Since Donald Trump's return to the White House on January 20, he has been ramping up his trade war agenda fuelling uncertainty over global trade and growth. The increase in tariffs and the expanded scope of their application on imported goods not only affects the US economy but also has worldwide repercussions. Economic theory and empirical evidence clearly demonstrate that tariffs reduce economic efficiency, generate welfare loss and distort global markets.
The US is a powerful player in global trade. In 2024, the US was the second-largest global merchandise exporter with over US$2,083.8 billion in exports and the largest importer with about US$3,295.6 billion in imports, resulting in a US$1.211.8 billion merchandise trade deficit. While the US runs a trade deficit in goods, a surplus in services trade is estimated to be around US $293.4 billion, with services exports reaching US$1,107.8 billion and services imports US$814.4 billion in the same year. But the overall trade balance remains in deficit at US$918.4 billon.
Trade has been cited as a major contributing factor to the relative decline of the US economy in the global context. Trump claims tariffs will enhance US manufacturing, safeguard jobs, increase tax revenue, and stimulate domestic economic growth. He also wants to restore America's trade balance with its trading partners, reducing the gap that exists between US imports from and exports to individual countries. These tariffs aim to reduce a US$1.2 trillion merchandise trade deficit by raising US tariffs to match those of other countries and counter their non-tariff barriers.
One reason suggested for the large trade deficit in the US is that its economy has been performing strongly compared to other economies, particularly those of industrialised countries. That means there is more demand in the US for foreign goods than the demand in other countries for American goods. The strong US dollar also makes imports relatively cheaper for Americans and U.S. exports more expensive for overseas customers.
But on a more theoretical level, the trade deficit is caused by Americans buying more from foreign countries than exporting to them or more precisely Americans are consuming more than they are producing. Where is this extra American purchasing power coming from? Due to ongoing budget deficits and tax cuts, additional purchasing power is being injected into the US economy. There is a close symmetry between the budget deficit and the current account deficit where a larger budget deficit quite often leads to a larger current account deficit. Therefore, Trump's assertion that foreign countries are ripping off the US is a complete and utter nonsense.
Trump's senior trade counsellor Peter Navarro said at a meeting that Trump wanted a transition of the US economy to one where the government relies less on income taxes and more on tariff revenue to fund its operations. This consumption-based tax regime operates in most LDCs, including Bangladesh. He also told Fox News that the new tariff regime would lead to new industrial golden age. He further added they would not only enable broad tax cuts while reviving manufacturing and protecting national security by ensuring the US did not rely on foreign products.
If Trump's tariffs fail to re-industrialise the US, they may prove as ineffective as the McKinley tariffs of 1890, which President McKinley later regretted. Furthermore, the economic problems that Trump is attempting to address are very deep-rooted and have been in the making for more than half a century. Tariffs will not solve these problems.
Navaro is effectively advocating for the Mercantilist economic doctrine, which was prevalent in Europe from the 16th to the mid-18th centuries, encompassing the transition from the Renaissance to the early modern period. Mercantilism was a form of economic nationalism that sought to increase the prosperity and power of a nation through restrictive trade practices. Mercantilism also provided the philosophical foundation for colonisation and colonial expansion.
It is most unlikely that Trump's tariffs can bring back manufacturing and make the US self-sufficient and at the same time by raising so much tariff revenue the US can do away with income tax. Some Trump supporters think that tensions from tariffs could revive US manufacturing. Many observers also believe that the US armament industry requires a strong domestic manufacturing base for long-term survival and continue uninterrupted supply to the military for the world-wide military operations, which Trump understands and supports.
The US economy has shifted from manufacturing to a service-oriented focus, as shown in its GDP composition. In 2024, the service sector dominated the US GDP, accounting for about 79.9 per cent, while goods-producing industries like manufacturing and agriculture contributed 19.1 per cent and 1.2 per cent respectively. Now to turn that back to the other direction will be a stupendous task.
Trump's tariff offensive since his assumption office in January has been marked by threats, reversals and delays and his trade team appears to be trying to formulate policy on the fly. But some also argue that such an erratic behaviour of Trump is typical of his pathological need for "escalation dominance".
To date, the administration has implemented a 25 per cent tariff on steel and aluminium, a 20 per cent duty on imports of goods from China, and a 25 per cent tariff on imports from Canada and Mexico. On March 25 President Trump issued an executive order imposing a 25 per cent tariff on import of all cars designated to have been made overseas. The tariff will go into effect on April 2, the day Trump has for weeks called "Liberation Day" and will unveil his "reciprocal tariffs" programme.
