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In the 1930s, the Smoot-Hawley Tariff Act plunged the global economy into a recession. Signed into law by then-US President Herbert Hoover on June 17, 1930, this single act drove affected countries to take counter punitive measures leading to a crumpled global trade which spun the world into a full-scale trade war. It also heightened the Great Depression which had started in October 1929.
The economic wreckage brought by the Tariff Act of 1930 fired up feelings of economic insecurity or national pride, giving birth to protectionism and leading to extremism which eventually ignited World War II. During those times, nations were figuratively seen as cocooning to protect themselves. If history were indeed a great teacher, this event should have taught us that isolationism does not always bode well, not for the country that restricts international trade to benefit its domestic industries, but to all its trading partners as well.
Obviously, US President Donald Trump, less than three months into his second term, is not one to learn from history. Miffed by what he sees as his country’s trading partners taking advantage of the American coffers, he announced on Wednesday his so-called “Liberation Day” reciprocal tariff policies which took effect on April 5, using a formula based on trade deficits, an approach that bewilders many economists and investors. A 10% baseline rate of import tax is being applied globally, with higher tariffs on many countries that made it to Trump’s list of his perceived “worst offenders” or those with the heftiest trade disparities with the US, such as the European Union, China, Vietnam, Thailand, Cambodia, and South Africa.
Trump’s sweeping new tariff plan sent global stock market plummeting on fears that it could trigger a sharp uptick of trillions of dollars in goods transported yearly to the US from other countries. On Thursday, even the US stock market suffered its worst daily loss since 2020. Much like what economists during Hoover’s time cautioned, today’s economists are predicting that American consumers will suffer the most. Experts see a protracted global trade war where nations sniping at each other will subvert supply chains, fuel inflation and foster affected nations to band together and isolate America.
Trade disruption or economic revival?
Trump’s tariff strategy is primarily aimed at restructuring US trade relationships and bolstering domestic manufacturing. This policy introduces a universal 10% tariff on all imports, with significantly higher rates for countries with substantial trade imbalances with the US. Notably, the European Union faces a 20% tariff; China, 34%; and various Southeast Asian nations which are subjected to elevated rates, including Cambodia at 49%, Vietnam at 46%, Thailand at 36%, Indonesia at 32%, Malaysia at 24%, the Philippines at 17%, and Singapore at 10%. Trump characterized these measures as “reciprocal,” stating: “They do it to us, and we do it to them. Very simple — can’t get any simpler than that.”
The Republican-controlled administration’s intent is to address perceived unfair trade practices and reduce the US trade deficit by encouraging domestic production. From the eyes of the protectionist sector in Trump’s inner circle, the goal of revitalizing American manufacturing is commendable. But Vantage Point sees the approach of imposing broad tariffs raises several concerns:
- Economic impact on US consumers and businesses. Tariffs function as taxes on imports, leading to increased costs for US businesses that rely on foreign goods and higher prices for consumers. Economists warn that such measures could fuel inflation and potentially slow economic growth. For instance, the automotive industry may experience an average vehicle price increase of 11% to 12% due to these tariffs.
- Global trade relations and retaliation risks. The imposition of steep tariffs is likely to strain relationships with key trading partners. The European Union has already signaled readiness to implement countermeasures, with European Commission President Ursula von der Leyen emphasizing that the EU is prepared to respond accordingly. Such retaliatory actions could escalate into a full-fledged trade war, adversely affecting global trade dynamics.
- Effectiveness in achieving stated goals. While the tariffs aim to protect domestic industries, history suggests that protectionist measures often lead to inefficiencies and may not result in the desired resurgence of manufacturing jobs. Companies might seek alternative strategies, such as relocating production to countries not affected by the tariffs or investing in automation, which may not yield significant employment gains.
The Trump administration, however, is betting that any short-term pain will be worth it.
Impact on Southeast Asian economies
The newly announced tariffs have profound implications for Southeast Asian nations, many of which have substantial trade surpluses with the US.
- Export challenges. Countries like Vietnam, Malaysia, and Thailand, with significant export exposure to the US, are particularly vulnerable. Vietnam, for example, has the fourth-largest trade surplus with the US, making it a primary target for higher tariffs. Malaysia, heavily reliant on semiconductor and electronics exports, could see disruptions in its key industries.
- Influx of diverted Chinese goods. With the US imposing a 34% tariff on Chinese imports, there is a likelihood of Chinese exporters redirecting their goods to Southeast Asian markets. This influx could saturate local markets with cheaper Chinese products, posing competitive challenges for domestic industries and potentially leading to trade disputes within the region.
- Supply chain realignments. The tariffs may prompt multinational companies to reconsider their supply chain strategies, such as relocating their capital and manufacturing operations elsewhere. Not surprisingly, the EU has expressed strong opposition to Trump’s measures. European Commission President Ursula von der Leyen highlighted the potential global repercussions, stating that the tariffs could lead to increased prices for essential goods and have devastating effects on developing countries. The EU, she emphasized, is ready to implement countermeasures, particularly in sectors like steel. She called on member-states to stay committed and united in navigating the challenges posed by the US actions.
