The impact of Trump's ‘reciprocal tariffs’ policy on global trade

The re-election of Donald Trump in 2024 revived a divisive, transactional approach to global economic relations, termed the "Reciprocal Tariffs" policy, introduced on April 2, 2025. Unlike previous protectionist measures, this strategy recalibrates the US trade framework based on numerical parity.

Most countries represented at the G7 are already facing Trump's 10 percent baseline tariff, with the possibility of further increases on the horizon. European nations and Japan are additionally subjected to higher levies on cars, steel, and aluminum. The G7 includes Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States. On June 16, 2025, G7 leaders convened to discuss trade amidst escalating global tensions and concerns regarding the impact of these tariffs on international relations. While the Trump tariffs are intended to protect domestic industries by promoting American-made products, they also generate increased government revenue, which could be reinvested in infrastructure and workforce development. This protective measure has the potential to revitalize struggling sectors and stimulate innovation among US companies. China has recognized the significant extent of its influence over the US and how to leverage this advantage in the coming months. “China believes it has more negotiating power than it initially assumed,” stated Liu Dongshu, an assistant professor of Chinese politics at the City University of Hong Kong. Recent trade discussions have shown Beijing that “Trump is not as formidable as he seemed.” In contrast to Trump’s enthusiastic announcements on social media, where he declared in all caps that the “deal with China is done,” China’s official statements have been notably more reserved. While Trump emphasized US access to China’s rare earth minerals, he maintained high tariffs. These tariffs have prompted China to reevaluate its negotiation strategies and capitalize on its economic strengths. To alleviate tensions, China can adopt several strategies: engaging in constructive dialogue with the US, diversifying trade relationships with other countries, enhancing domestic production capabilities, and employing flexible negotiation tactics. By pursuing these approaches, China can effectively mitigate the impact of tariffs and navigate its economic landscape more successfully.

The global economic order has undergone significant changes due to recent trade policies. There has been a marked shift away from free trade towards protectionism, aimed at supporting domestic industries. This shift has disrupted established global supply chains, prompting companies to reevaluate their production strategies and consider relocating operations to manage costs effectively. Additionally, traditional economic theories, particularly the concept of comparative advantage, have faced scrutiny as tariffs have altered import cost dynamics, diminishing the benefits of specialization.

The imposition of tariffs has also led to retaliatory actions from other nations, igniting trade wars that complicate international relations and heighten economic uncertainty. This environment emphasizes domestic manufacturing and job creation, reflecting a nationalistic shift in economic policy. Furthermore, higher tariffs have resulted in increased prices for imported goods, contributing to inflation and negatively impacting consumer purchasing power. The preference for bilateral agreements over multilateral frameworks has posed challenges to existing trade institutions like the WTO, potentially undermining global trade cooperation.

The US has imposed a 37% tariff on Bangladeshi exports, significantly impacting the ready-made garment (RMG) sector. Currently, export diversification is not a viable option for Bangladesh, and the use of AI is not being implemented. This tariff is perceived as politically motivated rather than economically justified. The associated economic risks threaten price competitiveness, which could lead to factory closures and job losses, while also deterring foreign investment.

Strategic Recommendations for Bangladesh

Market Diversification: Bangladesh should pursue diplomatic initiatives to increase imports of US cotton and other goods, encouraging the US to reconsider its tariffs.

Strengthening Trade Relations: It is crucial to enhance trade agreements and reduce reliance on a single trading partner to improve resilience amid ongoing trade tensions.

Trump's tariff policies have notably reshaped the global economic landscape, challenging established trade theories and complicating international trade dynamics. Bangladesh must adapt strategically to navigate these challenges and bolster its economic resilience.

Economist Nick Bloom, a Stanford University professor who studies the impact of uncertainty on business investment, notes that current data is limited and mainly reflects projects planned from the previous year. He indicates that while business investment may be slightly down, it is not significantly impacted. This pause in investment is a natural response to increased uncertainty, offering businesses a chance to reassess their strategies and adjust their investments for future growth.

However, criticism from economists like Harvard’s N. Gregory Mankiw labels these tariffs as "economic malpractice," arguing that they misinterpret bilateral trade deficits and overlook the role of foreign manufacturing in supporting domestic growth. Stanford's Nick Bloom reiterates that while business investment may be slightly down due to uncertainty, this pause allows companies to reassess strategies for future growth.

