There is nothing reciprocal about it: Donald Trump has unilaterally declared (trade) war on the rest of the world.
On what he billed as “Liberation Day”, President Trump decided to try to liberate the US from German cars, Samsung smartphones, Japanese TVs, Chinese computers and other appealing products that those dastardly foreigners dare to sell to Americans at affordable prices – not to mention the many American-branded goods that are largely made abroad, such as Chinese-assembled iPhones, Vietnamese-made Nike shoes and Levi’s jeans stitched in the tiny and poor African country of Lesotho.
What Trump called a “declaration of economic independence” is in fact a monumental act of economic and geopolitical vandalism that will harm the whole world, and the US most of all. As I described in my recent Substack essay, Trump has trashed the old US-led Open World era and ushered in a darkly chaotic new Broken World era.
The rest of the world now has to decide how to respond to Trump’s aggression. Many governments, including the UK, still seem minded to try to appease him. Others, notably China and Canada, are opting to retaliate. Almost all, including the EU, express a willingness to negotiate. And while the 27 EU member states negotiate on trade as one, most governments are responding to Trump’s tariffs individually, rather than coordinating their positions.
This essay examines the tactical and strategic choices that the rest of the world now faces. It argues that governments should remain calm, keep any retaliation targeted, not rush to negotiate with Trump bilaterally, and try to coordinate their response with like-minded partners.
Above all, they should start developing alternatives to US demand now, because even if short-term deals can be struck with him, Trump is an unreliable counterparty who uses foreigners’ dependence on him as leverage against them. The essay concludes by sketching three scenarios for the future of world trade.
The bottom line is that Trump doesn’t hold all the cards. The US accounts for only a seventh of the rest of the world’s exports. While sales to the US are huge for the likes of Vietnam, Canada and Mexico, for most countries they are a relatively small share of GDP. So, although it would be better if trade with the US were as free as possible, if it can’t be, the rest of the world has other options. Ostensibly aimed at putting America First, Trump’s tariffs are instead likely to leave America impoverished and isolated.
Trump’s tariffs
Trump’s declaration of trade war took the form of a gameshow-like presentation on April 2nd in the Rose Garden of the White House in which he delighted in imposing three separate tariffs on US goods imports:
an additional 10% tariff on imports from all countries except Canada and Mexico;
arbitrarily punitive (misnamed as “reciprocal”) tariffs (from April 9th) on almost all goods imports from some 60 countries that have a trade surplus with the US, including 20% on those from the EU, 24% on Japan, 27% on India, 46% on Vietnam, 50% on Lesotho and a cumulative 65% on China (once added to earlier Trump levies);
25% tariffs on specific sectors: cars (now) and car parts (by May 3rd), in addition to those already imposed on steel and aluminium, with further tariffs on pharmaceuticals, semiconductors, lumber and copper in the pipeline.
The arbitrarily punitive tariff rates were presented as if they were a fair, even lenient, response that was equivalent to only half of the unfair trade barriers that US exports face; in fact, they are the result of a bogus formula related to the size of each country’s trade surplus with the US.
Canada and Mexico face tariffs on their car exports to the US, but were spared the not-really-reciprocal ones; Trump had already slapped arbitrarily punitive 25% tariffs on their exports that do not comply with the local-content requirements of their tripartite trade agreement.
The upshot is that the US has almost overnight flipped from being one of the most free-trading major economies to the most protectionist one. Its trade-weighted average tariff will rise nearly ten-fold, from 2.3% last year to an estimated 24%. That is higher than the 20% average tariff imposed by the infamous Smoot-Hawley Tariff Act of 1930, which exacerbated the Great Depression of the 1930s.
Causes and consequences
Trump’s ostensible aims are to rebalance US trade, offset allegedly unfair foreign trade practices, repatriate manufacturing production, raise tariff revenue to fund tax cuts, and “Make America Wealthy Again”.
The likely immediate result will instead be to inflate prices and depress growth, pushing the US economy into stagflation (a toxic combination of stagnant growth and higher inflation) and making Americans poorer, with share prices already falling fast.
The tariffs are not a levy on foreigners, as Trump seems to think. They are a tax hike on foreign-made products that Americans consume and inputs from international supply chains on which US-based businesses rely. While smaller tariffs may be absorbed at least in part in companies’ margins, larger ones will inevitably lead to higher prices. Although the tariffs can be avoided by switching to US-made alternatives, in many cases these don’t exist, or are prohibitively expensive. No Apple iPhones are assembled in America.
Since Trump’s tariffs will considerably inflate the cost of almost all US goods imports (which are equivalent to 11.2% of GDP), their harm will be huge. That damage is amplified by the crippling uncertainty caused by Trump’s wild policy swings, which is cratering consumer, business and investor confidence. A US economic slowdown could thus easily slip into recession.
Geopolitically, the tariffs will further antagonise the US’s traditional allies in Europe and Asia, alienate partners such as Vietnam that had tilted towards the US because they feel threatened by China, and undermine America’s standing around the world by bludgeoning poor countries such as Lesotho almost as heavily as China.
