the countries to have been hardest hit by the paused tariffs exports a significant amount of T-shirts that are bought in the United States. Does the United States have the type of skilled labor required at the scale needed to replace this type of industry?

Even if these types of manufacturing activities were to be brought back to the US, the price difference in the cost of manufacturing the product would only serve to drive inflationary costs at the expense of US consumers.

Finally, the reality which the covid pandemic brought to greater consciousness is that supply chains are now global in nature.

A more measured approach targeting industries and the types of manufacturing to be developed in the US would have been more meaningful. Instead, the confrontational and unilateral approach adopted by the new US President only does damage to the American and global economies.

A negotiating tactic?

In his pronouncements announcing the 90day pause in the imposition of the tariffs, President Trump cited, as part of the reason for this, the (75) countries which have reached out to the United States to work out trade deals. It would be normal for some countries, including the Philippines, which have been shell-shocked to react to this “bullying” in this manner.

Countries and trading blocs (like the European Union), which, before this, have had no problems in their trade relationships with the United States are now scrambling for a logical response.

For someone who takes pride in “authoring” the Art of the Deal, it is quite ironic, but perhaps not surprising, that a key principle of doing deals and establishing relationships, trust, is simply cast aside.

And what is ultimately going to be negotiated? Is it that the dozens of countries and territories that were hit with the reciprocal tariffs buy more from the United States? What if these countries and territories simply can’t afford or have no use for what is being exported by America?

The inclusion of countries such as Myanmar (45%) and Vanuatu (23%) which have recently been hit by earthquakes or Syria (41%), which has yet to transition into a normal state after years of civil war point to the absurdity of these reciprocal tariffs. They are in no position to overcome the additional damage that these tariffs will do to their already fragile economies.

Implications for the Philippines

As the second-largest export market of the Philippines, the United States accounts for about 13% of total Philippine exports.

In 2023, the top exports ⁽⁵⁾ of the Philippines were Integrated Circuits ($28.9B), Office Machine Parts ($8.86B), Gold ($4.26B),

Insulated Wire ($3.6B), and Semiconductor

Devices ($2.96B). The predominance of Machinery and Electrical goods signify a risk to the companies exposed to this sector. In terms of geography, most of these companies at risk are located in the export processing zones in CALABARZON, the National Capital Region and Cebu.

The absurdity of this all

From the misleading poster to the intent of this action, the imposition of these tariffs are both illogical and irrational from an economic perspective. It does, however, serve both the domestic agenda and geopolitical ambition of Donald Trump from a signaling standpoint. This can end with a significant stand down by the US President by negotiating marginally better trade terms, a catastrophic trade war between China and the US or both. Having said that, it is quite difficult to read the intentions of the US President who has consistently shown unorthodox and damaging behavior.

For the Philippines, in particular, we propound that the tariffs being imposed are not grounded in facts and real data. While the country does have a trade surplus with the United States, these are not the result of some hidden agenda to keep American products from entering our markets. Rather it is the result of the impracticality of importing a significant amount of US goods based on geography and the need for these goods.

Philippine government response

The initial response by the Philippine government has been “diplomatic”. We are, however, disappointed in the seeming acceptance of the 17% tariff imposed on the country. Secretary Cristina Roque of the DTI was quoted as saying – “We just want to discuss also the possibilities on how we can strengthen the trade if they will lower down the tariff or how the other countries are reaching out to us to unite to be able to negotiate the imposed tariff. But for us, we accept the 17 percent, and we’ll see how it goes from there. I need to talk to my counterpart to clear things out. For now, we are not sure of course that the U.S. will lower their tariff for us,”. 

What is there to negotiate? Or to put in another way, what do we give the United States in return for lowering the 17% tariff on our goods? As we already pointed out, the Philippines, on average, imposes a 5% tariff on US goods. Do we propose 0% or no tariff on US goods? We hope that the Philippine government “politely” challenges the basis for the imposition of these tariffs in discussions with the US government. Other considerations for the Philippines

In previous reports, we presented data showing that the Philippines remains a net importer notwithstanding the trade surplus with the United States. There is a glaring need to strengthen the export promotion efforts of the Philippines. Beyond that, efforts should be made in diversifying our geographical markets and export products.

About 1/3 of our exports go to only 2 countries – the US and China. Despite being a member of ASEAN, none of the other ASEAN member nations figure as a significant export market for the Philippines. On the flip side, we did import a total of $11.4 billion of goods from Indonesia in 2023, making them the second largest source of imported items for the Philippines behind only China.

The European Union (EU) is another market that needs to be aggressively explored. Among the EU countries, only Germany is considered a significant export market accounting for about 5% of Philippine exports.

In terms of export products, about 45% of our exports are of intermediate electronic products used as inputs by final producers. Focus and investment is needed to develop end products for foreign retail markets to jumpstart diversification of our export product base.

Final thoughts

We believe that barriers to trade such as tariffs and NTMs are, on balance, a detriment to economic development. Tariffs do serve certain acceptable purposes such as the transitional and temporary protection of nascent industries as well as to retaliate for practices aimed by other countries at the Philippines.

The tariffs imposed by the United States, however, serves no rational purpose for the United States and the rest of the world. It represents a measure which undermines the work done in the past 80 years which the United States itself has led since 1944.

End Notes:

• Morgenthau, Jr., H. (1944, July 1). Address by the Honorable Henry Morgenthau, Jr., at the Inaugural Plenary Session.
• Hull, Cordell (1948). The Memoirs of Cordell Hull: vol. 1. New York: Macmillan. p. 81.
• Division, U. C. B. F. T. (n.d.). Foreign Trade: Data. Www.census.gov. https://www.census.gov/foreigntrade/balance/c5650.html
• World Tariff Profiles 2024. (2024, July 25). UNCTAD. https://unctad.org/publication/world-tariffprofiles-2024
• The Observatory of Economic Complexity. (2021). Philippines (PHL) Exports, Imports, and Trade

Partners. Oec.world. https://oec.world/en/profile/country/phl

The Institute of Contemporary Economics is a multi-disciplinary think tank which aims to be a credible thought leader in the policy-making space. It seeks to promote a vibrant and sustainable economic environment particularly in Western Visayas. This underlies a belief that a strong and healthy economy is a pre-requisite to uplifting the lives of our people. As a think tank, the Institute will be an organization that will use specialized knowledge to report on and perform research on a wide variety of subjects. It advocates for necessary interventions by using our research to influence public opinion and policymakers. Analytical reports produced by the Institute will play an influential role in helping decision-makers craft major policy agendas.