Bala Ramasamy: Trump Tariff 2.0: What's at stake for the global economy?

On what President Donald Trump has called "Liberation Day", the U.S. has taken a bold step in its trade policy, announcing a universal "baseline" 10% tariff on all imports into the U.S. But the stakes go even higher for certain countries, as they will be hit with even higher tariffs.

This decision, made under national emergency powers, marks one of the most significant escalations in U.S. trade policy in its history. What has "Liberation Day" really liberated? Has it “freed” the U.S. economy from the constraints of international trade, or is it setting the stage for more isolation and uncertainty?

Bala Ramasamy, Professor of Economics at CEIBS

No One Is Being “Liberated” by Trump’s Tariffs 

I'm not sure why it is called the Liberation Day because no one actually colonize the U.S. trading system. These were the system that was actually created by the U.S. and some of the other advanced countries in the past. Just because the system is not working so much in the favor of the U.S., that does not mean there is something wrong with the system. So I would not call it liberation day, because nobody is being liberated here.

I have to say that free trade actually benefited everyone, including the U.S., the problem is we also need to ensure that each country is doing something to ensure that the benefit of this free trade, benefit of globalization is somehow distributed equitably to the entire population. And I believe this was the this is a problem that the U.S. failed in the sense that those people in the middle income, their incomes never had a lot of change, over the last 50 years. So the rich got richer, but the middle income remain middle income. In that sense, this is a problem which is internal to the U.S. , I don't think this has anything to do with the free trade system. So sorry, I do not believe this is “liberation”.

Tariffs Will Be a Very Hard, Very Expensive Mistake for the U.S.

I think this idea of trying to bring back manufacturing to the U.S. depends on what kind of manufacturing, right? If you're hoping that you will bring back jobs, for example, factories that make shoes, the U.S. is not good at making shoes. So the question here is, what kind of manufacturing do you want to bring back to the U.S.?

If it's going to be high-end manufacturing, then you also have to realize that high-end manufacturing does not create that many jobs—right? Not the kind of jobs that you are looking for, for those people who, let's say, have less than a college education.

So in that sense, how is it going to benefit the U.S. by having this tariff? Yes, based on COVID and so on, it is obvious what we have learned is we need to ensure that our supply chain is a little bit more diversified. But that does not mean that we produce everything in our own country—that is ridiculous in the kind of world that we live in today.

So definitely, I do not believe that this is actually going to help the U.S., both in the short term as well as in the long term. I think this is going to be a very, very hard mistake, a very expensive mistake, and hopefully not so painful a mistake that the U.S. is making with this trade war.

Well, these tariffs may not be the "liberating" force some think they are. But if the tariffs are here to stay, what further impact will they have on the U.S. Economy? Could they spark inflation, disrupt markets, and more? And what is exactly the true cost of this  "liberation"?

Harvey Dzodin, Former legal advisor in the Carter Administration

Tariffs Will Lead to Hyperinflation and Stagflation

The levels (of the tariffs) are really astounding. And it surprised a lot of countries and surprised a lot of people. But I believe he's serious about imposing these tariffs because Trump, in a sense, he's a self-proclaimed stable genius and tariff man. He has no regard for history or anything else.

Trump hasn't even learned the lessons of history because he's ignorant about history and about most other topics. He doesn't know that he's repeating history's mistakes; he doesn't know that we had this tariff war in the 1920s and 30s, we had this very high tariff legislation called Smoot-Hawley. And so that led not only to the Great Depression, it led also to World War Two.

So the tariffs are going to definitely lead, at this high level, to recession and stagflation in the US and in many places. And to me, it's a very weird result for a man who won elections on the strength of promises to bring down inflation because inflation and unemployment are bound to go through the roof.

I think that what the tariffs are going to do, they're going to result in hyperinflation, they're going to result in stagflation. They're going to hurt the American public and everybody else. But I think it's being done because it's to benefit a certain elite in America. And the people who voted for Trump now have voter remorse. They're not going to get what they wanted. They're getting exactly the opposite of that.

It's Not About Making America Great Again

I think there's another angle to this story, and that angle is that I believe that Trump and the people who back him, which are, let's say, call them American oligarchs, are trying to redefine the world and trying to get as much of the money as possible. America is going to get trillions of dollars' worth of income from these countries. But does that mean that this is going to benefit ordinary Americans? The income that is coming in will be redistributed to the richest 1%. So I believe this is a huge redistribution effort on the part of conservative Americans to take money away from poorer people and not only poor people but middle-class people.

I think that the people who voted for Trump are surprised. And I think that's the story of these tariffs. It's not about making America great again. It's about making certain people in America great again and also about punishing other people that President Trump hates or doesn't like.

