Trump, tariffs and trade wars: where is the world economy going?

Donald Trump’s presidency will be brutal for working class people (Picture: Trump White House)

In Donald Trump’s world the United States has been ripped off over the last five decades by friend and foe alike. This rip off is evidenced and indeed defined by the fact that the US has a huge deficit in traded goods.

This ignores the fact that the US has a trade surplus in financial and other services which either balances or outstrips the goods deficit in many cases.

Wednesday was designated by Trump as “Liberation Day”. He used emergency powers from the 1930s to impose wide-ranging tariffs, which are taxes on imports. 

This followed a report delivered to him on April Fools Day claiming to identify various trade barriers to US goods which had helped to perpetrate the alleged theft against the American people.

The idea that the US has been ripped off through the imposition of various trade barriers to its exports is, of course, absurd. The US has in fact used its imperial might to rip off economically weak countries over many years.

And, of course, the biggest rip off is within the US itself where the rich have become ever richer by paying US workers and workers in other countries far less than the value of the goods those workers produce and pocketing the difference in profit.

In the event, the tariffs that Trump imposed had little or nothing to do with trade barriers real or imagined. Every country, including those like Britain which does not have a trade surplus, was subjected to a minimum 10 percent tariff.

Higher tariffs were imposed on many countries based on a simple algorithm – half of the percentage gap between US exports to that country and exports from that country to the United States. 

Vietnam, for example, was hit with an additional 46 percent tariff. Other poor or developing economies have also been hit with very high tariffs with potentially devastating consequences. And their trade surplus with the US has nothing to do with trade barriers but rather the fact they are so poor they can’t afford to buy American goods.

The intention of these tariffs is to raise prices of goods imported into the US and therefore choke off demand for those goods. So they won’t be working unless they raise prices.

This will fuel inflation and cut purchases thereby cutting economic growth or even contracting the economies dependent on exports to the US. Tariffs are therefore both inflationary and recessionary.

Some economic analysts have consoled themselves that Trump is imposing these tariffs on a transactional basis. If targeted countries lower their trade barriers, then Trump will do the same and in fact the world will end up with more free trade than before.

However, this ignores the fact that Trump wants tariffs to encourage manufacturing investment into the US in order to avoid those tariffs. And he also wants tariffs to raise money for the federal government so he can cut taxes for the rich. There is an enormous federal government deficit and national debt is 120 percent higher than both France and Britain and twice the level of Germany.

Temporary, transactional tariffs will not encourage investment in the US or raise money for tax cuts. And there is good reason to think they won’t work at all.

Paul Krugman, a Nobel prize-winning establishment economist, describes the tariffs that Trump has imposed as the biggest shock to trade in world history. They are certainly without precedent.

And they have spooked the rich who invest their wealth in the financial markets. More than a trillion dollars have been wiped off the value of major tech companies and others in the 24 hours following Trump’s tariff announcement.

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That is important for two reasons. It reduces the creditworthiness of those companies and the fall in the stock market also makes the rich feel a bit less rich.

But the rich in the US now account for roughly 50 percent of consumer spending, up from 36 percent from thirty years ago.

This is indicative of the redistribution of wealth from the less well off to the rich as wages have stagnated. If the rich now spend less because of the negative “wealth effect” it will be a further blow to the US economy.

If the US economy turns downwards, the enormous size of the federal deficit constrains the ability of the federal government to inject spending into the economy. That’s even if Trump was minded to do so—which he isn’t given his desire to shrink the federal government. 

The Federal Reserve, the US central bank, is also constrained over cutting interest rates by the persistent inflation. This dates back to the era of quantitative easing when vast amounts of money was printed to save the economy from the financial crisis of 2008 and the Covid crisis. Tariffs will give a further twist upwards to inflation. 

Further pressure downwards on the US economy is coming from the mass redundancies of public sector workers engineered by Elon Musk and his Department of Government Efficiency and by the expulsion of undocumented migrants.

One estimate of the effect on the US economy if Trump succeeded in expelling 11 million undocumented migrants is that the US economy would contract by a massive 7 percent on top of the forecast contraction from tariffs.

The uncertainty of where the world economy is now headed will also restrain investment spending which is the ultimate driver of economic growth. That uncertainty is now being compounded by the retaliatory tariffs being imposed by China and the European Union amongst others.

Those tariffs are both general but some are also targeted at the products of businesses in strongly Republican states and therefore at Trump’s political base.

The widespread use of tariffs to “protect” the US economy in the 1930s and the growth of economic nationalism more generally lengthened and deepened the Great Depression. But that was when international trade constituted just 5 percent to 6 percent of the US economy.

The figure today is nearer 15 percent. The US economy is therefore much more vulnerable to tariff retaliation than it was in the 1930s.

The rest of the world economy, on the other hand, is less dependent on the US than it used to be. China has overtaken the US as the biggest contributor to international trade. 

China is Trump’s obsession, just as it was for Biden and for Obama.

It is an irony that Trump’s attempts to use US economic power to boost US industry may result only in the further strengthening of the Chinese economy and government.

The probability of stagnation and even recession combined with inflation, so-called stagflation, has increased hugely with Trump’s tariff regime.

That would be occurring in a debt-ridden world where government, corporate and consumer debt is now well over three times the value of total world production. And one where half of the world’s financial system by value is in the far less regulated shadow banking sector.

Storm clouds are gathering and with tensions within the world’s ruling class growing, we would do well to remember that trade wars in the 1930s culminated in real war.

We urgently need to strengthen the resistance as the bosses try to make us pay for their gathering crisis.