The financial markets reacted negatively to Trump’s reciprocal tariff plan. Major indices, including the S&P 500 and Nasdaq futures, experienced declines, reflecting investor concerns about the potential for escalating trade tensions to hamper economic growth and corporate profitability.
The United Kingdom’s FTSE 100 share index was down 1%, while France’s Cac 40 fell 1.7%. Earlier, Asian markets had slid, while the price of gold — seen as a safer assets in times of turbulence — climbed to a record high.
Markets across Asia had fallen sharply after Trump’s tariff announcement, with the Nikkei in Japan closing down nearly 3% and Hong Kong’s Hang Seng index, 1.5% lower.
The price of gold hit a record high of $3,167.57 an ounce at one point on Thursday, before falling back.
On Thursday, April 3, the Philippine stock market joined other global markets that reeled following the Trump administration’s announcement of reciprocal tariffs on the America’s trading partners. The Philippine Stock Exchange index (PSEi) fell by 1.63% or 101.95 points to close at 6,145.73, while the all-shares index shed 1.09% or 40.71 points to end at 3,664.41.
President Trump’s aggressive global tariff regime against imported goods from some of America’s closest allies drew strong retorts across the globe. Most of the world’s largest economies and longstanding US allies reacted with a mixture of disbelief, anger, and despair as they vowed retaliatory tariffs and detailed some of the measures they plan to use to soften the blow to their own economies.
Based on how the White House is calculating duties on US exports, as well as “non-monetary” trade barriers in response to countries which manipulate their currencies or serve as “pollution havens,” exporters to the US will now face taxes as high as 54%.
Antonio Fatas, a macroeconomist at the INSEAD business school in France, views
it as a drift of the US and global economy towards worse performance, citing that there will be “more uncertainty [with the possibility of] heading towards something we could call a global recession.”
While Trump’s tariff escalation primarily targets countries with strong trade ties to the US, such as China, Mexico, and Canada, its indirect effects on the Philippines will be significant across several channels.
One possible effect is trade diversion. As US buyers seek alternative suppliers for products affected by tariffs on Chinese goods, the Philippines may see short-term benefits, but only if Philippine goods escape the onslaught of Trump’s tariffs.
However, if tariffs trigger a broader slowdown in US and global demand, Philippine exports, particularly electronics, garments, and processed food, could suffer. With Trump’s protectionist stance, “Buy American” policies may make it even more difficult for Philippine exports to compete in US markets.
As far as the Philippine business process outsourcing (BPO) industry is concerned, the effect may be less direct, but still significant. As a key driver of economic growth, the sector depends heavily on US clients. American companies facing higher costs due to tariffs might scale back on spending, which would potentially reduce demand for Philippine call centers and Information technology services. The upside to this is that the services trade is less vulnerable than trade in goods. Outsourcing remains a cost-saving measure for US firms. While onshoring policies could encourage US firms to bring jobs back home, the impact on BPO employment may be less severe than the disruptions in goods exports.
Foreign investment uncertainty in Southeast Asia will also have a significant impact. A global economic slowdown could cause multinational companies to delay expansion plans, causing limited job creation and technology transfer in the Philippines. Since investors tend to avoid volatile environments, sustained trade disputes could undermine confidence in emerging markets like the Philippines.
The pressure on prices and consumers is likewise a consequence of Trump’s reciprocal tariff scheme. Contrary to his claims, tariffs are not paid by foreign firms but by US importers who pass the costs on to producers and consumers.
As consumer prices increase in the US due to higher tariffs, there will be a reduction in purchasing power and slowing of demand for Philippine exports. If job losses increase in the US, the Philippines will also see a decline in remittances from overseas Filipino workers there. Trade uncertainty and a weakened dollar could also push up the cost of imported goods, such as fuel, food, and electronics, which will contribute to inflation.
Geopolitically, the Philippines may likewise feel the effects of shifting global alliances. As China seeks to counterbalance US tariffs, it may deepen trade ties with ASEAN nations, including the Philippines, through trade agreements and infrastructure projects. While this presents economic opportunities, aligning too closely with China could create diplomatic challenges, forcing the Philippines to carefully manage its relationships with both major powers.
The potential for increased consumer prices, strained international relations, and adverse effects on global trade and capital markets cannot be overlooked. Southeast Asian economies, in particular, face challenges from both reduced export opportunities and the risk of market saturation from diverted Chinese goods. A more nuanced approach, emphasizing negotiation and targeted measures, may be more effective in achieving sustainable and mutually beneficial trade relationships.
This piece is written with inputs from Washington-based fund manager, Eric Jurado of the International Investor.
Val A. Villanueva is a veteran business journalist. He was a former business editor of the Philippine Star and the Gokongwei-owned Manila Times. For comments, suggestions email him at mvala.v@gmail.com.
