When regimes end, they end in phases. Communism died over a period of 10 years, starting with the strike at the Gdansk shipyard in 1980. The fall of the Berlin Wall in 1989 was the great symbolic episode, and the 1991 coup against Mikhail Gorbachev was the final push. Yesterday was globalisation’s Gorbachev moment. Trump’s first term was Gdansk, the canary in the coal mine.
On Liberation Day, international macroeconomists were busy digging out the Project Fear models with which they spectacularly misdiagnosed the economic consequences of both Brexit and the sanctions against Russia. But, really, tariffs are better viewed in terms of longer cycles, as is the case in politics. In the very short run, they constitute a price and output shock, with some characteristics of the economic impact of Covid. The tariffs will raise substantial revenues for the US government this year and next, with industrial relocation playing a progressively more important role in the following two years.
When Tesla invested in Germany, there were two years between the announcement and the actual beginning of production. But the initial announcement was preceded by a year of evaluation and negotiations. Companies with existing plants are best placed to expand production quickly. Taking stock after three or four years is the preferable way to judge this, and the obsession with year-one effects is the reason why people are misjudging trade-related policy decisions.
Will Trump get what he wants? In terms of reshoring manufacturing, the answer is probably yes. For the largest trading partners, such as China and Germany, this will be a massive shock because of what it implies for the sustainability of the current economic models. Contrary to predictions, there has not been a compensating dollar revaluation, which open macro models would predict as a market response to tariffs. The unwinding of the globalisation Ponzi scheme, which brought increasing capital flows into the US markets, is now clearly the bigger factor.
Politically, these tariffs will work for Trump. Foreign manufacturers are already declaring that they will step up investments in the US. The old manufacturing jobs won’t come back, but new ones will be created. There is, though, a serious risk of a US recession this year if Trump fails to get his tax policies through Congress. The Republicans may lose the midterm elections. But if the goal is to raise external revenues, reduce the budget deficit, and reshore manufacturing, those tariffs will work — so long as one remembers that they cannot do everything at the same time.
Europeans in particular should be wary of wishful thinking. There were plenty of gleeful projections of a more severe impact for the US than for Europe. In the short term, there will be a negative effect on the American economy, as the tariffs are a huge tax on US consumers.
It’s a struggle, though, to see what the EU can do in return. The bloc ran a trade surplus of $230 billion last year and the current account surplus against the rest of the world is rising again, back towards the pre-Covid levels, when the euro area adjusted to the sovereign debt crisis by depressing consumption and investment. This is the unsustainable element of the post-Cold War international economic model, along with China’s financial repression. The EU could promise to import more US defence goods, but this would run counter to its strategy of making itself more independent from the US, which should be a more important strategic goal than tariff-avoidance. Nor can the EU simply decide to not buy more LNG from the US. In any case, even if the EU were to make such a promise, the tariffs would only be lifted afterwards.
“Will Trump get what he wants? In terms of reshoring manufacturing, the answer is probably yes.”
The EU could decide to reduce its own tariffs, remove quotas, and non-tariff barriers. One example of a non-tariff barrier is the lack of a German motorway speed limit. This necessitates a disproportionately high safety standard for cars — a protectionist measure designed to protect the European car industry from imports of cars that cost half as much elsewhere. If the EU were to reduce the direct and indirect tariffs and the quotas on US agricultural products, then we could see a pathway for negotiations. But the US is not going to lift its tariffs in anticipation of future EU action. Those times are over.
What, though, if the EU were to impose a tariff on US services? This is the closest the bloc has to a bazooka — it has a services deficit with the US of roughly half the size as its goods surplus. But a tariff on services is difficult because suppliers can easily evade them, by relocating out of the EU and citizens would push back since there are often no alternatives.
In any case, one of the reasons it would be unwise to predict the economic consequences of yesterday’s decision, is that so much depends on how others react. China, for example, could respond by diverting trade to the EU, and we could end up with a EU-China trade war. Ursula von der Leyen has already ominously said: “We will also be watching closely what indirect effects these tariffs could have, because we cannot absorb global overcapacity nor will we accept dumping on our market.”
So rather than co-ordinating our retaliation against the US along with those east Asian countries most seriously hit by the tariffs, such as China, South Korea, Japan, Taiwan, and Vietnam, we will probably go away and fight our own separate trade wars, allowing America to play us off against each other.
If, though, we were to co-operate and attempt to find an alternative to the US financial architecture, security guarantees or the dollar, that would be a genuine problem for Trump. But it’s doubtful that will happen. Instead, the EU finds itself in a position where it is fighting trade wars against both of its trading partners: retaliating against the US — which will inevitably backfire — while also trying to stem Chinese imports.
The EU tariffs on China are, of course, quite different in intention, form, and content from the US ones. But the net effect is a worsening diplomatic relationship with China, and an irreconcilable trade balance. And, so, Europe finds itself between a rock and a hard place. China, and the other countries hit hard by these tariffs, are both necessary partners in organising a response, and a threat to European industry. Unless a degree of rebalancing is accepted — losing the trade battle to win the trade war — it’s hard to see a way out.
