Changes in the Trump program are being made constantly. It is impossible to tell how much his program is posturing so as to reach trade deals and how much Trump believes in higher tariffs. Whatever one may think, Trump is erratic and unable to follow a consistent approach.
What are the purposes of the large increase in tariffs?
- The forced opening of negotiations to cause US trade partners to reduce tariffs and para tariffs applied to US exports. This may include demands to break the MFN conditions and give special rates for the US. There are arguments here about VAT taxes which are supposed to be applied to both imports and domestic productions so are neutral with respect to protectionism. This tariff reduction would reduce the US trade deficit by greater US exports
- To reduce the US trade deficit by limiting imports into the US. This could encourage greater investment in the US to fill the gap from reduced imports
- The imposition of the high tariff levels will increase collections of duties enabling the reduction of direct taxes
- The focus of the negotiations will be to reduce the target countries’ economic relationship with China
The US is now working to destroy the international trade system so as to reduce the US trade deficit. But in doing so it will reduce the volume of world trade. This will result in a major deterioration in the world economy, including that of the US: Slower growth, increased instability of the financial system, higher inflation, and increased poverty. This change in American trade policy is bad for everyone and rests on assumptions and myths, not sound economic analysis.
There will emerge a reduction of the economic welfare of everyone. Poverty will increase in every country; the path for getting out of poverty through export-led growth will close. The higher tariffs will be inflationary, leading central banks to raise interest rates. Efficiency will reduce as labour and capital are reallocated. The US trade deficit will decrease, and the dollar will become weaker. Combined, these effects will cause stagnation and inflation, increased unemployment and a worsened income distribution.
This will take place first in the US, but no country will be exempt. In a way it is a crime against humanity whose consequences may exceed the destruction of wealth of WWII. It is a disaster for all. This type of breakdown took place in the 1930s and contributed to WWII. Once started there will be little chance of recovery for several decades.
Salvation from this economic catastrophe will emerge only if an administration is elected in the US in 2028 that will begin reversing the restrictive trade policies of Trump and the Republican Party. But the consequences are not all reversible and the uncertainties and changes, under the best assumptions, will leave the world economy worse off.
2. The growth of democracy
The establishment of republican or democratic government was another of Immanuel Kant’s requirements for “perpetual peace.” The past 80 years saw the increase of democracy, an improvement in civil rights, and eventually a decline in cruelty. European countries emerged from WWII split between democracies and authoritarian countries. The cold war fought (1945-1990) and won by the democracies destroyed much of the autocratic movements in Europe, but left much of Asia in the hands of autocrats. South Asia, freed from colonial rule, became largely democratic. Southeast Asia shook off colonial rule but struggled with varying success to establish democratic rule. Northeast Asia, less China, went through similar changes. Japan, Taiwan and eventually South Korea become democratic nations.
After the victory of the Chinese Communist Party in 1948, the Chinese people went through 25 years of brutal misrule by Mao Tse-tung resulting in millions of unnecessary deaths and much suffering. Eventually, this terrible period ended with no economic success and the graveyards full. Chinese cruelty has now declined and limited rights established. Reduction in poverty in China increased demands for and use of human rights. Latin American countries have struggled with establishing democracy, probably with an upward trend. Russia has moved from the brutality of Stalin’s gulag; again, with a tough residual autocracy but some rights and much reduced mass cruelty.
But things are changing, Trump’s governing style is supportive of Russia’s leader Putin undermining democracy in Europe. The Americans now seem to support political parties which seek to establish autocratic regimes. It appears that Trump will condone the Russian takeover of Ukraine. The US is turning from a promoter of democracy to displaying indifference towards or active support for autocratic political movements. Important instruments to promote democracy such as the Voice of America and its related broadcasting organizations, support for NGOs focused on promoting democracy, and encouragement of the UN to monitor elections and argue for free and fair elections are closed or losing the support of the US government.
For 250 years the US has represented the democratic approach to governance: Freedom of speech, religion, assembly, private property rights, and the limits on government intervention. The changes introduced by the Trump administration undermine this history. Similarly, the responsibility of every human for the condition of others has been increasingly made possible through choices of government and is an essential part of a democratic system.
