The study emphasizes questions about how the US should engage with other countries regarding tariffs and trade.

Since January, the Trump administration has imposed many new tariffs and restrictive trade measures, including tariffs on steel and aluminum and increased imports from China. The administration has also temporarily suspended tariffs that are temporarily suspended in Mexico and Canada. In response, the European Union, Canada and China have imposed retaliatory tariffs on US exports.

There will be more tariff announcements. The suspension of tariffs between Mexico and Canada is expected to expire on April 2nd, with the US Department of Commerce scheduled to announce plans for “mutual tariffs” in early April.

To understand these policy changes, Robert Johnson, an associate professor of economics at Brian and Jeannell Brady at the University of Notre Dame, explained how tariffs affect the world economy and what this means to be involved in world trade.

“There is now a general reassessment to the extent that the US is engaged in trade with other parts of the world,” Johnson said. “Many of that involves raising tariffs to essentially free the United States from the global economy, a major fundamental change in our trade policy.”

At the same time, Johnson emphasized that the economic costs and benefits of tariffs differ from the past due to the increase in the global value chain. In the global value chain, various production stages are carried out by different countries, from design and procurement to manufacturing, marketing and distribution.

This type of linked integrated production occurs across borders in many industries, but the North American automotive industry stands out. Cars assembled in the US contain a large amount of imported parts, components and materials. Similarly, cars assembled in Mexico and imported by the US contain parts and components produced by US suppliers.

As a result, Johnson proposed that tariffs could destroy supply chains, raise prices and threaten job security, and that markets and consumers could impose tariffs and cause trade wars with their neighbors. The importance of global value chains and trade policy is explained in the journal article. Review of Economic Research, written by Johnson, Emily Blanchard of the Tax School of Business at Dartmouth College, and Chadbowen of the Peterson Institute for International Economics.

“The cost of increasing tariffs is high and profits are lower than if US producers were not integrated into the global value chain,” Johnson said.

Through these interconnected world trade networks, Johnson highlighted three mechanisms in which tariffs can damage US economic interests.

Customs duties on imported parts that enter US production

The main purpose of the tariff is to have consumers buy locally and support US manufacturing, Johnson said. However, from the perspective of US producers, many companies need to import items from either Mexico or Canada to use them to produce US-made goods. Tariffs on these imports will increase production costs and create intense competition.

Johnson said it would “reduce demand for products” both at home and abroad, because companies have high production costs. “The tariffs placed on inputs are said to be large and bad for US manufacturing.”

Customs duties on imported finished products including foreign parts

Johnson said if tariffs are placed on imported finished goods (cars, t-shirts, televisions, etc.), the goal is to shift consumer spending from imported goods to domestically produced goods. Even here, there is a significant hidden impact on the existence of the value chain.

The tariff goal is for consumers to buy more US-assembled cars instead of assembled cars in Mexico, while US-assembled cars use Mexican and Canadian parts, while Mexican assembled cars contain US parts. Some of the benefits of tariffs are leaking back to foreign auto parts suppliers, as US cars contain imported parts, Johnson explained.

“This will result in a change in demand that results in tariffs not appealing to the government,” he said.

Another way to see it, Johnson said, is that when you raise tariffs on foreign imports in the hopes of increasing the number of cars that will be assembled in Michigan, some of the value of those assembled cars is actually Canadian.

“In effect, we are supporting Canadian auto parts suppliers. For example, Canada’s value embedded in Canada. For example, tariff benefits will return to Canada.”

Johnson uses the same example of the automotive industry to say that if a car is assembled in Mexico and there is tax on imports from that country, what happens if a Mexican-made car is made from parts and materials made in the USA?

“In Ohio or Michigan, there are auto parts and engine companies that send those parts and materials to Mexico, where they are used to assemble cars, and then those cars are re-exported to the US,” Johnson said. “When we tax cars across the border from Mexico to the US, we implicitly tax that Mexican car assembly company on the supply of US parts.

Tariffs for multinational corporations, including US-owned companies located overseas

The third example where imposition of tariffs can cause global pain is when US companies own foreign companies. For example, Johnson said that if Ford or GM owns an auto assembly plant in Mexico, he is engaged in foreign direct investment by building that plant. When the US places tariffs on imports from Mexico, we are actually hurting GM and Ford.

“The more globalised ownership structures, the more globalised the value chain, the less attractive it is to raise tariffs,” Johnson explained.

Technological change affects trade decisions

Johnson said the amount of value chain activity has increased significantly across borders over the past decades. The 1980s weren’t as connected as today. Technological changes in communication and information sharing have made it much easier to coordinate production and move goods across borders, thus increasing connectivity.

“It helped us to further deepen our national value chain,” Johnson said. “And we now live in this world and have these built-in costs as a result of global value chain integration, which may not have been in the past. The right things to do in the 1980s would have been very different from the right things to be done today.”

As the new administration is working on how tariffs are utilised courtesy of the US, Johnson says that the current approach to cooperation with Canada and Mexico takes into account some of our closest partners — “has not been tested, to say the least,” appears to be contrary to years of interest in cooperation within North America.

“Given that we are in this period of reevaluation, I think it’s important to think broadly about how the US should engage with the world,” Johnson said. “The United States has great benefits from the global trading system, a system designed and built into the interests of America’s economic and foreign policy. I think we should pause and look back on the way it flourished through our involvement with partners and allies around the world before we tear it apart.”