Most trade pundits (and a few others) were shocked by the magnitude of Trump’s tariff announcements on 2nd April: a replica of McKinley’s famous US tariff wall of 1890, or of the Smoot-Hawley legislation of 1930. If there are lessons of history, these precedents are bad omens indeed. But this is not the only reason to believe that, once again, the US, and, to a lesser extent, all of us, will pay dearly for such a massive blunder. Hopefully, however, and as a consequence, is unlikely to last very long.

There are several other factors at play. Without entering into any technical details, let us consider the three layers of tariffs that were announced: a floor of 10 per cent to increase budget revenues, a sectoral tariff of 25 per cent (for cars, steel, aluminium etc.) to ‘re-industrialise’ the country, and a so-called ‘reciprocal’ unilaterally (and by many accounts weirdly) determined tariff as a blackmail tool to gain whatever advantages for the US in negotiations in exchange for removing the threat. A typical mafia-like method. All in all, this amounts to a tariff fence around the US of around 25 per cent for 80 per cent of imports, the remaining 20 per cent being raw materials or their equivalent.

If implemented, the immediate impact will be to slow down imports (thus reducing the expected budget bonanza), trigger inflation, prompt interest rate hikes and consequently reduce economic growth. Industry relocalisation is unlikely to happen given the higher production costs in the US and the added cost of imported inputs and components in an economy that presently has quasi-full employment, including immigrants. 

Arm-twisting negotiations might bring marginal concessions from small countries with no capacity to retaliate, but it will not work with big shots such as the EU, China or India who are unlikely to cave in, even if they keep the door open to win-win negotiations. Add to these meagre benefits the high bureaucratic costs of determining and controlling the rules of origin of imports with different tariffs on different countries and an extensive list of tariff positions, and you get a recipe for failure.

These results should not be surprising given that Trump’s trade policy relies on false premises, starting with his view that the US economy is doing poorly, which is nonsense if you benchmark it with other countries. Or that the US trade deficit is a weakness, whereas, in reality, Americans can afford to consume more than they produce thanks to the worldwide dominance of the dollar. Or that the dollar is overvalued, which does not stand the test of serious economic studies.

The blunt truth is, unfortunately, that while the US economy is in good shape, US society is in bad shape. What is missing is a proper welfare state that would cushion the impact of technological change and trade opening, an issue we have tried to discuss for many years with our Democratic friends, so far to no effect. The poorest part of American households who voted for Trump will have to pay the price of his tariff vagaries and will hopefully change their minds once they feel the effects of inflation in their pocketbooks. Under these conditions, we should expect a domestic pushback against these trade measures to take shape in the US eventually. This will probably happen later rather than sooner given that many of us were wrongfooted in expecting a quick reaction and a more visible containment of the president through ‘checks and balances’, whether via Congress, the judicial system, the media, or even street protests which could turn violent.

The surprise pushback came on 9th April when bond markets sanctioned the US debt with rising interest rates, which triggered Trump’s pause, except with China. But the question of whether this is a U-turn or a short-lived temporisation remains open. Uncertainty, and its negative impact on the economy will persist for some time. This development also leaves open the question whether some sort of international coalition could be built to coordinate reactions or countermeasures, including to the benefit of poorer or vulnerable countries that will be disproportionately hit, as is the case in Africa, for example Lesotho, which is threatened with a tariff of 50 per cent on textiles and clothing. Brussels would be well advised to consider this scenario seriously, noting that Japan, Korea and China, for instance, have already begun discussing how to react.

To conclude, contrary to what seems to be conventional wisdom, this trade conflict between the US and 60 countries is not truly a global trade war. After all, the US represents 13 per cent of world imports, and I see no reason to believe that the rest of the world will adopt Trump’s voodoo trade economics. Trump’s recent pause for all concerned countries except China on a part (but not all) of his tariffs clearly increases the US-China tensions, accelerating a more intense, hence more dangerous rivalry than just trade tensions. But more importantly, let us not be fooled by this well-crafted Hollywood-like daily trade show. What matters much more for us, and many others, is the danger the US president embodies for democracy, social justice, international law, corruption, peace and human dignity. This is the big game.