The rest of the world will suffer economically too, albeit typically less so, as I explained in a previous post. Whereas Trump’s tariffs will hammer almost all US goods imports, for other countries only their goods exports to the US will be harmed. Those are a big share of GDP for some countries, notably Lesotho (10%), Canada (19%), Mexico (27%) and Vietnam (30%). But for most countries they are not: the proportion is 2.4% for the UK, 2.5% for China and 3% for Germany.
Moreover, while the tariffs will be inflationary for the US, they will be deflationary for the rest of the world. Thus, if US prices spike and inflationary pressures become entrenched, the Federal Reserve may be forced to raise interest rates, compounding the misery, whereas the European Central Bank and others may be able to offset some of the pain by cutting interest rates.
Of course, the fact that the US will tend to suffer most is of little comfort to the specific foreign businesses that suffer lost sales, the particular employees who lose their jobs, and the many people around the world who experience the recessionary side-effects of Trump’s scorched-earth tactics.
Tactical choices
The longer-term consequences of Trump’s tariffs depend on how long they last, how other governments react and how businesses respond.
One initial decision for governments is whether to retaliate. The UK, Australia and Singapore have chosen not to do so for now, perhaps understandably since they face an additional tariff of “only” 10%. Canada has opted for targeted retaliation. The EU moves more slowly, but probably will eventually retaliate, in a targeted way too. China has responded with a blanket 34% tit-for-tat tariff.
In general, governments should think twice before retaliating, because taxing imports is economically harmful. Just as Trump’s new tariffs will mostly harm the US, retaliatory ones would primarily inflate prices and depress growth abroad, as well as inviting further retaliation.
Tactically, though, limited retaliation against US exports for which there are ready alternatives may be helpful if it inflicts political pain on Trump and thus deters further bullying.
That said, with someone as thin-skinned and reckless as Trump, this can backfire. The limited retaliation against imports of Jack Daniels and other American whiskey that the EU threatened in response to Trump’s steel tariffs prompted Trump to threaten 200% tariffs on French champagne, Italian wine and other European alcoholic drinks.
The second choice is whether, how soon and how to negotiate. Many countries seem keen to negotiate immediately. “Every country is calling us, that’s the beauty of what we do,” Trump claims. “If we would have asked these countries to do us a favour, they would have said no. Now they will do anything for us.”
But while it is understandable that Vietnam, a relatively poor country that is economically dependent on the US, is rushing to try to avert Trump’s tariffs, most governments would do best to bide their time.
The US is already suffering from Trump’s madness; if governments wait, a combination of market meltdown, economic stagflation and political backlash may yet force him to backtrack. After all, Trump has often flip-flopped in the past.
But even if he doesn’t backtrack soon, it still makes sense to be patient. Moving too fast reeks of desperation that Trump will exploit against you. And once governments do eventually negotiate, it would be best to do so collectively, so as to maximise their leverage.
EU countries know that: they negotiate together as 27. Although this would take time and require compromises, the EU would also do well to try to assemble a coalition of the willing with the likes of Canada, Japan and others to face up to Trump from a position of strength, instead of allowing him to divide and rule. Likewise, African countries could aim to negotiate as one through the African Union, and so on.
Develop alternatives to US demand
The third choice is the overarching strategic one: should governments be striving to restore their access to the US market at all costs, or should they be starting to diversify away from the US regardless?
For now, most seem intent on trying to restore market access. After all, the US is a huge and lucrative market; businesses’ existing production structures and supply chains are geared towards the current pattern of trade; and developing alternatives would take time and cost money. Having already cut itself from EU markets through Brexit, it is understandable that the UK doesn’t want to sacrifice the US market too. Germany’s export-driven economy is already suffering from collapsing exports to China; it doesn’t want to lose the US too.
The most positive interpretation of Trump’s tariffs is that they are a one-off move that provides a new baseline that foreign governments can try to negotiate down bilaterally by offering him concessions on trade, tax, tech regulation, geopolitics and other issues. That was the view expressed by William Lee, the chief economist of the Milken Institute, in my debate with him and Steven Okun on Al Jazeera English’s Inside Story.
If so, governments might deplore Trump’s negotiating tactics but still find it advantageous to make concessions to try to restore access to the US market. Since free trade is a win-win, foreigners could, in effect, offer the US a bigger share of the gains from trade, while still profiting somewhat from their US sales.
But the belief that Trump’s tariffs are mostly a negotiating ploy is contradicted by his repeated statements that businesses can avoid them only by relocating production to the US. Likewise, if the levies were temporary tools, they couldn’t provide revenues for the permanent tax cuts he wants. It seems more plausible that Trump is intent on reordering the US and global economies on the basis of instincts and prejudices developed when he was a young man in the 1970s and 1980s. If so, there may be little to gain from negotiating.
