End of a global era

2025-04-25

As stock markets fell precipitously following President Donald Trump’s announcement on 2 April of high tariff rates for imports to the US from 185 countries, market uncertainty indicators reached levels similar to those of the Covid-19 pandemic and lockdowns. 

A week later the tariffs came into force, including an additional 50% on China, taking the tariff rate to 104%. Yet just a few hours later, President Trump announced that most of the higher tariffs would be paused for 90 days, with the exception of China, which was singled out for an even higher tariff, at 125%. China has announced retaliatory tariffs and a defiant approach, declaring it will ‘fight to the end’. 

Stock markets rose with the announcement of a suspension – although even after the pause, the US tariff level is at the highest for nearly 100 years, at an average effective rate of around 20%. The stock market recovery began before the formal announcement, indicating a level of insider trading. It then fell the following day.

This is a seismic shift in the world economy. President Donald Trump has called an end to the policies of relatively free global trade of the past few decades. 

Before critiquing the policy and its likely effects, it is necessary to acknowledge that there are real problems of economic inequality and imbalances that the tariff policy is seeking to redress.

Since 2001 when China entered the World Trade Organization, it has become a manufacturing powerhouse, and the USA, the largest market, has been the destination of many of its exports. In the early 2000s, under the doctrine of maximizing shareholder value, major US corporations outsourced many operations, especially in manufacturing, to low-cost locations, notably China and other east Asian nations. 

These developments have been mutually beneficial in aggregate terms, but manufacturing employment fell in the US, and unemployment rose in some formerly industrial regions.

Huge trade and financial imbalances have built up over the years. Borrowing and consumption rose in the US, while lender nations notably China have an export-based economic model. Many people and companies have grown rich, but imbalances and inequalities also grew.

While it is important to understand these issues, it is less obvious that sweeping, high tariffs – and the way in which they have been announced and keep being changed or suspended – will be effective.

A lack of comprehension of how global trade operates is evident. President Trump and his team have the view that a nation running a trade surplus with the USA as essentially cheating, and that this balance is akin to a financial loss on a profit-and-loss account. This is not correct. The USA would not necessarily be richer if it had a trade surplus with every nation. 

It makes sense for each nation to specialise in what they can produce efficiently and effectively, based on their natural resources, skills, infrastructure, business capability and so on, and then trade with each other. Selective tariffs and state subsidies can be used to mitigate the social impact where a competitive advantage by one country has a severe impact on employment in another. That is a quite different approach from the policy of President Trump.

The White House will argue that short-term market turbulence is a price to pay for longer-term gains, and that there will be investment and onshoring of US production as a consequence. In a narrow sense, this may occur but only for some sectors, and the policy disregards other dynamics.

The proposed tariffs cover trade of physical goods, and the policy fails to take into account inter-dependencies or the complexity of real economies. The US has a surplus with many nations in services – for example, management consultancy, investment banking and cloud computing. So if you take a low-wage economy such as Vietnam whose exports are principally in manufacturing – such as making sports shoes for Nike – but with limited purchasing power for high value-added products like Teslas and Boeing aircraft, it is almost inevitable that Vietnam will register a surplus in trading of physical goods with the USA. This is not really a problem; it has been to the benefit of both economies. The US deficit in goods with Vietnam is part of the dynamic that has helped the likes of Apple and Nike produce bumper profits, high stock market valuations, and good employment opportunities for many thousands of US citizens, as well as tax revenues for Washington.

If Nike were to onshore its manufacturing, then the price of its shoes would go up, or it may have to hire many immigrant workers – going against another of President Trump’s policies – or both. Nike’s profit margins would almost certainly fall. There would be a net transfer of low-wage manufacturing jobs from Vietnam to the USA, but not necessarily an aggregate increase in employment, spending power and wealth in the States – and more probably a fall.

Stock markets collapsed because the business model for many of the world’s multinational companies, including giant US companies, has been undermined by the announcement of high and sweeping tariffs. It’s not an irrational reaction.

Although some protected industries such as steel manufacture may be able to invest and hire workers under a high-tariff regime, many other sectors will be making redundancies because of increased supply chain costs, and even those who do gain employment may find that every-day items cost a lot more. 

Policy-making is unpredictable, causing extreme uncertainty. Just two days before the White House announced suspension of the higher tariff levels and highlighted the importance of negotiating deals, President Trump’s senior counsellor for trade and manufacturing, the economist Peter Navarro, had an article in the Financial Times stating that: ‘This is not a negotiation’. 

Businesses thrive on knowing what the rules, and the tax rates, are going to be, so that they can make investment decisions and annual budgeting plans. Uncertainty is recessionary in itself. Also, the approach of threats and inducements undermines trust.

President Trump has yielded to pressure from stock market falls, warnings of recession, some coming from business leaders and from within his own Republican party. Possibly the single biggest factor behind his policy change was the selling of US Treasuries, and consequent rise in yields, making financing its deficits more expensive. For US stocks and bonds to be falling in value simultaneously is unusual, and points to declining confidence in the USA. 

President Trump is justified to pay attention to those who have not thrived in the era of global trade. There are several problems with his policies: the winners of globalization have outnumbered the losers, and his policies may not help the losers very much. Moreover the rules keep changing. The globalization world order had unsustainable features, but the new world order imposed by the Trump regime – erratic policy-making, high tariff rates, reduced trade flows, tension between the world’s powers and brinkmanship – promises to be considerably more unsustainable, and poorer.

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