Protectionism will ultimately backfire

Editor's note: This article was written by Wan Zhe, a research fellow at the Belt and Road School of Beijing Normal University. It reflects the author's opinions and not necessarily the views of CGTN. It has been translated from Chinese and edited for brevity and clarity.

For over two months, the already volatile global economic order has come under severe strain. The US has repeatedly resorted to aggressive tariff measures against its global trading partners. This protectionist policy appears to be the US's attempt to reshape trade rules, but in fact, delivers a systemic blow to the globalized industrial chain. It not only violates the multilateral trading rules of free trade and fair competition but also weaponizes tariffs as a negotiation tool—an approach that is bound to backfire.

Protectionism will disrupt the global automotive supply chain

Global supply chains will become increasingly fragmented and regionalized. The US's push for "manufacturing reshoring" through tariff hikes is directly forcing companies to restructure their supply chain strategies. In an effort to avoid tariffs, enterprises may begin readjusting their global supply chain layouts. Some are accelerating the shift of low- to mid-end production capacity to Southeast Asia, Mexico, and other regions, assembling vehicles in ASEAN countries, for example, before exporting them to the US market to circumvent tariff barriers.

Traditional automobile exporters such as the EU and Japan inevitably face a dilemma. If they continue exporting, they must bear the cost of tariffs or pass them on to consumers; if they relocate production, they must make massive investments. Following the US imposition of a 25 percent tariff on imported cars, companies such as Germany's Volkswagen and Japan's Toyota were compelled to adjust their North American supply chains, moving parts of their production from Mexico to the US. However, they now confront the dual challenges of high labor costs (US auto workers earn $35 per hour while Mexican workers earn only $4 per hour) and an underdeveloped supply chain infrastructure. German automakers, for instance, have limited capacity to build factories in the US, leaving them with little choice but to accept shrinking profit margins. Japan, where auto exports to the US account for 30 percent of total exports, could suffer estimated economic losses of 13 trillion yen ($90.4 billion yuan) due to the tariffs.

Emerging economies such as India and Brazil are even more likely to become direct "casualties" of the tariff war. India, which enjoys a $45 billion trade surplus with the US, will see its automotive, pharmaceutical, and other sectors hit hard by high tariffs. While North American automakers may seem to benefit, their operations are actually highly dependent on cross-border supply chains. On average, components of a single vehicle cross the US-Mexico border six times during the manufacturing process. Tariffs will force companies to restructure their supply chains, pushing up costs and eroding profit margins. The auto supply chain across the US, Mexico, and Canada now faces the risk of disruption due to tariff shocks, as compounded tariffs on components that cross borders multiple times drive up vehicle prices by thousands of dollars. In response, Canada has launched a $1.4 billion fund to support domestic auto parts manufacturing. While this "nearshoring" trend may help mitigate tariff risks, it also increases logistics costs and may slow the pace of technological innovation.

Trade protectionism will ultimately backfire on the US economy

The US has sought to use tariffs to force automakers to bring production back to the US. However, "protection" and "backfire" are two sides of the same coin for this measure. Tariff costs cascade along the industrial chain, creating a "price spiral" that increases the industry burden and intensifies structural tensions across society. 

After the US imposed a 25 percent tariff on steel and aluminum, raw material costs surged in downstream sectors such as automotive and aerospace. At Boeing, for instance, aluminum alloy makes up 22 percent of the production cost of its 737 MAX aircraft. Tariffs have added around $3 million to the cost of each plane. Ultimately, these added costs are passed on to consumers. Average car prices in the US have risen by 15-20 percent due to higher steel prices, while retaliatory tariffs imposed by Canada have driven up the price of American whiskey there by 40 percent. It should be noted that small and medium-sized enterprises have been hit the hardest. Among 100 US companies that import goods from China, 78 percent reported that tariffs had "paralyzed" their operations and undermined their ability to plan for the long term.

History has shown the world that any short-term gains from the US's protectionist tariff policy will be offset by long-term costs. According to estimates by the Peterson Institute for International Economics, Section 301 tariffs on Chinese goods have reduced US GDP by an average of 0.3 percent annually and led to the loss of 240,000 jobs. More profoundly, the efficiency of industrial supply chains has declined, global auto supply chains have seen logistics costs surge by 15 percent due to tariff-related adjustments, and in the semiconductor sector, fragmented production has lowered returns on R&D investment by 12 percent.

Tariffs have also exacerbated inflationary pressures in the US. Although the US government projects $100 billion in annual tariff revenue, those gains are likely to be wiped out by rising consumer prices. The Anderson Economic Group estimates that tariffs have added between $2,000 and $12,200 to the cost of certain car models. Meanwhile, according to the calculation by Deutsche Bank, even a modest effective tariff rate of 3.3 percent could lift US core inflation by 0.5 percent. In addition, tariffs on steel and aluminum have already pushed up US steel prices by 30 percent and aluminum prices by 15 percent, further inflating the costs in the manufacturing sector. The Organization for Economic Cooperation and Development forecasts that by 2025, US CPI will rebound to 2.8 percent as a result of tariffs, likely forcing the US Federal Reserve to maintain elevated interest rates, thereby dampening economic growth.