President Donald Trump’s announcements of reciprocal tariffs on the US’s trading partners, unless reversed, will inflict a massive blow to globalisation as we know it. The US, as Trump’s executive order announcing tariffs notes, was the vanguard of trade liberalisation in the world and led the efforts to establish a multilateral trade regime, first under the General Agreement on Trade and Tariffs (GATT) and then the World Trade Organisation (WTO).
The positive impact this multilateral trading regime had on global trade is unambiguously clear. Data from the World Bank shows that trade-GDP ratio for the world economy increased almost consistently between 1970 and 2008, with this number more than doubling from around 25% to 60%. This number has stagnated since. What is interesting is the fact that the US’s own trade-GDP ratio is significantly lower than the world average although it has increased in almost the same proportion during this period.
That the stagnation in world’s trade-GDP ratio coincides with the 2008 global financial crisis which triggered the biggest economic recession in the world after the Great Depression of 1939 is not a coincidence. The economic pain of the 2008 crisis inflicted a big shock to the political economy in advanced economies and eventually paved the way for political developments such as Trump’s first election victory and Brexit in 2016. Even the global trading order, as characterised by the World Trade Organisation’s ministerial decisions has been largely defunct in the last decade or so.
This has also been a period of resurrection of protectionist sentiments in large parts of the world, especially in advanced economies, in the form of return of tariffs (they began in the first Trump administration) and industrial policy. Trump’s latest decision of raising the US’s default tariff rate to 10%, of course, takes his trade war to a different level. What began with a policy targeted against China has now mutated into a global trade war being unleashed by the world’s largest economy.
{{/usCountry}}This has also been a period of resurrection of protectionist sentiments in large parts of the world, especially in advanced economies, in the form of return of tariffs (they began in the first Trump administration) and industrial policy. Trump’s latest decision of raising the US’s default tariff rate to 10%, of course, takes his trade war to a different level. What began with a policy targeted against China has now mutated into a global trade war being unleashed by the world’s largest economy.
{{/usCountry}}It will be delusional to expect that a status quo ante is going to be restored soon and we could well be entering into tactical trade retaliation by more countries. While Trump’s actions are based on a hubris around the US’s economic strength in the world, it remains to be seen whether other countries start an engagement with non-trade pillars of globalisation such as currency markets and financial flows. Major economies taking this recourse will only add more chaos to the global economy.