When Donald Trump was campaigning as a candidate for the US presidency, he often claimed that many countries were "taking advantage" of the US by exporting more products to it than they imported from it. Hearing this rhetoric, in my university courses I often pointed out that no one in the Trump team at the time was likely to have given much thought to global value chains. If they had, they would have known that, on a value-added basis, these trade balances are a much more balanced picture. Indeed, in some cases, such as Mexico, there is even a slight US surplus.

However, recent tariff increase announcements suggest that attention is being paid to global value chains after all. It seems that Trump's advisers now see not only the simple trade balance, but also the outsourcing of production capacity and the offshoring of industrial capacity as the reasons behind the decline of US industry and thus the trade deficit. This industrial decline is a major cause of dissatisfaction among the US electorate, as stressed not only by the Trump team but also by experts more closely associated with the Democratic Party, such as Paul Krugman. As early as 2007, he said: „It’s no longer safe to assert that trade’s impact on the income distribution in wealthy countries is fairly minor. There’s a good case that it is big, and getting bigger. I’m not endorsing protectionism, but free-traders need better answers to the anxieties of globalisation’s losers.”

A possible explanation

This suggests that one possible explanation for the tariff increases could be that the US is trying to break out of the global value chains. It is important to note, however, that the US has been one of the lowest tariff applying countries in the world so far - all its low (simple average just above 3%, trade-weighted average just above 2%) ad valorem tariffs are bound in the WTO (i.e. in principle it cannot touch them, if it does it has to compensate its trading partners, although the significance of this binding was already questioned during the previous Trump administration). These tariff increases that are effectively prohibitive, i.e. that effectively discourage imports, have a serious impact on global value chains, which are characterised by a high level of international trade.

Global value chains are international production networks within which multinational companies fragment production and divide it between different locations in different countries - in order to reduce costs. This is particularly prevalent in the automotive, machinery, textiles and clothing, electronics and chemicals, and certain service industries. The geographical "dispersion" of production phases results in a high level of external trade in components, semi-finished and finished products and some services. This is why the openness of a country's external trade, especially towards other countries in the global value chain, is of paramount importance. Participation can be facilitated unilaterally by the application of low tariffs and non-tariff trade restrictions or by participation in free trade agreements. However, if the level of trade barriers between members of value chains increases, the economic viability of international production networks is jeopardised and these arrangements may gradually disintegrate.

If this is indeed the reason behind the Trump administration's tariff hikes, it is worth examining whether this strategy could be a way to disconnect from global value chains and "lure" industry back home, and to what extent it is in the interests of the US economy. At the moment, it does not seem that this approach is necessarily appropriate. On the one hand, the uncertainty created by protectionist economic policies is in itself a disincentive to investment, whether domestic or foreign. On the other hand, the 'repatriation' of production does not bring back the mass of jobs that used to be created in industry, as technological progress, automation and robotisation mean that new investment requires only a fraction of the number of jobs that were created in the 1970s, 1980s or even 1990s. Even if the US market is large enough in itself to withdraw some capacity, losses of scale efficiency can occur here too. Some exporters may decide that the tariff burden will raise their selling prices so much that they will withdraw from the US market instead, leading to the disappearance of some products.

The price-increasing impact of tariff increases - with the risks of inflation, a reduction in real income for consumers or an increase in illegal trade - would require a separate analysis. And some US companies that organise their domestic and foreign production in global value chains will suffer a significant loss of competitiveness. The same can be expected for US manufacturers that rely heavily on imported parts and components, for example in the automotive sector. The impact on the rest of the world economy will depend on whether other countries follow the US example or continue to keep their economies open. Of particular interest could be the reaction of China, for which the US is the most important export market (with a share of around 13%). If Chinese exporters were to try to sell their such 'liberated' goods on other markets - even at depressed prices - instead of the US, this would create trade tensions. The US policy of tariff increases runs counter to the rules and spirit of the WTO, raising questions about the future of the multilateral trading system and the extent to which current developments will lead to an increased role of regional blocs in world trade.

Direct involvement of Hungary

According to data for the year 2024, the US is our 8th most important partner for Hungarian goods exports. It is important to note that it is the only non-EU member in the top ten (and the only non-EU member in the top 15, apart from the US, is Ukraine). Its share is over 4% in total exports.

