in-cyprus 9 February 2025 - by Xenia Tourki
Donald Trump never hid his plans.
To make America great, he wants to impose tariffs on those who don’t comply with his directives and those he considers harmful to the country’s interests. Canada, Panama, Mexico, and China are already in his crosshairs, with the European Union and potentially Britain next in line. It’s a difficult gambit as he aims to pressure both friends and foes to yield to his wishes while trying not to disrupt the US economy.
In an interview with Fileleftheros, Dr Panos Hatzipanayotou, Professor Emeritus of Economics at the Athens University of Economics and Business, notes that the American president is trying to achieve his goals through threats, though this doesn’t mean he won’t follow through with his words, or at least part of them. What’s certain is that such moves are pushing international trade into uncharted waters, with unpleasant consequences for all sides. Everyone will lose, he argued, if we end up in a trade war.
Countries like China, alliances like BRICS or the European Union will respond to Trump’s tariffs with similar measures. This means the production base will be hit, affecting employment and consumption, and consequently consumer incomes, who will bear most if not all of the burden of imposed tariffs. And all this without reason, Dr Hatzipanayotou noted, as it’s completely illogical and paradoxical for Donald Trump to try to solve problems like drug trafficking and illegal immigration by creating barriers to international trade and hurting both his country’s economy and those of other nations.
What does Donald Trump want to achieve by imposing tariffs?
Donald Trump has previously made moves that don’t align with the global order, such as withdrawing the US from the Paris environmental agreement or now pulling the country from the World Health Organisation. These are moves that show international isolationism and are, if I may say so, “painless”. However, with his moves on trade, we’re entering uncharted waters, as we don’t yet know which of these announcements will be implemented and how. They come into direct conflict with the entire edifice of the World Trade Organization. And things are very serious.
Obviously, it won’t be one-sided – there will be tectonic shifts in the global economic system. These won’t be mere tremors, and no side will emerge unscathed. It’s not a win-win situation but a lose-lose situation. What I see is that he wants to achieve, to implement his own electoral promises and is using every means to achieve this. He wants to show a tough character against those who, as he says, “don’t behave well towards America”. The other issue is that after this specific rhetoric, he must do something – he can’t just stick to words and threats, or he’ll lose much of his credibility. I believe the measures he takes won’t be as extensive as he’s currently saying, which is essentially frightening his interlocutors.
However, the pressure seems to be working, as Panama, Mexico, and Canada are complying with Donald Trump’s directives. Did these three countries really go along with the American president’s wishes, or was it a move for temporary de-escalation?
I believe the “compliance” as put by the Canadian Prime Minister and Mexican President means they want to take things from the beginning. Donald Trump says he has a problem with illegal immigration and drugs like fentanyl and methamphetamine, and that’s why he’s imposing tariffs. The problem is that while this might apply to Mexico, illegal immigration and drugs don’t flow from Canada to the US but the opposite. There’s a great irrationality here – his arguments have no basis regarding Canada.
It’s paradoxical to believe that imposing trade tariffs will succeed in stopping drug trafficking. What he’s doing is, as we say in Greece, “hitting the saddle to scare the donkey”. If there’s a problem, there needs to be closer cooperation and efforts focused on addressing it, rather than targeting something that endangers everyone’s prosperity, including his own country.
What will be the impact, the price if you will, on the economy and particularly consumers from the policy that the new American president is following, if he ultimately proceeds with imposing tariffs?
At the moment, it’s estimated that American households will face an additional cost of about $1,700 annually in product costs if the tariffs are ultimately imposed. The US is the world’s largest economy, which is why the turbulence will be significant both internally and externally. Let’s look at the external impact first. What will happen is that exporting countries will be forced to bear a significant portion of the tariff burden, as they’ll have to reduce their prices to remain competitive.
This is where major players like China and the European Union can respond with their own tariff impositions. This is the beginning of what we call trade wars. For the domestic economy, what we need to understand is that tariffs don’t just distort consumption but also the production base. Tariffs on imported products are likely to lead to their abandonment in favour of others that don’t match the economy’s capabilities and character. It’s not at all certain that when a country closes its borders in such an artificial way through high tariffs on imported products, its consumers will benefit. Note that the cost is estimated to reach 2% of US annual GDP.
