Transformative trade dynamics in Trump era

Yanis Varoufakis, globally respected political economy thinker and former finance minister of Greece recently in an article wrote: “Trump understands how raw economic power, not marginal productivity, decides who does what to whom — both domestically and internationally”. Yes, economic theories can explain what has happened and what would have its impact in future, only when all other things remain the same. In reality, things never remain the same. Technological, social, political, cultural and economic contexts are changing every day. These changes are the results of technological and social innovations, and political, social and cultural choices. As the innovation and decisions dynamically changes contexts, it is safe to say, political decisions determine the courses of economy, not the other way around. The United States (US) President Donald Trump and his MAGA (Make America Grate Again) team members knew it and made few dramatic decisions about tariffs on US imports in early April that rattled the world.

In order to reclaim economic sovereignty and getting rid of the main causes of economic subjugation, as perceived by MAGA movement, immediately after assuming office of the president on January 20, 2025, Donald Trump ignited his tariff war and imposed 10 per cent tariff on all imports from China and 25 per cent on imports from Mexico and Canada starting February 4. By signing an executive order on April 2, President Trump declared an economic emergency and added two rates of, what he called “Liberation Day” tariffs on top of the existing tariffs: (a) a “universal” tariff; and (b) a “reciprocal” tariff. The universal tariff is 10 per cent for all countries or regions that took effect on April 5. Moreover, reciprocal tariffs were imposed on 57 countries excluding China, on which the latest rate is 145 per cent. These rates are changing and were active on May 4. Reciprocal tariffs were set at varied rates for each country. These rates range between 11 to 50 per cent. The higher the trade deficit with the US, the higher the reciprocal tariff rate is. Only a few products will not be subject to these tariffs. They are for separate treatment: personal communications, donations, information and information-related items, travel purchases, steel, aluminium, copper, pharmaceuticals, semiconductors, lumber, gold, fuel, certain minerals, etc.

Tramp tariffs have not yet been finalised. US President wants negotiations with trading partners, which may happen within his 90-day pause. All of the stock and bond markets become more or less stable after immediate shock. Global trade and financial market regulators, global lenders warned about the uncertainty that causing supply chain disruptions. They also downgraded global economic prospect. No regulator or global lenders yet warned about recession or depression, though some economists compared Tramp’s executive order with Smoot-Hawlet Tariff Act of 1930 that imposed on 20,000 goods at the rate of 40 per cent caused a catastrophic fall in global trade. America’s trading partners reciprocated to the tariff that aggravated and prolonged the great depression of 1930s. Many global thinkers opined that if negotiations with trading partners, including China will not be able to eliminate economic uncertainty, another economic Armageddon may come true.

CHINA FACTOR: In this trade war that started in 2018, China has more leverage than that of the US in the short-run. In the medium-run, this trade war will hurt China more, as its 2 per cent of gross domestic product (GDP) depends on the US. China’s weakness is that it is the trade surplus country and surplus country cannot generally, win a trade war. China has already reduced its dependence on export to the US and taken several measures to counter US adversaries. Chinese state media, Xinhua recently reported that China could drop tariffs on some US products, including semiconductors. According to the report, “Beijing would work with the international community to actively uphold multilateralism and oppose unilateral bullying practices”. Politburo proposed a series of interventions to bolster the domestic economy and protect people and businesses from the impact of Trump’s tariffs, including increasing unemployment insurance pay-outs. It promised to increase low and middle incomes, develop the service industry and boost consumption. Chinese president Xi Jingping has recently visited Cambodia and Vietnam and is trying to forge deals with them along with ASEAN, European and BRICS countries. It is determined to create an alternative global order. China is preparing for long fight with the US.

In his article on The Washington Post, columnist Max Boot informed: “In 2014, the eminent political scientist Graham Allison wrote an influential book called ‘Destined for War: Can America and China Escape Thucydides’s Trap?’ The subtitle referred to a famous passage in Thucydides’s ‘History of the Peloponnesian War’. It was the rise of Athens, and the fear that this inspired in Sparta, that made war inevitable.” Allison surveyed the history of the past 500 years and found 16 cases in which a major nation’s rise has disrupted the position of a dominant state. In 12 of those instances, the result was war. And that includes two of the most horrific conflicts in history: the First World War was caused in no small part by the rise of Imperial Germany, and Second World War was caused by the rise of both Nazi Germany and Imperial Japan. Allison ranged an alarm that another conflict was brewing because the rise of China was threatening the US hegemony. There was nothing inevitable about a US-China conflict, he wrote in 2014, but the odds were that one would eventually erupt.

