Donald Trump's reciprocal tariffs: Running blind on a global tightrope

Last week, American President Donald Trump set the global trading system ablaze by imposing massive tariffs on countries/geographical regions with large trade surpluses with the United States (US), such as China, Japan, South Korea, Vietnam, India, and the European Union. The repercussions are mind-boggling. A month ago, I suggested: “Unless something changes, Trump is a huge threat right now, which is perhaps not being fully recognised.” In fact, way back in mid-November, I wrote: “It would be suicidal to assume that his promised actions would be tempered … Even if a part of Trumponomics is implemented, it will hit the rest of the world like a tidal wave.” This has now happened. As economists, policymakers, and businesses scramble to chart a dangerous and unpredictable future, they are first trying to discover a method in Mr Trump’s madness. What is he trying to achieve? Here is the logic from Trump apologists. 

The supposed method

  1. Force yields lower: The biggest problem for the US is its massive national debt of $36 trillion, of which $9.2 trillion must be refinanced in 2025. The only short-term fix for this is lower yields, which would mean lower interest payments. How can Mr Trump drive yields down or induce a massive buying of US bonds, especially when inflation rates are not low? By playing the madman, which creates tremendous uncertainty. Abnormally large tariffs create panic and a risk-off scenario, where investors exit stocks and buy US treasuries, thus lowering yields. What would help additionally is the US Federal Reserve cutting interest rates. This is why Mr Trump was yelling at Jerome Powell, chairman of the US Fed, to cut interest rates during the Fed’s press conference on Friday. 

2. Cut deficit: A lower yield will do nothing to reduce debt. Therefore, the second plank of Mr Trump’s strategy is to cut the deficit by apparently eliminating “waste and fraud” from the US Federal Budget. This is the work of Doge (Department of Government Efficiency), overseen by Elon Musk. Doge aims to slash $2 trillion from the US Federal Budget, which totals over

$6.75 trillion. 

3. Tariff revenues: The third plank of the strategy is to raise revenues. For Mr Trump, the most obvious revenue source is tariffs. According to the Trump camp, tariffs could generate $600-700 billion annually. 

4. Geostrategy: The next part of the strategy is supposedly to force negotiations with Europe, Japan, Australia, South Korea, and Taiwan — countries that depend on the US for their security — in a way that benefits US trade and investment. This is why the Trump team went after these long-standing allies first. 

5. Reshoring: The final plank of this strategy is to force exporters to make their products in the US. While there are no estimates on how much investment and how many jobs this will create, there are only a few pledges — from companies like Taiwan Semiconductor, Hyundai Motors, Nvidia, and Apple. 

What if the plan fails? 

Even assuming this is all well thought out, it is an extremely risky strategy, akin to running blind on a tightrope. For one, tariffs come into effect immediately and are so huge that significant costs will be passed on to US consumers and businesses. This could lead to an inflation spike and job losses. If inflation rates remain high, the Fed may raise rates, and the “lower-yield” plan will fail. The Fed can cut rates during a recession, but that would also lead to massive job losses and lower tax revenues. The savings effected by Doge could fall far short of target while causing massive disruption in US society. Mr Trump cannot have trade deals, tariffs, jobs, and reshoring all at the same time. If trade deals are struck, there will be no need for reshoring.  Reshoring will take years. As the Alcoa chairman has said, the company makes large investment decisions based on a 20- to 30-year outlook, not on months and years. Why would anyone commit to long-term investment in the US based on a presidential diktat when the presidency itself lasts just four years? 

The biggest issue is the assumption that while Mr Trump upends the existing order at his own will, “all other things will remain equal”. They will not. China, which is ruled with an iron hand, has an enormous capacity to endure pain, which most democracies don’t. It has retaliated with a 34 per cent increase in tariffs on US imports, sanctions on select US companies, and a ban on some rare earth exports that the US electronics industry depends on. China, the world’s largest holder of US treasuries, can even force yields up by dumping US debt. The People’s Bank of China has announced the digital cross-border settlement system will be fully connected to the 10 members of Asean (Association of Southeast Asian Nations) and six West Asian countries, which means that 38 per cent of the world’s trade volume will bypass the SWIFT (Society for Worldwide Interbank Financial Telecommunication) system, dominated by the US dollar. Reports say that SWIFT clears cross-border payments in three-five days while the Chinese system has a clearing speed of just seven seconds, possibly leading to a massive shift away from the dollar. 

It will be messy 

Countries will attempt to work out deals with the US. The deals will be messy, long-drawn-out, and likely to be capriciously altered. As the world learns of these negotiations in real time from Mr Trump’s social media handles, strategies will have to be drawn and redrawn, buffeted by mercurial shifts in his imperious demands, backed by outright falsehoods. The most likely outcome is higher tariffs, but at lower rates than the current ones, along with lower economic growth across the board — perhaps leading to a recession, lower US tax revenues, new trade alliances with China at the centre, and continued uncertainty. Not since Covid has the world faced such a dire threat to growth and stability. Equity markets, which are derivatives of business and economy, will react with extreme volatility to each twist and turn. Buckle up. 

The writer is editor of www.moneylife.in and a  trustee of the Moneylife Foundation; @Moneylifers