Naturally, there will be other unpleasant side effects, isn’t that right?
There’s a risk of inflation increasing in the US from 0.7% up to 1%. The tariffs will impact final products. But tariffs might also be placed on intermediate products, such as microchips, which will be used to produce other products like mobile phones. The initial 20% tariffs could potentially become 30% and if it goes further, even higher. Therefore, the consumer cost won’t be the initial 20% of tariffs but much higher. The cost will cascade from one production stage to another. And at the same time, these moves won’t go unanswered – there will be retaliation. In the global market, there are other players who can reciprocate.
China has begun to show its intentions and responded with new tariffs. Do you think they will continue in the same vein?
Beijing won’t sit idle. There will be a trade war if Donald Trump proceeds further with his announcements, something that will affect the United States itself. However, discussions are taking place to avoid the worst-case scenario. Trump may shout and threaten, but he doesn’t immediately implement his threats. I believe, though, that China won’t be alone. We’re likely to see heterogeneous alliances forming because the common enemy unites its opponents, who will stand against the same problem. The EU knows it won’t receive better treatment from Donald Trump than the US, so why not join forces either with China or with BRICS? Even Britain, Washington’s quintessential good ally and friend, has received threats.
How can the Beijing-Washington trade war end?
If the US-China trade war escalates, we can’t expect anything good. And here I want to say that it was a clever move by China to signal that it will oppose and act within the framework of World Trade Organisation rules. This way, it’s calling on the international organization to take action, as many of its rules are being violated. At the same time, however, it proceeded with retaliation. This, as you understand, will create massive disruption in the global economy. It will be a very complex problem.
Although Donald Trump said he doesn’t care what the markets will do and that he’ll follow his chosen path, I believe that in the end, the markets will speak and impose their will, in a compromising way that will somehow satisfy all sides. But not at all to the extent of today’s announcements. This, of course, doesn’t mean we can say let Donald Trump shout and he’ll eventually back down. Certainly not. There will be reactions, and it’s likely there will be reactions from the American people themselves.
Impact on production, consumption and income
You’ve mentioned that the EU might form alliances to protect its interests. What else can it do, what other means does it have to react if Trump imposes tariffs?
The EU will impose corresponding tariffs, as it did in 2018 and 2019. Everyone’s reactions will be within the framework of tariffs and appeals against each other in global, judicial, legal forums which handle legal disputes between states, organisations, etc. But this will be unnecessary turmoil. When this tsunami passes, our equilibrium point will be more or less where we started. The gains will be very small. Meanwhile, I’d say we need to look at the substance. If someone has a problem with immigration, let’s discuss immigration. The same goes for drugs or anything else. Economic policy is nothing but medicine. For example, if I have cancer and take medicine for gastroenteritis, no matter the quantity, it won’t help.
However, many doubts are being expressed about whether the EU can resist Trump due to its internal problems.
What you’re saying is correct, but it mainly happens during periods of calm. Now, we’re in a kind of war that will hit both the French and the Germans and everyone else. I believe everyone will set aside their internal problems to face a common enemy. We might be talking about unholy alliances, but this will happen. Not because we’re friends and love each other, but because someone is threatening us. If we add China to the equation, then we become stronger to face the common threat.
The EU by definition is forced to engage as a united front; individual countries cannot act alone. And there’s another dimension – this time the issue affects Europeans’ pockets. All Europeans, which is why there will be unified reactions. US tariffs mean there will be a transfer of real purchasing power, real income from Europe, China, Mexico, Canada to the United States. So no country will easily accept such a thing.
If tariffs are ultimately imposed, what will be the consequences for European consumers?
The EU’s production base will be hit because we are largely an outward-looking productive force. We produce with an eye on international markets. EU trade with third countries is almost double that of intra-European trade. So, when a large economy restricts purchases of European products, there will be consequences for employment, incomes, and inflation in the sense that it might end up very low, leading to recession, which doesn’t provide incentives for production and business profits. If there’s no business profit, why should an entrepreneur produce? And without production, how will there be employment? And without employment and production, there won’t be consumption either.
Everything is a chain. That’s why I believe all this is understood by all sides. For now, everyone is taking a wait-and-see approach and waiting to see what will happen.
