“Trump has set the stage not just for his own tariffs but for retaliatory tariffs by other countries. That is, he has started a global trade war”— Paul Krugman
The world is currently facing economic challenges reminiscent of those caused by the 1930 Smoot-Hawley Act, potentially leading to a significant economic downturn like the Great Depression. Trump’s actions have significantly impacted the international trading system. It is now generally acknowledged that the remnants of the post-war trading framework, established with US involvement immediately after WWII, have been disrupted. The tariffs imposed by President Trump on April 2 may lead to an economic disaster like the Great Depression, if sustained.
The post WWII world order was created to ensure that the disorders that in the first half of the 20th century in the form of two world wars and a great depression do not happen again. In fact, the post war multilateral arrangements were based on the industrial and economic power and capacity of the US.
International trade is the exchange of goods and services across international border because there is a need or want of goods or services. In most countries such trade represents a significant share of GDP. While the US constitutes less than 5 per cent of the world population, it earns more than 20 per cent of global GDP. The US also remains the leading global trading nation now accounting for approximately 12.3 per cent of global imports and 11.6 exports of global exports in 2024.
The United States holds a significant advantage, acting as the primary export market for countries such as Canada, Mexico, and China. According to the US Census Bureau these three countries collectively accounted for 36.5 per cent of all U.S. imports and 32.1 per cent of all U.S. exports in 2024.These three countries depend significantly more on exports to the US than the US depends on them for exports. The 30 largest trade partners of the United States represented 86.1 per cent of U.S. exports, and 89.6 per cent of U.S. imports in 2024. These figures do not include services or foreign direct investment.
But over the last 80 years or so, that US dominance steadily eroded, marked by a series turning points such as the scrapping of the Bretton-Wood monetary arrangement in 1971 and the global financial crisis of 2008. A decline in the US dollar’s proportion of global foreign exchange reserves, coupled with increasing geopolitical tensions, has revived discussions regarding the potential end of the US currency’s dominance. In fact, its lynchpin status remains unshaken because of the power of the American state despite being a fiat currency. The US dollar continues to function as the basis of international monetary and trade relations.
The outsized role played by the US in capital markets, trade and debt reinforces the status quo. The biggest and a very stable footprint of the US dollar is in foreign exchange transactions, almost 90 per cent of which involved the currency in 2024. Unless the global economy undergoes a complete overhaul, the US dollar will remain on top.
The Washington Post (April 8) pointed out that for a generation, analysts and commentators have been discussing the advent of a “post-America world”. In addition to the historical turning points previously mentioned, the ascent of China and the gradual reduction in the US’ share of global wealth and power, notably signal the waning of the longstanding certainties of the Pax Americana.
The paper then goes on to say that it is ironic now that President Trump and right-wing Republicans have done the most to accelerate the arrival of a “post-American world”, something that anti-globalisation activists from decades ago would have hardly imagined.
Trump’s recent extensive tariff initiatives have unsettled global markets and significantly reduced share values. In response to China’s imposition of a 34 per cent reciprocal tariff on American goods, a cumulative tariff of 104 per cent has been levied on China. This 104 per cent tariff is on top of the pre-existing 25 per cent tariff which is still in place from Trump’s first term in office. President Joe Biden also maintained that 25 per cent tariff.
There are no indications that China is reconsidering its stance, nor does it appear to be pursuing negotiations or discussions. Beijing officials described the tariffs as “blackmail’. Furthermore, the high tariffs on South-East Asian countries were also intended to hurt China. China recognises the US aim of decoupling and is preparing to adapt. But hitting China so hard goes beyond decoupling, it is an act of economic war.
The European Union (EU) responded with countermeasures of its own on last Wednesday. However, these are relatively modest. Brussels is holding out for an agreement with Washington. The EU Commission emphasised: “These countermeasures can be suspended at any time if the US agrees to a fair and balanced negotiation outcome.”
The global economy, already experiencing some of the lowest growth in decades, is now about to take another major blow. These tariffs will increase prices on many goods, fuelling inflation during a time when it is already persistent. According to the Financial Times, the overall hit to the global economy could be in the order of US$1.4 trillion.
Global markets took a pummelling on last Wednesday (April 9) as President Trump’s 104 per cent tariffs on China came into effect wiping off trillions of dollars in value from stocks and hitting commodities and emerging markets with force. The tariffs, which caused a nearly US$6 trillion drop in US stock values last week and battered global markets, have drawn worldwide attention and sparked fears of a potential economic downturn.
At the epicentre of the rout on the day were U.S. Treasuries and the US dollar, effectively the backbone of the global financial system. According to the Financial Times last Tuesday’s “sell-off is the latest sign of how some investors are ditching even very low-risk assets as…..Trump’s tariffs on major trading partners spark intense volatility in markets”.
