Although the White House insists it used a sophisticated formula to calculate its ‘Liberation Day’ tariff list, and even showed us its maths, can it really be a pure coincidence that if you type “What would be an easy way to calculate the tariffs that should be imposed onto other countries so that the US is on even playing-fields when it comes to trade deficits?” into almost any AI chatbot, you get just that set of tariffs?
Whether or not US trade policy is now being designed by White House interns who left their assignment to the last minute, Britain’s comparatively lenient treatment — if that’s what you can call a blanket 10% tariff — probably owes little to Prime Minister Keir Starmer’s “calm-headed” approach. It’s really thanks to Britain’s trade deficit in goods with the US that it got off relatively lightly.
That’s little reason to celebrate. For one thing, sooner or later someone will explain service trade to Trump, whereupon Britain will get that furrowed-brow look, given the large surplus it runs with the US. But until then, Britain might persist in the hope that Starmer and Trump will reach a trade deal that will protect it from the President’s caprices.
They’d be unwise to bank on it, though. It’s true that Trump loves striking a deal. After some impressive diplomacy by the Mexican president, as well as some assiduous ring-kissing by a couple of Canadian provincial premiers, both Mexico and Canada were granted a slight reprieve from their assigned tariffs. In a moment of generosity, Trump decided to impose only the earlier tariffs he had put on them, rather than raising their rates further.
But that itself is reason to worry. As both the Mexicans and Canadians will tell you, Trump is perfectly capable of negotiating an agreement only to tear it up shortly after. So if he wakes up in a bad mood tomorrow, who’s to say what he’ll do. Plus he has indicated that if any country retaliates with tariffs of their own, he will ratchet up their rate, depending on how irritated he is feeling.
You’d be hard-pressed to find an economist anywhere who can discern any logic or strategy behind this approach. Using a tariff as a bargaining chip, or to exert pressure, is arbitrary and fickle, and doesn’t serve any obvious vision for building the country’s export capacity. Thanks to Trump’s tariffs, US coffee-drinkers will have to shell out more for their morning java. So too will chocoholics. And of course, it won’t lead to coffee or cocoa production coming to America, because America can’t grow tropical crops. The same goes for bananas and a host of other products whose Stateside prices will now shoot up. There was a time when Latin American tourists would fly to America with empty suitcases just to stock up on all the cheap clothes and groceries there. Now the direction of travel will reverse.
But while analysts scramble to find method in this apparent madness, they are probably missing the point. Madness may itself be the method. By constantly keeping his negotiating partners on the backfoot, Trump appears to believe he maximises his leverage in negotiations. It’s not clear whether this is true. After all, trade negotiations aren’t real-estate deals: they are vastly complicated, and tend to take place over many years and involve a fine-grained understanding of the sectors that will most benefit. In the trade negotiations Trump has carried out so far, the US has generally come off the worse, which is no doubt why he often renounces his own deals.
Worse, this keep-’em-guessing method is terrible for business. Thanks to his cryptic policy by tweet, the Economic Policy Uncertainty Index is now at levels only ever seen once before in the US: during the early-pandemic panic when stocks were crashing and the economy was collapsing. When the index reaches such levels, investment and spending tends to fall, which slows the economy. Given that the US economy is already decelerating, the double whammy of higher prices from tariffs and slower growth is going to create a vicious cycle in which those who can will put their money aside for a rainy day. It’s no surprise, then, that US stock markets tanked yesterday. Moreover, given how heavily invested ordinary Americans are in the stock market, this will further worsen the gloom.
What is equally significant, though, is that the Uncertainty Indices for major Asian economies — China, India, and Japan — aren’t showing similar levels of panic. Unlike the supplicants lining up outside the White House to beg clemency, the response of some Asian countries to the Trump tariffs appears to be neither to fight nor beg, but to ignore. China seems set to use its immense reserves of savings to stimulate local consumption while Malaysia says it will seek to diversify its trade away from the US. Growth in China, India, and the dynamo southeast Asian countries will take a hit, but it will continue.
Instead, the losers will be America’s erstwhile friends, in Europe and North America. The East will inevitably beckon, as Western countries look to reduce their dependence on the United States. Assuming China does engage in a programme of fiscal stimulus to boost domestic consumption, its trading partners will be keen to strike new deals to replace lost sales to America.
The bonds with America that are weakened today may never recover their intensity. The faith that neoliberal internationalists had after 2020 that Trump might only be an unpleasant interlude before a return to normality was this week proven wrong. If current polling trends continue, he may well leave office a reviled president. But he came to power off the back of the popular vote, and there will likely be future presidents who will uphold his legacy. For Trump speaks for a new America — one that appears to be here to stay.
“The bonds with America that are weakened today may never recover their intensity.”
No longer willing to play the part of the global policeman, the US is turning its back on the world and the world is reciprocating. Nations which fail to do so will live at Washington’s mercy. This mass pivot risks harming America’s economy long-term, while weakening its global heft. Already, we see the dollar plunging in value, as global investors realise the US is no longer the safe haven it once was. And if foreign investors no longer underwrite America’s debt, the damage to its economy will be deep and permanent.
In the end, then, the biggest victim of Trump’s attack on free trade will probably be America itself. This year, and possibly for several years to come, its economy will underperform compared to its recent rate, and the country will gradually lose influence over others as they diversify away from it. Meanwhile, the “exorbitant privilege” of the dollar’s status as a reserve currency may in time be lost, which will hurt the living standards of ordinary Americans. Unable to live off the world’s credit, they’ll need to cut their spending and pay higher prices.
All told, this will probably accelerate the transition to a post-American age, particularly as other countries are already starting to regard China as a more predictable partner. The tragic irony is that although Trump pledged to make America great again, he may end up making China great instead. As for Britain, it would probably be best not to hope for salvation in some kind of trade deal. The Atlantic Age died on Wednesday, and whatever “special relationship” might have existed will, to paraphrase a former vice president, be worth a bucket of warm spit.