Adam Slater, Lead Economist at Oxford Economics

Tariffs Will Cut U.S. GDP and Raise Inflation

These tariffs are higher than we'd expected. It is, of course, possible that over time, some of these tariffs will be negotiated downwards, but it's also likely that a substantial chunk of them will be permanent. Now, our initial modeling suggests that the tariffs that have been announced will cut U.S. GDP growth from 2% that we had previously to 1.4% this year. Bear in mind, we already had some tariff increases in the baseline. This is the additional effect. The U.S., on that basis, will narrowly avoid a recession, and these new tariffs will raise core inflation from 3.1% in our original baseline to 3.9%.

Now, just to be absolutely clear, the effects could be bigger than this. And there are two main reasons for that. The first is that there is scope for substantial retaliation against the U.S. And the second is that it's possible uncertainty effects will add to the economic impact, especially on GDP growth. And what we mean by that is that the volatility of tariffs, the volatility of decision-making around tariffs may mean that an additional risk premium is built into trade with the United States. So if you feel like there's an invisible extra tariff in people's minds, they perhaps will be less keen to trade with the United States than they otherwise would be. So there could be this additional impact.

David Blair, U.S. Senior Economist

U.S. Tariffs May Reshape Its Economy

I think if these tariffs are fully implemented, it will cause a significant transition in the U.S. economy. And certainly, transitions are always difficult. So that could be difficult. But I do think what he's trying to do is redistributing income away from capital toward labor.

Regarding to the inflation, I think the price of some things will go up. You'll see an inflation of things that are largely imported. So the price of wine and cheese will go up, but some things might go down—energy prices might go down. So it's hard to see where the balance is.

I'm speculating about what I think the administration is thinking. I think they believe the old world is kind of over—the idea that there used to be a U.S.-led world where all the regions of the world were tightly integrated. I think they see more that we're moving toward a world where there's a North American sector, an East Asian sector, European, Russian, maybe Indian. There are a few big, great powers, and they might have less to do with each other than they previously did. So I think it will be a more isolationist, but also maybe less interventionist world.

As these tariffs set off ripple effects across the U.S. economy, we must also consider their broader impact on the global economy. How will other countries respond? And what effects might this have on international trade and the global economy?

Bala Ramasamy, Professor of Economics at CEIBS

Countries Realize They Need to Rely Less on U.S.

Again, it is surprising that, he's also having this war with close friends as well. But on the other hand, I think this is also good, in the sense that the EU, for example, realizes that it is important that they have a strong economy within the union as well, because they now realize that you can not depend on the U.S. too much.

I have a dream that, you know, all these other countries, that means Canada, the EU, China, India can come together and actually respond to the U.S. in a similar way, I know that dream will, probably not come true, but of course, I think it's very important, in international relations, many other scholars have mentioned this, you have to retaliate, right? I hope it comes true that they will retaliate in a similar way. But again, we're talking about Trump. We really don't know what his reaction would be. But I think retaliation is important.

One last point here is it also becomes important for the other countries, right here, I'm talking about the EU, Canada, India, maybe Japan, Korea, the ASEAN countries, Southeast Asia, it becomes more important that these trade wars does not have a negative impact on the relationship between these other countries, right? So that would mean, you know, if we increase our trade, increase our economic relationship, let's say, for example, between China and Southeast Asia, China and the EU and so on, I, this is a very good opportunity for us to become much closer with each other.

Adam Slater, Lead Economist at Oxford Economics

Retaliation Might Intensify as Tariffs Persist

Yes, the U.S. has been quite harsh towards some of its big trading partners, including well-known allies. Now, I think in terms of retaliation, the effect will vary from place to place. Some economies, I think, the approach will be to try to engage with the U.S. and get them to negotiate some of these tariffs down. Other places will probably be more combative, will go for more symmetrical retaliation. What we see is that certainly in the case of the EU so far, there's been some retaliation, but not total retaliation for the UK. Mexico has generally been trying to avoid retaliation so far. So a lot of different possibilities.

But if the tariffs remain permanent and are not easy to negotiate away, then the political pressure for retaliation, I think, will get quite large over time. So the danger of retaliation, I think, probably increases over time the longer these tariffs stay in place. And therefore, the effect on the world economy potentially becomes bigger, too.

The road ahead is filled with uncertainty. The long-term consequences—on both domestic prosperity and global stability—are still to be seen. The fragmentation of global trade brings even more uncertainty to the world. How will countries adapt to an increasingly fragmented and protectionist global economy? Only time will tell.

Source | SFC Markets and Finance