Just hundred years ago in the same month of April, Winston Churchill at the capacity of Chancellor of the Exchequer of United Kingdom (UK), returned pound sterling to the gold standard at the pre-war rate of exchange. The purpose was to maintain pound’s status as key currency of the world and, at the same time, preserve London’s status as the leading international financial centre. The return was not free. He preferred pound sterling’s and London’s leading status at the opportunity cost of devalued currency that might boost economy and export. He preferred greater financial stability than larger economy and export earnings.

What Donald Trump’s tariff war is going to produce? Will dollar prevail with its strength as most preferred reserve and transaction currency?

negotiate oR not: Trump’s executive order has already been challenged in the court of laws in twelve separate states. Some congressional Republicans have come out in support of legislation to limit the president’s authority to impose tariffs. Professor Nouriel Roubini, a senior adviser at Hudson Bay Capital Management LP and Professor Emeritus of Economics at New York University’s Stern School of Business wrote in Project Syndicate: “The US economy’s potential growth will approach 4 per cent by 2030, far above the International Monetary Fund (IMF)’s recent estimate of 1.80 per cent. The reason is obvious: America is the world leader in ten of the 12 industries that will define the future, with China leading in only electric vehicles and other green tech.”

In the article, Professor Roubini concluded that any substantial weakening of the dollar would be gradual, and the greenback would not suddenly lose its role as the global reserve currency. His conclusion also includes that US inflation will surge above 4 per cent this year, trade deals with most countries will limit the tariff rate to an undesirable but manageable 10-15 per cent level, and a likely de-escalation with China will leave that rate at around 60 per cent, on average, driving a gradual decoupling of the two economies. According to Rubini: “The ensuing shock to real (inflation-adjusted) disposable incomes will stall growth by the fourth quarter of this year, perhaps leading to a shallow US recession that will last for a couple of quarters. By the middle of 2026, US growth will be experiencing a strong recovery, but Trump will have been damaged politically, auguring a loss for his party in the midterm elections. Fears of the US descending into autocracy will be alleviated. American democracy will survive the Trump shock, and, after an initial period of pain, the US economy will thrive.”

Considering the predictions of the IMF, World Bank and Professor Roubini and the position of Federal Reserve, response of the market and expected positions of China, EU and rest of the world, it is safe to say that US economy is not going to be hurt heavily by the Trump tariffs and US’s trading partners including China will sit with America. In case Trump does not negotiate with trading partners and come out with amicable deals, the world may divide in different trade blocks with more powerful BRICS, EU, ASEAN and others. This option is not plausible.

The initial shocks have already been absorbed. It is expected that almost all the countries including China will have some kind of negotiations that would stabilise global economy in a different context. A modified world trade order would emerge, where today’s trade balances will not remain the same. Nobody can say for sure, who will win, who will lose. It can be said for sure that agile countries will gain much out of these chaotic situations. Everybody will gain if a fairer trade environment would emerge out of the havoc created by Trump.

Weakening THE dollar: Modified trade environment or the stronger economy is not the goal of Trump. These will not solve US’s economic problems and bring victory for him. He needs cheaper dollar that remains as the world’s most preferred reserve and transaction currency in order to bring back manufacturing and substantially lowered deficit.

In fact, Trump started the process in his first term by imposing high tariffs on goods from China, EU, Mexico and Canada, though withdrew them later from EU, Mexico and Canada. All the parties took their lessons at that time.

Germany has recently loosened its constitutional debt break to be able to borrow more to invest in priority sectors. More consumption-driven Europe and China will attract investors with a viable alternative to the dollar. Some countries may go to invest in the US to avoid tariffs that would help achieve Trump’s another goal, bringing back manufacturing. Countries like Bangladesh will try to woo US by purchasing more items from them and by reducing their own tariffs on US products. All these things would reduce demand for dollar and its reserve currency status may be diminished; so what Trump is looking for may not be achieved fully. The humanity would be benefitted if surpluses are invested in development that would reduce extortion, coercion and ultimately inequality. If all these happen, Donald Trump will be a history.

Sabbir Ahmed FCA is a practicing chartered accountant and Ranjan Sen is a senior journalist.

sabbahme@yahoo.com, rjsen61072@gmail.com