It happened. Everyone was afraid of it and hoped it wouldn't happen after all. The US announced tariffs on imports from every country in the world. Most have to reckon with a 10% tariff, with selected countries having higher, individually set tariffs. In addition, all car imports into the US face a 25 per cent duty.

Setting different tariffs for different countries looks as if it will help eliminate U.S. trade deficits with those countries. The larger the relative deficit, the larger the tariff. After all, the setting of tariffs by the US is not rocket science. One took the deficit in U.S. trade with a given country, divided by U.S. exports, took half of that, and rounded the result to the nearest whole number, with the minimum of that function set at 10 percent. Thus, for example, Cambodia has a tariff rate of 49 percent, Madagascar, 47 percent, and Vietnam, 46 percent. If the U.S. had not chosen a uniform tariff for EU imports, but had applied different tariffs for different EU countries, the result of the above formula for the Czech Republic would have been 5 percent, or 10 percent after applying the minimum.

Trying to equalize US deficits with individual countries is an economically "unusual" practice. It is a natural one. For example, I have a consistent trade deficit with our dining room. I pay for lunches, of course, I just don't deliver any goods to it while I take food from it. On the other hand, I am permanently in surplus at work. It's the same with countries. As long as the US needs Canadian oil, lumber, iron ore, aluminum and copper, their trade balance with each other will likely be negative from the US perspective.

In economics, it is a matter of ensuring that a country's overall balance to the rest of the world does not exceed the bounds of acceptable imbalance, otherwise natural adjustment mechanisms may kick in. However, these can sometimes be precipitous (currency crisis). Sound economic policy can help. Often, high government deficits and high external trade deficits, or more broadly current account deficits, go hand in hand. Wouldn't the US benefit from a fiscal diet rather than a tariff shoot-out?

However, it did. The logical question is what this will mean for us. The US seeks to reduce imports through tariffs, which from our point of view means a reduction in demand, all other things being equal. The US is not one of the Czech Republic's most important direct trading partners. In the ranking of exports from the Czech Republic, they rank only tenth with a share of 2.7 per cent, and our trade surplus with the US amounts to 0.2 per cent of GDP. There is, however, one catch, a crucial catch. In fact, the US is very important to us economically. If we look at foreign trade through the lens of value-added flows, we find that the U.S. is the third most important destination for value-added generated in the U.S. exports. The share of value-added exported directly and indirectly through subcontracting to other countries in total value-added exports is 6 percent.

If we stop at this point, we can count on negative real effects in the form of a slowdown in GDP growth by a few tenths of a percentage point, perhaps as much as 1 percentage point. But how will Europe respond? Borrowing tit for tat is not the best answer. Purely according to game theory, a better strategy is a generous tit for tat loan, where it is sometimes wise to give in and not repay. The question, however, is how much cold logic and economic rationality is at play on both sides.

Retaliatory tariffs should only come up as a last resort after the bargaining options have been exhausted. If they were to occur, higher inflation would add to the negative real economic impact. Slower growth and higher inflation is not an ideal outcome. Moreover, after the recent inflationary surge, central banks have become more cautious, especially those that have underestimated the fight against inflation, and fearful of raising inflation expectations and anchoring inflation at higher levels in the long run, they may not only stop cutting interest rates, but could start raising them again. Corporate investment is falling even at current interest rates. They would not benefit much from tighter monetary policy. Slower economic growth and higher interest rates would make it more difficult for European countries to invest more not only in defence but, above all, in increasing their competitiveness. And the US is showing that this will indeed be needed. Economists are fond of mentioning Adam Smith, at this point I would prefer to use Thomas Hobbes and his Homo hominis lupus, man to man wolf.