TARIFFS - TRADE TACTICS OR TRUMPIAN BLUNDER

 

 

At times it seems Trump doesn't know what he is up to? He is driving the bus of U.S economy through a dense fog, with nil visibility and absent GPS. If it tumbles into the ocean of recession no one will be surprised. Yes, he will succeed to bring a high Richter scale convulsion in the world economic order and decimate globalization once and for all. 

The mighty solitary pole of the unipolar world is travelling down an unsustainable path of large fiscal deficit, spending more than earning, high current account deficit, consuming more than producing and an ever increasing debt to GDP ratio. A course correction was long overdue. His plan is simple - correct current account deficit by imposing tariffs on imports, reduce fiscal deficit by Musk' DOGE hit on wasteful government spending and bring stability to the debt-GDP ratio through a sovereign wealth fund and a reevaluation of gold reserves. The ideas are Clinton's, but a lot more radical leading the U.S towards stagflation and the rest of the world towards recession. 

 

He said the countries of the world, allies and enemies alike, are all out to take advantage of America's goodness and are ripping off the U.S economy by high tariffs, currency manipulation and trade barriers. If I am to quote him he feels America is being "looted, pillaged, raped and plundered by nations near and far, both friends and foes alike". So, what was his answer? Reciprocal tariffs, which were country specific, the more the trade deficit U.S suffers the higher tariff the offending nation faces. 

 

But will that not increase the cost of virtually everything in the U.S market from toys to clothes to cell phones to cars. America has stopped manufacturing most of them since ages, so does Trump expect these factories to mushroom overnight?

 

Trump thinks that higher tariffs will incentivize foreign and domestic companies to establish factories in the U.S and create employment opportunities. This resonates well with Trump's core vote bank, the blue collared working class Americans that have seen thousands of factories close, and large part of their once industrialized states convert into rust belt with shuttered industries, dying towns and depleting population. However, even if car manufacturers and machine tool and cell phone makers set up factories in America, in the age of AI and robotics are the good old golden days of manufacturing expected to return with bountiful employment opportunities?

 

Another miscalculation which Trump plan has is the U.S will earn $600 billion in tariffs, which will reduce their national debt, which today stands at 123% of their GDP! Lowering imports, because of higher tariffs will also reduce the trade deficit with their trading partners, he argues. Someone should tell him that his ideas will surely lead to worldwide recession and trade wars and Americans will not remain insulated from this impending economic disaster. 

 

All along he was telling in his election rallies and even today he continues to believe that tariffs will cause momentary price hike but the rich will be harmed and the poor will be benefitted! His MAGA supporters have no reason to disbelieve him because the stock market has tumbled, the Wall Street is running for cover and the MAGA crowd is cheering, oblivious of the fact that their own cost of living has gone through the roof! If Wall Street experiences pain long enough, the Main Street will feel it soon. 

 

Trump's class warfare is against the Elite America and the Global Elites. The MAGA followers know it is accompanied by pain, higher costs, shortages and inflation. But, the price is worth paying, they feel. Short term pain is worth long term benefits - more employment and better life! MAGA now has a President who can screw the Wall Street and the Global Elite and stand with working class Joes! Excuse me, but who exactly are Trump and Elon Musk if not global elites?

 

Trump has repeatedly told the blue collared Americans that they are victims of bad trade deals, off-shoring of cheap labour, starving the homeland getting work done at slave wages in China. As if that was not enough, illegal immigrants from Mexico, Central America and Asia are picking up the farm and factory jobs in the mainland at much below mandatory minimum wages.

 

No one except Trump could understand the logic of his varied reciprocal tariffs - 125% on China, 49% on Cambodia, 48% on Laos, 46% on Vietnam, 44% on Sri Lanka, 37% on Bangladesh, 32% on Indonesia and 26% on India! His insanity is best seen when he imposes 10% tariff on Heard &McDonald Island which has only penguins and no human beings. Perhaps he is charging the island for using his first name!

But, hang on; is there a method in his madness? Why is this 90 day pause on imposing tariffs on every country except China? By announcing mega tariffs and then postponing them the US President is acting like the thresher shark which stuns the shoal of sardines with a tail slap, before gobbling them up. Now more than 50 countries are, according to him, ‘licking his ass’ to renegotiate trade deals!

 

The trade war has already started. China has imposed a 84% tit for tat tariff on U.S goods. It looks like the world's biggest buyer U.S, and the world's biggest seller China, who together account for 40% of world trade, do not want to do business with each other. How can this be good for the post globalization global supply chain which turns around these two important cogs?

 

Different countries will be differently affected and right now Canada and Mexico, the two immediate neighbours, whose economy are heavily dependent on American consumers, seem to be facing the worst case scenario. Europe requires U.S to provide it security guarantees that subsidizes its welfare state economies. As their sclerotic thought process will not allow them to have an imaginative understanding with Moscow and lower their defense spending, they will remain easy target of Trump’s blackmail. 

 

Every crisis is an opportunity waiting to be exploited. Brazil, which is only second to the U.S in agro-trade, has an opportunity to sell more beef, soybean, oil and iron ore to China and footwear to the U.S. How will India use this opportunity? Higher tariffs on our competitors in textile and garment industries (China and Bangladesh) and electronics and telecom (Vietnam and Thailand) are opening opportunities for us but pharmaceuticals, agro products,  diamonds and jewellery will require renegotiation. 

 

With top companies of the world, Apple, Nvidia, Meta, Google, Microsoft, Amazon,  Netflix and Tesla, the U.S already enjoys a privileged position in world trade, with the best business minds calling America home. The USD is world's reserve currency. This irresponsible trade behaviour raises serious questions about the reliability of the USD as a favoured currency for conducting international trade. By weaponizing the dollar in the form of Sanctions against its strategic enemies, the world is already looking for an alternative. China, Russia, India and a host of other countries, almost 45% of the world’s population can and are trading in alternative currencies. China-Asian bilateral trade is already over $900 billion and with higher tariffs in America these intra regional trade options will become more frequent. 

 

Trump wants to leave behind a spectacular legacy, but a long standing recession in the U.S and in the rest of the world will surely not be anything worth boasting. Goldman Sachs has raised the probability of U.S recession to 35% and J.P Morgan Chase has predicted a 60% chance of global recession this year. High inflation is a distinct possibility and if the Fed raises rates, economic slowdown may become unavoidable. Economist John Kenneth Galbraith once said "when all else fails, immortality can be assured through spectacular errors". We are unfortunately witnessing one, and I am afraid, we have not yet reached the climax of this story!