It’s official. The US is now a rogue nation. It has started a trade war with the whole world. There is no, repeat no, trade war between countries going on in the world. It is between the US and all the other countries it trades with, including its closest allies since the Second World War.
This is the fourth one-in-one-hundred-year event we have experienced in the last 15 years. The first was the global financial crisis of 2008/9. Second was the 2019/2020 pandemic. Third, roughly speaking, was Russia’s invasion of Ukraine on 23rd February 2022, Europe’s and the world’s largest country invading Europe’s second-largest country, both big exporters of oil, gas, food, agricultural products, fertilisers and other raw materials. The shock of this event created a global inflationary surge only after causing economic havoc to growth, inflation and interest rates.
With Donald Trump taking office in January 2025, the US upended the global trading system it helped create after the Second World War and, indeed, the international economic order. Former trade enemies are now talking together about how they can keep trade going in the US’s absence. We will discuss the tariffs in a later article, but first, let’s go through this preamble, which is crucial to understanding the magnitude of what has just happened. This has to be one of the most egregious acts of self-harm by a rich, successful, large economy ever. Jettisoning its global leadership and soft power in one burst of action and turning on friends and foes alike will do the US no good at all.
First of all, talk of trade wars being good for the US is what they are, nonsense and should be said to be such to avoid any ambiguity. The last time we took this sort of action was in 1930, which created the ‘beggar-thy-neighbour’ policy. This policy, characterised by retaliatory tariffs and trade restrictions, led to a tit-for-tat situation that plunged the world into an even deeper depression, which ended only at the beginning of the Second World War and rearmament.
Interestingly, Trump’s actions are inadvertently fostering closer ties between countries. China, South Korea, and Japan, former foes and testy partners at best, have pledged to create an even closer economic and trading union. This could lead to a significant boost in global economic growth. Europe has also reached out, and it’s likely that other large global economies that trade intensively with the US will follow suit.
It’s important not to underestimate the potential for unexpected alliances. New Zealand and Australia could join the pact with China, Japan, and South Korea. It wouldn’t be surprising if India, Cambodia, and Vietnam did the same, given the impact of the massive tariffs on them. These shifts in alliances could reshape the global economic landscape.
Amazingly, they could even bring some of these countries together. Unintentionally, Trump could even have led to the breaking out of World Peace between former countries at war. Because they all know that this trade war will not serve their population, they will aim to develop wealth and prosperity via links with other like-minded trading partners, setting enmity aside. Do not be surprised if Europe and Canada also forge links with them.
Will the UK join this, or will it cleave to the US, hoping that the 10% increase in tariffs on it is rescinded and that the 25% tariff on cars, aluminium products and steel are also reduced?
This is momentous stuff; this is the first of the posts I intend to write about the existential events unfolding in real-time.
The next one will be on the details of the tariffs that have been announced and what they mean. A summary, however. They will harm the US, leading to a hike in the level of price inflation. Of course, the one-off move increases the price level, which no further action could arrest, but at the moment, it seems there will be further action.
Moreover, if the tax take for the government from implementing these tariffs is up by $600bn, then there either has to be a tax cut of $600 billion to give this money back to people who have lost it by effectively paying more for their goods and services they formerly imported, or it will lead to price controls to keep the lid on inflation and all other sorts of measures to dampen the deflationary effect that this will have on US economic growth rate.