Trump is destroying elements of the US government concerned with these matters, through pompous false proclamations claiming the opposite. He does not believe in the proposition that “all men are created equal.” Ironically, there is indeed a hierarchy among humans ranked by integrity, honour, humility, and fairness -- Trump is at the bottom of this list.
3. Immigration, education, and professional groups
The third of Kant’s conditions for perpetual peace calls for professionals talking to each other. This is perhaps the germ of the idea of the United Nations. The idea makes good sense -- if professionals talk to each other on a regular basis conflict could be moderated and perhaps solved without wars. We expand this idea to include students going to a foreign country for university training; professors moving among universities; the growth of scientific work achieved in international groups.
The Trump administration, through its actions on immigration issues, is tearing apart this sharing of experience and knowledge. These international associations of professionals, students, and research scientists have over the past 80 years helped build understanding among nations. Now the US is making visiting students and professionals unwelcome and entry is being denied. The professional organization with an international reach will begin to wither. Certainly, the role of the US will decline. Collaboration in scientific research will decline and the leadership in many scientific disciplines will shift to China and Europe. Professionals will not be welcome in the US or will fear problems with the US immigration service, a particularly sadistic organization.
4. America as the world police
Until a few months ago, the US was trying to act as a policeman to the world. Until the Russian invasion of Ukraine, the wars that had been fought since the Korean war (ended in 1953), with one exception, had been of modest size and were not wars of conquest. The one exception was the war between Iran and Iraq from 1980-1988 that began with Iraq’s invasion to seize an oil rich area of Iran. It ended as a stalemate (2 million killed and wounded about the same on both sides). The war in Vietnam was a brutal civil war with terrible loss of life; the American wars in Iraq and Afghanistan were of limited violence and casualties. It was widely understood that any war of conquest would be opposed by the US and the UN.
That expectation has gone away. The invasion of Ukraine has been opposed by the US and its allies but not in sufficient force to end the war. Trump has given every indication that he will not act strongly against Russian aggression nor does he seem inclined to act to maintain peace. His very perceived reluctance encourages aggression. The only location where there is doubt is Taiwan. The current conflict between India and Pakistan is developing without serious containment issues.
The world is now without a policeman. There is every prospect that there will be continued aggression in Europe once Russia has digested Ukraine. The three Baltic States previously part of the Soviet Union since WWII, are, in Putin’s eyes, part of Russia, Poland is a tastier but more difficult morsel as the challenge to NATO is explicit. Nevertheless, historically, the Russian government believed Poland to be part of Russia and continue this violent belief.
In Africa the messages from Trump are very clear: Little interest in what happens. In Asia it is unlikely that Trump would intervene in any armed clash in South-East or South Asia. During these past 80 years, conflicts have been frequent but limited in impact. We omit any discussion of wars involving Israel; as the US will frequently get involved in these violent clashes.
5. The end of foreign aid
With Trump’s destruction of the US Agency for International Development the first step has been taken that will lead in the next few years to the reduction of all foreign assistance organizations. The UN Development program will find the withdrawal of American support challenging. For a few years other countries may maintain some level of financial support, but this will gradually decline. Bilateral assistance organizations will slowly decline, some rapidly.
With the US out of the funding sources other countries will be unwilling to replace the reduction and will eventually decide that there must be other things to do. It is likely the World Bank and the IMF will quickly get mixed up in disputes about their focus on climate change and equity; the US will use its power in these organizations to control the purpose of lending. The resulting conflicts may lead to impediments to their functioning.
The US may even leave regardless of recent statements by the treasury chief. For the World Bank, this would lead to higher costs to raise funds and a reduced volume of grants. It could lead to the WB leaving Washington and moving to another country. For the IMF, without the US as a member it can hardly function as its work is so closely linked to the US financial and banking systems. The collapse of foreign assistance will have a devastating impact on many countries. Private investors will never fill the gap of support for health and education. It is a myth that it is possible to replace the work of foreign assistance organizations by the private sector.
Forrest Cookson is Research Adviser to the Centre for Research and Development. In Bangladesh, he led the central bank component of the Financial Sector Reforms; was the Team Leader of the study of Northwest Area Development of Bangladesh; and served as the Statistical Advisor of the Legal and Judicial Capacity Building Project.