The re-election of Donald Trump in 2024 introduced the "Reciprocal Tariffs" policy, significantly reshaping global trade dynamics. This approach emphasizes numerical parity and protectionism, which has profound implications for countries like Bangladesh. Key impacts include a shift away from free trade towards protectionist measures, leading to substantial disruptions in established supply chains. Companies have been compelled to reevaluate their production strategies and consider relocating operations. Traditional economic theories, particularly comparative advantage, have come under scrutiny as tariffs alter import cost dynamics, diminishing the benefits of specialization.

The imposition of tariffs has triggered retaliatory actions from other nations, complicating international relations and increasing economic uncertainty. The focus on domestic manufacturing and job creation reflects a nationalistic economic policy shift, while higher tariffs have contributed to rising prices for imported goods, negatively affecting consumer purchasing power. Additionally, the preference for bilateral agreements over multilateral frameworks has undermined existing institutions like the WTO, complicating global trade cooperation.

This tariff is seen as politically motivated rather than economically justified, posing significant economic risks by threatening price competitiveness and potentially leading to factory closures and reduced foreign investment. Furthermore, exports of pharmaceuticals, light engineering products, non-perishable items, and frozen foods from Bangladesh face hindrances due to these tariffs.

To navigate these challenges, strategic recommendations for Bangladesh include pursuing market diversification by actively engaging in diplomatic efforts to increase imports of US cotton and targeting emerging economies in Africa, Southeast Asia, and Latin America. Strengthening trade agreements and reducing dependence on a single trading partner will enhance resilience amid ongoing trade tensions.

As the 90-day suspension of Trump's reciprocal tariffs approaches its conclusion on July 8, Bangladesh plans to propose duty facilities to the US through a multilateral trading framework. This initiative aims to:

Maintain Low Tariffs: By advocating for duty facilities, Bangladesh seeks to keep tariffs low, which is crucial for its export-driven economy.

Enhance Trade Relations: Strengthening bilateral trade ties will be a focus, promoting cooperation and mutual benefits between Bangladesh and the US.

Support Domestic Industries: This approach aims to bolster local industries, ensuring they remain competitive in the global market.

Key Benefits of the Proposal

Mitigating Economic Risks: With the potential for high tariffs looming, proposing duty facilities could protect Bangladesh’s export-driven economy from adverse impacts.

Improving Market Access: Duty facilities could facilitate greater access to US markets, benefiting various sectors beyond textiles, such as agriculture and manufacturing.

Bangladesh's proactive strategy to propose duty facilities underscores its determination to navigate the complexities of international trade. By utilizing multilateral mechanisms, the country aims to secure favorable trading conditions and enhance its economic resilience amid shifting trade dynamics. To effectively navigate its challenging relationship with the US, Bangladesh should establish a high-powered negotiation team comprising diplomats, economists, civil society members, academicians, bankers, business leaders, entrepreneurs, industrialists, journalists, bureaucrats, and security personnel. This diverse group will facilitate dialogue with the US administration, promote increased imports, and leverage the Bangladeshi-American diaspora to strengthen trade relations. By enhancing international trade practices, particularly through the lens of diaspora theory, Bangladesh can mitigate the adverse effects of high tariffs and foster economic growth.

Nobel laureate Paul Krugman warns that President Trump’s unpredictable tariff policies are generating significant uncertainty, which discourages business investment and increases the risk of recession—a challenge that policymakers in Bangladesh must address. While inflation remains a concern, Krugman highlights that the more pressing issue is the decline in investment in trade-sensitive sectors due to the instability of US foreign policy, an area where the negotiation team should focus its efforts.

Moreover, Bangladesh needs to explore new markets within the changing global landscape while maintaining exchange rate stability. It is crucial for Bangladeshi exporters to curb excessive greed that can undermine competitiveness. By applying the principles of Pareto optimality and concentrating on social welfare, Bangladesh can improve its standing in the global economic order. Additionally, tackling inflation and corruption is essential, and developing strategies to address these issues should be a priority for the negotiation team. Joining ASEAN could further enhance Bangladesh’s economic strategy.

In terms of game theory, utilizing a Nash equilibrium approach will enable Bangladesh to identify strategies that lead to mutually beneficial outcomes in trade negotiations, ensuring that all parties can meet their objectives without escalating into hostile confrontations.

- Dr Muhammad Mahboob Ali, a PostDoc, is a macro and financial economist teaching at Bangladesh University of Business and Technology as a Professor in the Department of Economics. He can be reached by email -- pipulbd@gmail.com.