US President Donald Trump's decision to impose tariffs on all its trading partners and at much higher rates on China has sent the shock waves across the world and threatens the end of the post-war trading system which the US played the key role in establishing. After decades of progress in trade liberalisation under the auspices of the GATT and then its successor the WTO, it now faces several major challenges, including stalled negotiations and a crippled dispute settlement system due to US actions which are essential for resolving trade disputes. This has created a backlog of cases and raises concerns about the WTO's ability to enforce its rules.
Now by imposing sweeping new tariffs, the US has not only blatantly violated its WTO commitments but also signalled that it no longer feels bound by WTO rules. In recent years the US has not only ceased to be an active participant in pursuing free and open trade agenda but has actively disrupted it.
Now Trump, as promised, launched a sweeping overhaul of America's trade policy, introducing high tariffs. The reason he states is to rebalance imports and exports with key trade partners. His aggressive and high-stake tactics make it certain that his policy stance is deliberate and flexible only on his terms.
Trump's policy will only further destabilise the rules-based trading system that the US helped to build, driving more countries towards hedging strategies and regional blocs. Trump's tariff war does not simply accelerate US-China tensions, it speeds-up the breakdown of the global economic order with serious consequences for global trade flows.
According to a report issued on April 15 by the WTO, global trade will go into reverse this year because of the tariff war launched by US President Trump. The WTO report said the outlook for global trade had "deteriorated sharply" because of the US tariff hikes and the "trade policy uncertainty" they had created. It estimated there would be a 0.2 per cent contraction for 2025, compared to an increase in trade of 2.9 per cent in 2024.
Former British Prime Minister Gordon Brown accused Trump of "weaponising" the global trading system with steep import tariffs that threatens the "breakdown" in the global economic order. He also said that Trump had "weaponised" the interdependence of the global trading and financial systems.
Trump's tariffs and war on free trade signal the end of an experiment in globalisation that began in the 1990s. More importantly, as inflation goes up the worst effects of the turmoil created by Trump tariffs are yet to leave their mark on financial markets and living standards.
Trump declared a 90-day pause in the implementation of his "reciprocal tariff" on April 9 because of turmoil in the bond market as well as fears conveyed to him by leading members of his administration and bank chiefs such as Jamie Dimon of JP Morgan - that the bond market was on the brink of a freeze. Larry Fink, the head of BlackRock also joined Dimon in expressing the view that the present turbulence was unlike anything they had seen before. The "pause" has not stopped the turmoil in the US Treasury market but is continuing.
The tariff rates still matter, their initially planned implementation was only postponed with the key exception of China for which tariffs have been raised 145 per cent making clear that Beijing is the central target of Trump's economic war. This was done primarily to allow time for the negotiation process to proceed with trading partners under the looming threat of tariffs.
He is not necessarily trying to balance trade; he is trying to negotiate concessions. This is classic Trump playbook - he creates a crisis, then offers to dial it back as a "goodwill gesture" demanding concessions in return.
The US market is very critical to many countries like Bangladesh, and Trump is leveraging access to it for concessions as Bangladesh had immediately done. Many other countries also opted not to retaliate against Trump tariffs, instead opted for favouring negotiation. But Beijing took a different approach to confront US tariffs head on with its own tariff of 125 per cent.
In fact, Trump has boasted that about 75 countries "kissing my ass" to enter negotiations, but China is not among them. Even if the tariffs are not enforced immediately, their very existence in the background gives the US significant leverage in shaping more favourable terms for the US to negotiate.
No matter how many times Trump reverses or pauses tariffs against other nations, a global trade war is in the making. This trade war would be reminiscent of the one following the Smoot-Hawley Tariff Act of 1930, which is mostly blamed for deepening the Great Depression. The Act was aimed at safeguarding US agriculture interests in the wake of the 1929 stock market crash but soon expanded to cover manufactured goods and tariffs averaging around 40 per cent but in some cases were as high as 100 per cent.
However, it is important to put the Act in the proper perspective. Back then, the US had a trade surplus, a consumption shortfall, and high levels of investment and tariffs only made the situation even worse. But now the US has the opposite problem. Regulations like tariffs, quotas and embargoes can artificially increase the cost and reduce the availability of goods impacting consumers and businesses alike.
Economic history clearly demonstrates that from the Smoot-Hawley Act to Trump's current trade war that protectionism is not only ineffective, but counterproductive. In a world where value chains are global and innovation depends on transnational cooperation, closing economic borders weakens collective resilience.
Global trade imbalances are the result of mismatches between national savings and investment. In countries such as China, Germany, Japan and oil exporting countries, savings tend to outpace domestic investment. This surplus of savings flows out as capital, which shows up as a trade surplus in the country's balance of payments. In the US it is exactly the opposite, investment outstrips savings, and the gap is filled by capital inflows and shows up as a trade deficit in the balance of payments.
To correct trade deficits rather than to resort to tariffs as a policy instrument, Rudiger Dornbusch once commented, "For this reason God created exchange rates". He was suggesting that a freely floating exchange rate regime would be self-correcting mechanism to alleviate chronic trade deficits and promote both foreign and domestic investment in more competitive American exports.
In fact, Trump's ostensible goal of his trade war to bring back manufacturing jobs and trade surpluses with every country in the world are not only unrealistic but absurd. The absurdity of the tariff measure on the US economy was underscored by a remark recently made by US Commerce Secretary Howard Lutnick, "The army of millions and millions of human beings screwing in little, little screws to make iPhones, that kind of thing is going to come to America".
While 75+ countries including Bangladesh opted to cooperate and negotiate with the US, China took a very different path by responding with swift and counter measures and raised its own tariff against the US to 125 per cent. China further has taken a significant step to intensify trade war with the US by restricting the exports of rare earth minerals. Trump's trade war with China is likely to cause serious economic problems for the whole world with far more severe consequences for the US itself.
Amid intensifying trade war with the US, Chinese President Xi Jinping visited Vietnam, Malaysia and Cambodia on Aptil 14 to 18. The trip was part of China's diplomatic efforts to garner support internationally to counter punishing "reciprocal tariffs" imposed by the Trump administration on virtually every country. Spanish Prime Minister Pedro Sanchez visited China in the second week of April and Xi made an appeal saying both China and the EU should oppose "unilateral acts of bullying" obviously referring to the Trump Administration.
Trump's view of Xi's visit to Vietnam was summed up in his crude remark made to reporters in the White House that China and Vietnam were trying to "figure out how do we screw the United States of America". Trump maintained and escalated the tariffs on China, making clear that China remains the central target of his economic war.
This is not just a trade war taking place between the US and China but has far-reaching multilateral impacts on most countries around the world. China also views Trump tariffs not simply as economic pressure, but as strategic coercion. China has already seen advantage in positioning itself as a leading advocate of further trade liberalisation through the WTO. It wants to be seen as a good global citizen, especially at a time when the US behaves very badly.
Historical and contemporary evidence clearly demonstrates that tariffs rarely function as an effective tool of economic protection but create a trade crisis and could be as devastating as the Asian Financial Crisis of 1997 and the Global Financial Crisis of 2008. Far from helping the US economy, Trump's tariff measures will contribute to the collapse of international trade as countries friendly to the US like Canada, Mexico, France, Germany and others also impose counter-tariffs on US goods notwithstanding China's counter measures.
Tariffs are a blunt, inefficient tool. Trump is gambling -- big time. Economists know this full well and this is why most of them are getting seriously concerned. But then this is not so much really about tariffs, but more about reshaping the economic model of the US and the world.
muhammad.mahmood47@gmail.com
© 2025 - All Rights with The Financial Express