Table 1 Top 10 Hungarian export partners in 2024 and their share of total Hungarian exports (%)

Source: KSH Information database, Product data by country of destination by SITC (EU-27_2020)

What products do we export to the USA? Presumably mostly foreign-owned subsidiaries operating as part of global value chains, are the main exporters: automotive, electronics and machinery products are listed among the top exported products. The exception is 'pharmaceuticals and pharmaceutical products', ranked 10th, where Hungarian-controlled companies may be involved. Another interesting feature is the strong concentration of exports at the product level: the top three product groups account for half of total exports to the US; the top ten for more than 80%. The share of US exports in total Hungarian exports of the given product group is significant for the top two, exceeding 10%. (For some product groups of lesser importance in total Hungarian exports, however, the US market is dominant. These are the case for more product groups in the SITC 3rd position breakdown (more than 260 product groups altogether): Works of art, collectors' pieces and antiques (46% of total Hungarian exports), Arms, parts thereof; ammunition (36%), Miscellaneous base non-ferrous metals and cermets used in metallurgy (35%), Paper pulp and paper making machinery, Paper cutting machinery and other machinery for making paper products; Parts thereof (27%), Precious metal ores, whether or not concentrated; waste, scrap and waste powders of precious metals (except gold) (25%), Tin (22%) and the top twenty exports Copper (20%). )

Table 2 Top 10 products (groups) in Hungarian exports to the US, 2024, SITC

Source: KSH Information database, Product data by destination country according to SITC (EU-27_2020) , 3 positions

The picture is even more interesting when looking at the product level (Combined Nomenclature, CN) rather than by product group and taking into account the duties applied so far. Tariffs (MFN rates) for the top ten products are typically low, in many cases 0%, with the highest for car tyres at 4%. Exports are highly concentrated, with the top five products accounting for half of exports out of some twelve thousand products, and the top ten products for 60%. For some of the top 10 products, the share of the US market in Hungarian exports is significant: almost four-fifths for generators (product 6) and more than 40% for the second-ranked automotive products. It is interesting to note that 32 of the products outside the top 10 are exclusively destined for the US - notable among these are exports of jet gas turbines. Although these do not appear to be large in volume and share, if a company manufactures them in Hungary, they could be severely hit by tariff increases.

Table 3 Top 10 products (groups) in Hungarian exports to the US, 2024, CN

Sources: KSH Information database, Product level data by CN (from 2015) and WTO https://www.wto.org/english/tratop_e/tariffs_e/tariff_data_e.htm (WTO customs data do not always correspond to the eight-digit accuracy of the CN categories reported by KSH)

The tables of course only include exports from Hungary directly to the US. The exposure of the Hungarian economy is significantly increased “indirectly”, through its heavy integration in global value chains, i.e. by parts and components that are produced here but incorporated in another country into a product that is subsequently exported to the US market. The magnitude of this can be very significant, e.g. linked to global value chains led by German companies. To identify such 'indirect' exports, it would be necessary to look at value-added trade data, but this is beyond the scope of this short post.

In conclusion, one of the possible goals of Donald Trump's tariff increase policy is to disconnect the US economy from global value chains and thus bring industrial capacity back to the country. Although the US has been one of the world's lowest-tariff economies, the protectionist turn is aimed at luring back production abroad, justified in principle by the decline of US industry and the loss of jobs. However, the strategy is of questionable effectiveness, as automation and the uncertainty that discourages investment mean that 'repatriated' or newly established factories will not be numerous and create far fewer jobs than expected, while the inflationary and international tension-increasing effects of tariffs are also to be reckoned with.

For Hungary, the United States was the 8th most important and the first non-EU export market in 2024, with more than 4% of total exports. Hungarian exports are highly product-concentrated: the first three product groups (vehicles, electrical machinery and data processing equipment) account for half of all exports to the US, and the majority of these are linked to global value chains, typically produced by foreign affiliates operating in Hungary. Some products that are less important in total Hungarian exports but have a strong presence in the US market (e.g. artwork, weapons, gas turbine components) may be particularly sensitive to tariff increases.

The majority of tariff rates applied by the US are currently low (typically 0-4%), so a tariff increase represents a significant additional burden. More importantly, however, a change in political and trade policy direction is an even larger risk for Hungary - especially given our significant export-oriented industries integrated into global value chains.

Magdolna Sass