Last week, I discussed how Trump was using tariffs in economic policy. I explained that the administration aims to pass a significant, comprehensive bill: an omnibus bill, which includes the Reciprocal Trade Act; reduces the corporate tax rate to 15% and imposes a 10% revenue tariff by April. I also showed that, despite commentary to the contrary, this tariff revenue was not inflationary, contributing a maximum of 0.8% to the US Consumer Price Index (CPI).
However, this week what we've seen is that Trump has used tariffs not for economic purposes but rather for social policy, in attempting to address the social crisis in the United States. This social crisis helps explain much of how Trump was elected and why he now has substantial support.
This situation began in 2000 when China entered the World Trade Organization, which allowed its exports to enter the US market. At the time, tariffs were exceptionally low, around 1–2%.
Over the next decade, the US experienced deindustrialisation. 12 million American workers losing their jobs and never got them back. This created a significant social crisis in the US, contributing to a social collapse. This collapse led to a massive increase in drug dependency, particularly within the American working class. A key work on this issue was written by Nobel Prize winners, Sir Angus Deaton and his wife Anne Case in 2020, titled Deaths of Despair.
In the book, Deaton points out that the US overdose deathrate increased from under 20,000 before 2001 to 92,000 in 2020. Overdose deaths rose further to 108,000annually by 2024. Notably, young men are twice as likely to die from these drug overdoses as young women.
Peter Navarro, Senior Counsel Trade and Manufacturing in the Trump administration, made his career at Harvard researching American trade with China. He claims that 76,000 of those drug deaths are directly linked to fentanyl use. From a social policy perspective, Trump's recent actions, including threatening to impose a 25% tariff on Mexico and Canada within a month and introducing a 10% tariff on China, reflect a shift towards addressing the flow of fentanyl into the US. This is not simply a trade war but, as Navarro asserts, a "drug war" aimed at reducing the influx of fentanyl and fentanyl-laced drugs.
In response to these threats, Canada has pledged $1.3 billion to police its border, and Mexico has committed 10,000 troops to patrol its border. I would bet that no 25% tariffs will be imposed on Mexico and Canada in fact, I am highly confident of this. Fentanyl, which is involved in most drug-related deaths, primarily originates from Mexico and is produced with chemicals from China. The 10% tariff in China could be a precursor to a similar revenue tariff later in the year as part of the omnibus bill. Remember, Biden before he left office, already levied a 100% tariff on Imports of Chinese Electric Vehicles into the US.
Historically, during Trump's first term, Trump had a meeting with Chinese President Xi Jinping, who promised to reduce the flow of basic chemicals to Mexico that were used to produce fentanyl. However, in response to the latest 10% tariff, China has stated that "fentanyl is a US problem "and has declined to cooperate as it had promised in the past.
The key question now is whether US tariffs on China will harm Australian exports to China. Australia's Iron Ore Exports to China are valued at $84 billion annually. China's steel Industry is the largest in the world.
Will US Tariffs on China damage Chinese steel exports? When we examined Chinese exports of steel last year, we found that very little Chinese steel is exported to the US. According to US data, the majority of Chinese steel is exported to the Indo-Pacific, with Vietnam being the largest importer (at 9.96%), followed by South Korea (9.1%), Thailand (5.3%). the Philippines (5.2%), Indonesia (4.5%), Türkiye (4.4%), The UAE (4.0%) and India (3.2%). The amount of Chinese steel sent to the US is minuscule. Therefore, it is difficult to see how any US tariff on Chinese steel would have a significant impact on Australian exports to China.
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