Lesotho, a small landlocked country, faced a new 50 per cent tariff rate imposed by Trump on his “Liberation Day” due to its US$240 million trade surplus with the US. Lesotho primarily exports Levi’s and Wrangler jeans and diamonds (which are not produced in the US), and imports from the US are processed through customs in South Africa, thus recorded as South African imports.
Trump’s announcement of a significant tariff increase brings cumulative tariffs on Chinese imports to 104 per cent. China has pledged to “fight till the end” in response to the steep new tariffs on exports to the US, its largest trading partner. Also, trade decisions on this scale are not about trade alone. In his executive order, Trump declared that “large and persistent trade deficits constitute an unusual and extraordinary threat to the national security and the economy of the United States”.
China has called on India to collaborate in opposing Washington’s new trade policies, which Beijing has described as ‘abusive’. However, New Delhi has made it clear that it will not impose retaliatory tariffs. Indian Foreign Minister S. Jaishankar announced that India plans to negotiate a trade deal with the US by fall and is keeping an open dialogue with the US administration.
Around 70 countries have sought talks with the US administration, while China is preparing for a major confrontation. A significant trade conflict with China appears likely due to President Trump’s implementation of a 104 per cent tariff on Chinese imports. China on Wednesday raised its retaliatory tariff against the US to 84 per cent hours after new American tariffs took effect in a dramatic escalation of the superpower trade war. The all-out conflict between the two top economies of the world will revibrate across the world with far-reaching consequences for all countries around the world.
White House National Economic Council Director Kevin Hassett said late last Sunday that more than 50 countries had contacted the White House to negotiate on the tariffs. US Treasury Secretary Scott Bessent said more than 50 countries had called the White House seeking concessions, but he ruled out any immediate shift. Trump told a Republican Party black-tie dinner party in Washington last Wednesday that, “I’m telling you; these countries are calling us up, kissing my ass. They are, they’re dying to make a deal”.
Head of Bangladesh’s interim government Muhammad Yunus has written to US President Donald Trump requesting a three-month pause on a 37 per cent tariff on imports from Bangladesh, citing efforts to boost imports from the US. To reduce the US$6.2 billion trade surplus with the US in 2024, Bangladesh has pledged to add 100 American products to its duty-free list, according to the commerce advisor. “We hope the letter will have a positive impact. Our main goal is to narrow the trade gap,” he further added.
While it now appears that a very large number of countries (more than 75 countries according to Trump) are very eager to negotiate individual deals with the Trump administration, these countries including Bangladesh might be better off to just work around it and move on.
President Trump on Wednesday (April 9) pulled a stunning about-face suspending his threatened worldwide “reciprocal” tariffs for three months scaling it down to 10 per cent on imports to allow negotiations to take place, while raising the levy applied to China to 125 per cent. In response China says that they are “in this until the bitter end”.
Meanwhile, stocks tumbled against their gains from the day before (Wednesday), after the White House clarified that its tariff on all Chinese goods is at least 145 per cent, even higher than previously believed. China on Friday (April 11) raised its retaliatory tariff rate against the U.S. to 125 per cent from 84 per cent, but said it will “no longer respond” to further hikes by U.S. US stocks are still below where they were just a week ago. Technology stocks were the biggest drag on markets in early trading on Thursday, followed by the industrial and the financial sectors.
Paul Krugman in an article published recently highlighted the absurdity of Trump’s tariffs citing Bangladesh as an example and wrote “Trump’s 37 per cent tariff on imports from Bangladesh will make our principal imports from Bangladesh, clothing, more expensive and divert American capital and labour towards clothing production and away from the advanced technology sectors that are our real strength”. He then emphasised, “The theory of comparative advantage underlies the case for free trade: letting markets decide what you export and import”.
But now under the Trump administration, precepts of free and open trade are being violated in the most primitive manner to the disgust of most economists around the world. Also, the power and legitimacy of the World Trade Organisation (WTO) to facilitate the smooth flow of goods and services across the globe are being trampled by Trump. Under Trump’s America First Strategy, the US is steadily now moving away from global cooperation to imperial assertion.
Nearly half of US merchandise imports are intermediate inputs for producing final goods. By increasing the cost of production, Trump’s tariffs will diminish the competitiveness of US manufactures and cause job losses, rather than promoting manufacturing activity. Also, as Trump wages war against the world, there is significant blowback hitting both the real economy and the fragile financial system in the US.
The warnings of the consequences of Trump’s actions for both the US and global economy have come thick and fast. JP Morgan chief executive Jamie Dimon, in his annual letter to shareholders, mentioned that the tariff could potentially increase inflation and lead many to consider a higher likelihood of a recession. A recession in the US would rapidly hit the rest of the world, already experiencing low growth, now being battered by the tariff hikes.
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