Trump's global shake-up: Tariffs, alliances, and economic turmoil

The world order is witnessing today what I would describe as “The Great Dismantling.” The global financial crisis in 2008–2009 was called “The Great Deflation.” The pandemic in 2020 was called “The Great Lockdown.” These events had huge economic consequences but did not disrupt the global order. Once the world recovered from them through coordinated fiscal and monetary policy and rapid vaccine development, it returned to some sense of normality. That world order, which emerged after World War II, is now being dismantled despite continuing American pre-eminence — not by opposing powers, but by an American President who thinks the world, including his allies, has taken the US for a ride.

 

Mr Trump’s slogan is “Make America Great Again.”  His weapons in this quest include withdrawing from existing global agreements (Paris climate accord) and institutions (World Health Organization), ask allies to pay more (North Atlantic Treaty Organization) by raising their defence spend to over 2 per cent of gross domestic product (GDP), impose higher tariffs to reduce the large US trade deficits, and deport millions of illegal migrants. He has initiated a six-month review of US support for all UN agencies, including the World Bank and the International Monetary Fund, despite the US’ considerable control over them.

 

The trade-weighted US tariff of 2.2 per cent is lower than that of any of its trading partners, except Japan at 1.7 per cent. The European Union’s stands at 2.7 per cent, China at 3 per cent, Canada at 3.4 per cent, Mexico at 3.9 per cent, Vietnam at 5 per cent, Brazil at 6.7 per cent, South Korea at 8.4 per cent, and India—labelled by Trump as the “tariff king”—at 12 per cent. But Mr Trump has imposed steep tariff increases. He has instituted a 25 per cent tariff on steel and aluminium imports, an illogical 25 per cent tariff on Canada and Mexico despite a comprehensive trade agreement with them, an additional 10 per cent tariff on China, and announced reciprocal tariffs on countries like India, Japan, South Korea, and the European Union. As China retaliated against the initial 10 per cent tariffs with duties of up to 15 per cent on US agricultural exports, he responded by announcing an additional 10 per cent tariff increase.

 

As a result, prices will surely rise, interest rates will remain higher, and global growth may slow down. Economic policy and trade uncertainty indices have risen, and equity markets are dropping sharply. Mr Trump is also exerting control over previously independent agencies designed to protect consumers and regulate the economy. With weakened regulation, investment may initially rise but will decline over time, ultimately slowing the US economy. If most countries retaliate, as China and Canada have done and Mexico is likely to, the world economy could spiral downwards. In 1930, a similar set of tariffs — the so-called Smoot-Hawley tariffs — led to a global trade war and eventually the “Great Depression.”

 

Within the US, the newly created Department of Government Efficiency is slashing entire government agencies, such as USAID, and firing thousands of civil servants. Mr Trump’s tariffs, along with expenditure cuts, are intended to help fund his over $4 trillion tax cut for the wealthy. While urging allies to spend more on defence, he also plans to cut the US defence budget by 40 per cent over five years and has suggested that Russia and China follow his lead — including in reducing nuclear weapons. Mr Trump has weakened Nato in a sellout of Ukraine, remarkably similar to his controversial deal with the Taliban in Afghanistan. This calls into question US alliances worldwide. Europe will almost certainly increase defence spending, as will Japan and South Korea. The UK has already announced an increase to 2.5 per cent of GDP.

 

Mr Trump has opened the door to imperialist land and mineral grabs. He wants to take over Gaza by displacing over two million Palestinians, annex Greenland for its minerals, take back control of the Panama Canal, and make Canada the 51st state. His mafia-like mineral grab in Ukraine is on hold for now. He revived the Quad in his first term to target China but can leave his Quad partners stranded by striking a deal with Xi Jinping. But he may also pull off a “reverse Nixon/Kissinger” by breaking Russia away from the Russia-China strategic alliance to isolate China. It’s all up in the air.

 

What should India do? Geopolitically, his pro-Putin stance works in India’s interests, especially if he does end up weaning Russia away from China. China may also want better relations, at least for now, with India. But his broader attack on global institutions may not be in India’s favour. Time will tell. In a new imperialist “Jungle Raj,” military and economic strength will matter. India, which spends less than 1.5 per cent of GDP on defence — not including pensions — must take note.

 

On the economic side, India has not immediately retaliated to steel and aluminium tariffs and is working on a bilateral trade agreement. In addition to lower tariffs, Mr Trump wants India to buy more oil and gas and energy and defence equipment. If the US can provide energy at world prices and offer suitable defence and energy equipment — such as small nuclear reactors — with the option for technology transfer, India may find that acceptable. Enhancing technology and artificial intelligence cooperation is also on the anvil. The UK and EU, both under threat from Mr Trump’s tariffs, are now willing to complete trade deals with India, which have festered unsuccessfully for years, before the end of this year. And if the West Asia conflict gets resolved, the India-Middle East-Europe Economic Corridor could see a revival.

 

Working out a bilateral trade deal is necessary but will not be easy — especially on agricultural products, where India imposes a trade-weighted tariff of 65 per cent compared to the US’ 4 per cent. The 2024 National Trade Estimate Report on Foreign Trade Barriers1, issued by the Biden administration, provides a detailed assessment of its dismal view of India’s tariffs and non-trade barriers. Mr Trump’s trade review is likely to be even more negative. If the US also targets non-tariff barriers and India’s growing quality control orders, internal taxes like goods and services tax or supply chain components such as pharmaceutical and iPhone parts, which come from China, a trade deal with the US may become extremely complicated. During Prime Minister Narendra Modi’s recent visit to America, President Trump said Mr Modi is a better negotiator than him. That will be tested soon.

 

But for now, fasten your seatbelts and prepare for a bumpy ride.  

 

The author is distinguished visiting scholar, Institute for International Economic Policy, George Washington University, USA  1.  https://shorturl.at/ngm7a