His reciprocal tariffs will feature rates on a country-by-country basis corresponding to tariffs and non-tariff barriers US products face. The reciprocal tariff rate will account for the actual tariff rate and domestic policies of other countries that hinder US exports. The extent of tariff coverage is uncertain due to various technical and political factors. The world has been collectively waiting for Trump to reveal the details of his new tariffs known as "Reciprocal Tariffs".
Last Wednesday (April 2), Trump announced his "liberation day" global tariffs plan at the White House Rose Garden. Trump's tariffs, which he imposed via executive order, are expected to send economic shockwaves around the world. He slapped a baseline tariff of 10 per cent against all trading partners, plus extra tariff as high as 46 per cent against select countries. He vowed that his tariffs plan would be enacted immediately.
Many developing countries in Asia and Africa including Bangladesh are also facing the highest tariff rates imposed by President Trump. In Southeast Asia, Cambodia has a tariff rate of 49 per cent, followed by Laos at 48 per cent, Vietnam at 46 per cent, Myanmar at 46 per cent, Thailand at 36 per cent, and Indonesia at 32 per cent. In fact, South- East Asian countries are among the hardest-hit by Trump's tariffs. Lesotho faces the highest tariff in Africa at 50 per cent, followed by Madagascar at 47per cent and Botswana at 37per cent.
Sri Lanka has the highest reciprocal tariff rate in South Asia at 44 per cent, followed by Bangladesh at 37 per cent, Pakistan at 29 per cent, India at 26 per cent, and Nepal at 10 per cent. The US asserts that Bangladesh imposes tariffs of up to 74 per cent on American products.
Bangladeshi exports to the US market are now subject to a 37 per cent tariff, an increase from the previous rate of 15 per cent, more than doubling the existing tariff rate. The US is the largest market for Bangladeshi readymade garments. In 2024, Bangladesh exported US$8.4 billion of goods to the US of which US$7.34 billion was readymade garments.
The tariffs on South-East Asian countries are primarily targeted at Chinese investment. By targeting products from these countries will negatively impact on Chinese exports. A key goal of Trump's tariffs is to separate the US economy from China by imposing high trade barriers on goods made by Chinese companies, regardless of their country of origin.
Lashing out at foreigners, Trump said that foreign leaders had "stolen our jobs, foreign cheaters have ransacked our factories, and foreign scavengers have torn apart our once-beautiful American dream". US Treasury Secretary Scott Bessent warned countries hit by Trump's new tariffs not to retaliate."Do not retaliate," he said. "If you retaliate, there will be escalation."
Speaking to Ireland's Newstalk, ECB President Christine Lagarde said that the effects of Trump's tariffs would be "negative…the world over". The OECD states that Trump's trade wars are slowing global growth and increasing inflation. EU Chief Ursula von der Leyen described the tariffs as a major blow to the world economy and said the 27-member bloc was prepared to respond with countermeasures if talks with Washington failed. She further added, "The consequences will be dire for millions of people around the globe". The tariffs "clearly represent a significant risk to the global outlook at a time of sluggish growth," IMF Managing Director Kristalina Georgieva said in a statement. Michael Gasiorek, the director of the UK Trade Policy Observatory at Sussex University, stated, "For all intent and purposes, the US is now a rogue nation when it comes to trade".
Critics within the US contend that Trump's protectionism will cause price hikes and likely to drive the economy into recession. In fact, many observers point out that Trump's tariffs will lead to a contractionary macroeconomic shock of 2 per cent of GDP resulting in stagflation. As the US economy slows down significantly in the short run, it will drag down the global economy. Trading partners from the EU to Canada and Mexico have vowed to respond with retaliatory tariffs and other non-tariff measures. China also vowed retaliation for Trump's 54 per cent tariffs on imports into the US from the country.
The ongoing trade tensions between the US and other countries resulting from Trump's tariffs have created economic uncertainty and may cause significant damage to the global economy. In fact, the global economy, already experiencing some of the lowest growth in decades, is now about to take another major blow. The lessons countries around the world draw will help determine just how much the global economy cracks up as Trump's trade war deepens and what will be the way out of the crisis.
muhammad.mahmood47@gmail.com
© 2025 - All Rights with The Financial Express
