The US trade measures – import tariffs, but also other types of export and import restrictions – will have far-reaching and long-term consequences for the US and the global economy. I believe the effects will be quicker, more severe and longer lasting than thought. The international trade system built after the second world war will come under grave pressure, with sustained consequences for the world economy.
Owing to the unusual degree of uncertainty, the International Monetary Fund provided its estimates in its 22 April World Economic Outlook in the form of a reference forecast with a range of possible developments. In this ‘reference’ scenario, US gross domestic product growth for 2025 (relative to the January forecast) has been revised downwards to 1.8% from 2.7%. For the euro area and China, it has been revised to 0.6% and 4.0%, respectively, down from 0.8% and 4.6%.
For several reasons – recent and long-term historical experience, the relatively long 90-day ‘relief period’, erratic US negotiating tactics and sharply increasing geopolitical risks – I believe the IMF is too optimistic.
Looking to history for comparisons
Trump’s chaotic geopolitical approach represents the most worrying aspect of current circumstances. Unfortunately, subtlety is not part of the US administration’s DNA. It is bringing in trade restrictions at the same time as numerous measures aimed at domestic individuals and institutions, covering areas as varied as diversity, equality and inclusion, immigration, financial matters and the judiciary.
All this is being done with little or no coordination, for reasons often based on either prejudice or vindictiveness, and in a manner that frequently borders on the unconstitutional. America’s geopolitical tactics show the same erratic and ill-considered characteristics, with associated dangers for economic and political stability.
In the WEO, the IMF emphasises the downside risks, including those stemming from financial instability, exchange rate movements and fiscal developments. It does not foresee recession, either in the US or globally. Understandably the Fund does not wish to be too pessimistic. It aims to avoid either self-fulfilling expectations or provoking Trump into disastrous madcap actions such seeking to leave the IMF.
But we need to look at comparators. The most relevant historical example is America’s Smoot Hawley Tariff Act of 1930. Like Trump’s protectionist measures, it was introduced against the advice of prominent economists and only after much political wrangling. Because this Tariff Act more or less coincided with the outbreak of the Great Depression, it is difficult to isolate its effects from the other influences. However, it is clear that this act deepened and prolonged the downturn that had already begun in 1929.
The 1930 experience shows the difficulty of dismantling protectionist measures once they have been introduced. Only in 1934, with the Reciprocal Trade Agreements Act, could the US president negotiate bilateral tariff reductions. Import tariffs were gradually reduced until the early years of the war. After the second world war, US trade tariffs were reduced gradually and by the turn of the century the effective tariff on all US imports had reached an extremely low level. In current circumstances, substantially reversing import measures is even more difficult because revenues from import tariffs are desperately needed to finance promised US tax cuts.
Learning from the Brexit experience
We should examine, too, the effects of Britain leaving the European Union. Supply chains largely cross national borders and capital flows can move freely around the world. This has greatly increased vulnerability to trade barriers and can widen and speed up negative effects. The UK-EU Trade and Co-operation Agreement (effective January 2021) led to average import tariffs (2.8% for the UK and 1.5% for the EU) that were based on ‘rules of origin’ and compliance with the most-favoured-nation clause and are incomparably lower than the present effective rate on all US imports of around 25%.
Yet despite the relatively limited increase in import duties, Brexit has been extremely damaging. The UK Office for Budget Responsibility estimates that, longer term, withdrawal will reduce the size of the economy by 4%.
The non-tariff consequences of Trump’s measures are likely to be much greater. The number of countries and supply chains affected is much larger. Many more conflict situations will arise. The MFN approach has de facto been abandoned. The US and subsequently China have decided additional targeted, non-tariff measures such as restrictions on goods such as certain chips, Boeing aircraft and rare earths that could further fuel the trade war.
Uncertainty fuelled by negotiations
Regarding the 90-day negotiation period, Trump’s wayward style in dealing with Mexico, Canada, China as well as the EU adds to anxiety about what could go wrong. As an example of this behaviour, Trump announced he would double the universal base rate of 10% and add specific rates with a focus on China. When he put this on hold – except for China – financial markets and governments breathed a sigh of relief, but this appears premature.
The tariff policy has clearly got completely out of hand with absurdly high tariffs, especially for China, which Scott Bessent, US Treasury secretary, has termed unsustainable. Trump has expressed a willingness to negotiate, under pressure from financial markets and US corporations. However, the path to an acceptable outcome is paved with problems. The Chinese want an end to the tariff war, but their demands will be hard for Trump to swallow. His claims that negotiations with China have started appear to have no factual basis. It will not be easy to rein back, especially because Chinese confidence in American trustworthiness will have sunk to a very low level.
No one knows exactly what the US position will be in coming months. Uncertainty will prevail for a relatively long period, with a paralysing impact on investors and consumers. The negotiations will in any case be extremely complex. The US will attempt to incorporate more than just trade considerations. For example, America will try – and probably fail – to separate Asian countries from China.
The reciprocity approach is another complicating aspect. For the US, reciprocity includes not only tariffs but also value added tax and safety and health requirements, which the US believes distorts competitive relations. However, reciprocity is at odds with the MFN clause. Compliance with this clause is crucial. It seems almost impossible to reach an agreement with so many countries in such a short period, in a way that maintains equal trade opportunities.
A balanced outcome requires a multilateral framework and not bilateral negotiations in which a dominant country tries to impose its often misguided economic views on others through all kinds of threats.
With Brexit we have already seen, in a much more limited case, the high price of non-tariff consequences. Without MFN, customs authorities will have to check the goods codes of hundreds of imported products as well as the country of origin, which could lead to discussions about where ‘substantial transformation’ has taken place.Forthcoming difficulties include increasing bureaucracy, interpretation problems, delays in processing, political and legal conflicts and retaliation. Furthermore, the system will become much more susceptible to fraud because companies will seek export opportunities to the US via countries with low tariffs.
Three-stage Trump process: bravado, threat and confusion
We are now familiar with the three-stage Trump process. It starts with bravado (‘We will solve this problem overnight’), followed in many cases by threat and ends in confusion and derailment. We have seen this with Ukraine and Israel, areas of high geopolitical risk.
Both cases are striking. Trump recently stated that Putin had made a significant concession by renouncing the occupation of all of Ukraine. After America gave carte blanche to Israel gradually bombing the entire Gaza strip and its inhabitants, Trump proposed turning this territory, under American supervision, into a wonderful holiday resort and relocating the inhabitants to surrounding countries. This proposal defies all descriptions of empathy and international law.
The next risk areas are Iran and China. Both countries are willing to negotiate but demand mutual respect, dialogue and consultation on an equal footing. If the discussions with these two countries do not end well, serious consequences will probably ensue.
Resistance in the US to Trump’s policies is growing. States, universities and individuals are increasingly turning to the courts to influence or stop processes under way. I hope the judiciary will act vigorously and independently, but legal contests are time-consuming. The damage done in the meantime, not least in the trade arena, will be difficult to repair quickly.
In its 22 April report the IMF rightly emphasises that the path forward requires clarity, caution and co-operation. In the foreseeable future, these are not traits we can expect to see from the Trump administration. For all the talk at the IMF-World Bank meetings in Washington that Trump may be switching back to more sensible policies, there is a strong probability of pessimistic rather than optimistic outcomes.
Nout Wellink was President of De Nederlandsche Bank, 1997-2011.
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