Economic and political ramifications of Trump’s trade war

By Loukis Skaliotis

Some time ago, I wrote in the Sunday Mail that US President Donald Trump’s policies instead of making America great again, would rather usher in the decline of the US on the world stage.

On February 8, one of the 2024 Nobel laureates in Economics, Daron Acemoglu, wrote an essay in the Financial Times arguing just that. His claim was how the decline in American institutions which started before Trump’s second term in office would intensify under the current president, leading to a decline in American prosperity. Part of that institutional framework that Trump has set out to dismantle is the global trade order the world economy was based on since the end of WWII. An order that, despite its flaws, contributed to the unprecedented growth and well-being in the world, including in the US.

A similar period of globalisation existed in the period before the two world wars, 1870-1913, with similar benefits to the world, so much so that it came to be known as the Belle Epoque. During this era, the US, as a developing country then, applied various tariffs to protect its new industries to enable it to catch up with the industrialised Europeans. This is what President Trump refers to when saying making America great again. Yet, the circumstances facing America in 1870-1913 are very different to the ones that exist today.

Applying tariffs today, when the US is the foremost economic power, does not make sense. Of course, applying economic pressure to force unfriendly countries into a more positive stance has been used widely in the political arena. President Trump’s use of tariffs, however, has now applied the same economic pressure on foes and allies alike. The announcement of 25 per cent tariffs on imports from Canada and Mexico (even though subsequently postponed for a month), has effectively torn up the ‘fabulous’ agreement Trump himself negotiated with these countries, during his first term. The 10 per cent tariffs on China came into force on February 1. The threat of similar tariffs against the EU is also not far from materialising. Already Mexico, Canada and China are going to implement retaliatory tariffs in what amounts to a trade war, with the EU also preparing its own arsenal of measures. 

Abandoning the trade rules that underpinned the growth of economies worldwide will have two distinct general repercussions. One is economic, the other political.

On the economic front, the immediate impact will act as a supply shock to the world economy, with inflation sure to pick up. Industrial disruption will follow, as supply chains need to adjust to the new tariffs. This has been widely reported on by economists and commentators alike.

What is less well reported, however, is how worldwide trade will shift away from the US and towards other areas. This will happen even if, as some believe, Trump reverses course on his tariff plans. This is because, once the principle of trust is broken, it is not easily restored. In Ruchir Sharma’s pertinent Financial Times article on January 26, he points out how the US share of global trade has been declining to about 15 per cent following eight years of inward-looking policies. This is likely to accelerate further with Trump in power.

In a New York Times article on February 3, Patricia Cohen highlights how the world has been moving to set up trade deals without the US. The EU has recently concluded a major agreement with four South American countries to create one of the world’s largest trade zones whereas the UK has joined the trans-Pacific trade bloc, a group that includes Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam. In a similar vein, Indonesia last month became the 10th country to join BRICS, another trading block aiming to challenge the supremacy of the US dollar.

The importance of trade in promoting economic prosperity and leading to political dominance has been observed throughout history, from the merchants of Venice, to Portugal, to the Netherlands and the UK to present day America. Trump’s policy of pushing for economic autarky (as evidenced by the other tariffs he introduced of 25 per cent on all aluminium and steel imports) will eventually lead to a decline in American economic and – eventually – political hegemony.

This brings me to the political impact of tearing up the trade rules. The “America First” policy is not something new. It has a complicated history having its roots in the isolationist sentiments and the “beggar thy neighbour” trade wars of the 1930s Great Depression era. It only evaporated in the US after it entered WWII.

Trump may or may not be aware of the historical parallels, but he is surely no fool. In his Davos conference address to business leaders, he emphasised that “America First” did not mean America Alone. Trump is aware of the dangers of political isolation and has already been acting in developing alliances with people aligned with his policies. Argentina’s President Javier Milei (despite his free trade credentials), has jumped on the Trump bandwagon, pulling Argentina out of the World Health Organisation (WHO) following the US. Similarly, Israel’s Prime Minister Benjamin Netanyahu, in Washington to collect his reward for gifting Trump the ceasefire in Gaza on Trump’s inauguration day, was the first foreign leader to visit the White House in a clear display of alignment of the two countries.

Developing this like-minded alliance requires not only assisting countries with leaders who are friendly to his policies but also destabilising countries with leaders who are not. Witness the attacks by Elon Musk on the UK Labour party, and his involvement and support of the far-right party in the coming German elections. In this light, the invitation of the Cyprus Elam party to Trump’s inauguration (the only Cypriot party to get an invitation) speaks volumes.

The global trade war will create economic hardship as the world adapts to the new realities. President Trump in a post in his Truth Social account on February 2 claimed that this is a price worth paying if he is to make America great again. Unfortunately, like all wars (trade or otherwise), while leaders follow their vain pursuits, it is the simple people that end up suffering. I cannot predict how Τrump will spin the outcome of the trade war to claim his victory, as he will surely do. What is definitely true, however, is that America, and the world, will never be the same again.

Loukis Skaliotis is an economist