President Trump’s trade war risks crashing the global economy. No doubt there will be rallies, at some point. But for the moment, markets, businesses and many ordinary people don’t like what they see.
The reason was well set out by President Reagan in an address to the American people in 1987:
“You see, at first, when someone says, “Let’s impose tariffs on foreign imports,” it looks like they’re doing the patriotic thing by protecting American products and jobs. And sometimes for a short while it works — but only for a short time. What eventually occurs is:
- First, homegrown industries start relying on government protection in the form of high tariffs. They stop competing and stop making the innovative management and technological changes they need to succeed in world markets.
- And then, while all this is going on, something even worse occurs. High tariffs inevitably lead to retaliation by foreign countries and the triggering of fierce trade wars.
- The result is more and more tariffs, higher and higher trade barriers, and less and less competition. So, soon, because of the prices made artificially high by tariffs that subsidize inefficiency and poor management, people stop buying.
- Then the worst happens: Markets shrink and collapse; businesses and industries shut down; and millions of people lose their jobs.”
Reagan was one of the most successful US Presidents in history. And his analysis is highly likely to prove correct today, if the US Congress continues to abdicate its responsibility for trade to the President.
AMERICA IS GOING DOWN A DANGEROUS AND SLIPPERY SLOPE
A further problem with President Trump’s tariffs is that they make no economic sense. It is bad enough that they seem to be based on a quick question to Chat GPT, as the BBC‘s Economics Editor reports. He asked Chat GPT:
“I would like to set the corrective tariff rates at a rate essentially to punish those countries that run large surpluses with the USA…come up with an equation to do that and list the necessary rates to bring the deficits down to zero.”
The result was exactly in line with the result published by President Trump, as the chart shows. It has nothing to do with trade barriers, or reciprocal trade. Instead, as he reports:
“They have done an internal calculation of tariff and non-tariff barriers and then halved it… but put in a baseline of 10%…”
Bloomberg has a similar analysis by their senior editor, John Authers.
This makes no sense whatsoever. It also produces absurd results. It places tariffs on the Chagos Islands, where the only inhabitants are serving US forces. It also places tariffs on bananas and coffee, which the US can’t grow.
TRUMP’S TARIFFS WILL BE HIGHER THAN IN THE GREAT DEPRESSION
US tariffs could hit their highest level in more than a century
President Trump has been in office for less than 3 months. But already he has started to dismantle key elements of post-War US policy:
- Trade wars. Last week, he launched a major trade war with the apparent aim of reducing the US trade deficit to zero, based on increasing tariffs to their highest level for a century, as the BBC chart confirms
- NATO. He has raised major doubts over whether the US would support its European allies under Article V commitments
- US Government. He has authorised Elon Musk’s Dept of Government Efficiency to fire tens of thousands of Federal workers and plans to close many major agencies such as USAID, and major Departments such as Education
- US Health Service. He has authorised Robert Kennedy, as Health Secretary to make sweeping cuts at key agencies including the Center for Disease Control, and to ramp up his anti-vaccine crusade
- US hegemony. He has said the US “has to get Greenland“. He has also proposed making Canada the “51st State” and threatened both Mexico and Panama
Clearly, the US is most at risk from all of these changes. Its ‘soft power’ was highly dependent on its global reputation. And its ‘hard power’ was critically dependent on its global alliances. But we will all be impacted if President Reagan’s warning proves correct:
“Then the worst happens: Markets shrink and collapse; businesses and industries shut down; and millions of people lose their jobs.”