Destabilising the world economy

A decade ago, the idea of imposing tariffs on major economies to tackle problems such as illegal migration or the opioid crisis would have been dubbed outlandish. Today, it’s a reality in the world’s largest economy. On Saturday, Trump invoked emergency executive powers to impose 25% tariffs on Canada and Mexico and another 10% on top of the existing tariffs on China. We do not know what is yet to come. Will he go ahead and slap similar tariffs on the European Union or even countries such as India? Will the affected countries retaliate? Will it trigger a full-blown trade war, stoking inflation, and jeopardising complex value chains with links to the American economy? What will all this do to future investment decisions? There is only one answer to these questions now: It is difficult to say but it is always a good idea to hope for the best even as one prepares for the worst.

What explains this irrational, self-damaging mercantilism masquerading as statecraft? That Trump does not appreciate that the interdependence of complex economies is only a part of the problem. To be sure, this characterises his approach on other issues as well. For instance, Trump has unleashed an attack on the US Federal Reserve after the latter refused to bring down interest rates. US central bank independence is pretty much the cornerstone of a modern monetary system. While one would expect Trump’s Wall Street supporters to provide sage counsel, it can’t be taken for granted that the President will listen. The second and deeper problem with this approach is that Trump seems to see tariffs as a silver bullet to tackle what are non-trade and even non-economic problems. Illegal migrants and opioid abuse are perfect examples of this. Deportation and curbing imports aside, which is what Trump wants his tariffs to deliver, solving these problems will take serious policy attention and time. But that’s not Trump’s way of doing business. Given the fact that the Democrats continued the policy of Trump 1.0’s trade war with China, it remains to be seen whether they adopt a more critical view now.

The US President has the democratic mandate to implement his policies unless the US courts declare them unconstitutional. But the one thing that can be said with certainty is that Trump’s claim that “the tariffs are going to make us (the US) very rich, and very strong”, isn’t going to materialise.

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