For sure, there may still be deals to be done; Trump loves making them, especially when supplicants come to him begging for mercy. But any deals struck would be unlikely to stick, while the enduring uncertainty about whether they would last would deter businesses from investing, undermining their benefits. So, governments should be wary of desperately trying to buy a temporary peace at the cost of weakening their longer-term bargaining position.
For one thing, Trump is an unreliable bully who is likely to come back for more if foreigners make concessions that he construes as weakness. Consider how the UK rushed to offer trade, tax and regulatory concessions to avert the imposition of tariffs, but failed to do so, thereby highlighting its desperation and inviting Trump to make further demands.
A second reason why deals with Trump are unlikely to buy longer-term peace is because of his bugbear that countries running a trade surplus with the US are “ripping off” America. Since those surpluses would be likely to persist – because they are driven more by America’s low propensity to save than other countries’ unfairness – Trump would likely soon resume his tariff threats. Witness how he now rages against the US-Mexico-Canada trade agreement that he negotiated in his first term and which he hailed in 2020 as “a tremendous victory for American workers, farmers, manufacturers, and businesses alike”.
A third reason to be wary is that in some cases Trump has overarching geopolitical ambitions, such as undermining the EU, annexing Canada and containing China, that cannot be resolved by a trade deal.
China seems to have concluded that economic conflict with the US is inevitable, because the US sees it as an economic and geopolitical rival that needs to be contained. In any case, its longstanding priority has been to foster technological self-sufficiency, develop local supply chains and seek alternative markets to the US. So, while Xi Jinping would doubtless pocket an attractive deal with Trump if one was on offer, he is scarcely going to stop trying to disentangle China’s economy from America’s.
Canada’s new prime minister, Mark Carney, has likewise concluded that his country needs to reduce its dependency on Trump’s America. That will be eye-wateringly expensive in the short term, but Trump’s existential threat to try to annex Canada as the 51st state makes it essential.
The EU needs to be clear-eyed too. Trump poses a threat to Europe’s economy, security and political stability. Thus, while offering to buy more US liquefied natural gas (LNG) or defence equipment might help secure a temporary trade truce, it would be unlikely to quell Trump’s hostility towards the EU, while making Europe more vulnerable to his future blackmail.
In short, foreigners ought to start reducing their dependence on the US now. That would limit the economic pain if Trump’s tariffs endure. It would strengthen governments’ negotiating hand in any dealings with him. And if negotiations fail or deals fall through, it would provide more stable, predictable and diversified sources of growth that Trump can’t use as leverage against them.
Domestically, policymakers can try to boost growth by cutting interest rates, increasing productive public investments and enacting supply-side reforms that raise productivity growth. The EU should also prioritise completing the single market in services and creating one for savings and investment.
Internationally, like-minded governments should agree to free trade among each other and commit to make limited use of anti-dumping duties to protect against import surges.
In short, governments should stay calm, keep any retaliation targeted, bide their time before negotiating with Trump, ideally do so collectively, and above all start to diversify away from America now, by stimulating domestic demand, enacting growth-enhancing reforms and seeking alternative commercial relationships that open up trade with like-minded countries.
What if they don’t, though?
Three future scenarios
The emerging Broken World era is full of uncertainties. Conventional economic models, which are unreliable guides at the best of times, are of little use in predicting where world trade might up. A better way of thinking about what a highly uncertain future might entail is to think through possible scenarios. Here are the outlines of three.
The most optimistic scenario would be a negotiated peace. Trump could be forced to reverse his tariffs and emerge chastened from the experience. Many governments could succeed in striking trade deals with Trump that reduce their own trade barriers in exchange for lower US tariffs. They might also agree to free trade with each other. That is the most positive scenario, albeit an unlikely one, given Trump’s temperament and worldview.
The worst-case scenario would be a 1930s-style protectionist spiral of tit-for-tat retaliation that causes world trade and the global economy to collapse. Retaliation against Trump’s tariffs could prompt further cycles of tariff hikes. China could seek to divert its US exports to the EU and other markets, prompting foreign tariffs to limit import surges. Diverted EU exports could trigger further foreign protectionism. This nightmare scenario is all too possible. But one reason to hope it won’t happen is that most countries are aware of the risks and still wish to maintain relatively open trade with each other.
Perhaps the most likely scenario is a messily unstable patchwork of protectionism and partial deals. Some countries may manage to negotiate partial carve-outs from Trump’s tariffs through unstable deals on which he continually threatens to renege. Others may learn to live with the tariffs, substituting domestic demand and other foreign markets for lost US sales as best as possible. Import surges from China may be met with limited anti-dumping duties in a few sectors, rather than blanket tariff walls. And with luck, more open-minded countries – such as the EU, the UK, Canada, South Korea, together with Japan and the other members of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CP-TPP) – may also pursue freer trading relations among themselves.
Final thought
Trump’s tariffs are a terrible mistake for the US and an act of aggression against the rest of the world. But by making wise decisions, other governments can still mitigate the damage instead of compounding it. Let’s hope they do so.