“Presidential Tariff”: How Trump's trade war could shake up the global economy — and America itself

RU

Trump envisions the dollar maintaining its role as the global reserve currency of choice and the default method of payment for international transactions. He has vowed that any attempts to move away from the dollar will come at a steep price for those endeavoring to promote an alternative. His warning to the BRICS countries, posted on Elon Musk’s social media platform and featuring the president-elect’s characteristically haphazard use of capitalization, was unequivocal:

“We require a commitment from these Countries that they will neither create a new BRICS Currency, nor back any other Currency to replace the mighty U.S. Dollar or, they will face 100% Tariffs, and should expect to say goodbye to selling into the wonderful U.S. Economy.”

However, it is difficult to imagine any economically plausible scenario in which imposing tariffs and reducing U.S. imports would lead to a strengthening of the dollar’s dominance.

Obsessed with tariffs

Trump's fondness for high import tariffs is hardly new. As far back as the 1980s, he accused Japan — then the world’s second-largest economy — of “ripping off” the U.S. by exporting far more than it imported. According to one theory, his grudge against Japan was personal: in 1988, Trump lost an auction for the iconic piano from the movie Casablanca. The rare piece went to a company representing a Japanese collector.

“I’m a big believer in tariffs,” Trump, then a Manhattan real estate developer with budding political ambitions, told journalist Diane Sawyer. Besides Japan, he felt high tariffs were justified for countries like West Germany, Saudi Arabia, and South Korea. “America is being ripped off,” he said. “We’re a debtor nation, and we need to tax and tariff goods to protect this country.”

Trump partially realized his vision during his first presidential term, imposing tariffs on Chinese imports. However, his previous trade war pales in comparison to his latest ambitions. During his campaign, Trump promised universal import tariffs and even higher rates for countries like China and Mexico.

After the election, he escalated his rhetoric, threatening China with an additional 10% import tariff on all goods, citing the influx of narcotics allegedly smuggled into the U.S. from across the pacific. Mexico and Canada were also warned of impending 25% tariffs on all imports unless they took stronger measures to curb the flow of drugs and undocumented migrants into the U.S.

“On January 20th, as one of my many first Executive Orders, I will sign all necessary documents to charge Mexico and Canada a 25% Tariff on ALL products coming into the United States,” Trump declared on a different social media platform.

If Trump follows through on his long-standing threat to impose 60% tariffs on China, the consequences could be severe for the world’s second-largest economy, where manufacturing plays a critical role. UBS estimates that China could lose around 3% of its GDP over the next three years. Meanwhile, the U.S. would likely see a 1.5% decline in GDP. Mexico and Canada, whose exports to the U.S. represent 27% and 20% of their respective GDPs, would face economic damage comparable to that of China.

Europe under fire

Europe also has reasons to worry. “Here’s what I’ll tell you. All these sweet little European countries that banded together — they don’t take our cars, they don’t take our farm products. But they sell millions and millions of cars in the United States. No, no, no, they’ll have to pay a steep price,” Trump harangued during his campaign.

The Eurozone does in fact boast a trade surplus with the U.S., selling $200 billion more in goods to America than it imports. Analysts at ABN Amro estimate that a 10% tariff, like the one promised by Trump, would reduce exports to the U.S. by a third, resulting in a 1.5% GDP loss for the EU over three years.

“There would be second-round effects, via lower employment and business and consumer confidence,” the analysts write. “Indeed, the weak starting point for eurozone industry — still struggling to recover from the energy crisis — could amplify these second-round effects. Germany is especially vulnerable. Its three biggest exports to the US — chemicals, machinery and transport — are still experiencing demand shortfalls following recent shocks. The U.S. tariffs could be the blow that tips the German economy into a more serious downturn.”

The Netherlands could fare even worse than the rest of the Eurozone, with a predicted 2% GDP decline over three years. Overall, ING analysts warn that the looming trade war could push the continent’s economy from sluggish growth into a full-scale recession.

In an effort to avoid such an outcome, the European Commission (EC) is prepared to purchase more American goods and is seeking ways to increase U.S. imports in order to reduce its trade surplus. EC President Ursula von der Leyen has proposed importing more liquefied natural gas from the U.S. to replace Russian supplies. According to officials and diplomats cited by The Wall Street Journal, the EU might also consider buying more American weaponry and agricultural products.

Not all the news is bad. Lower inflation could enable the European Central Bank to cut interest rates further, and reexport flows through member states may increase. However, for economies like Germany’s, heavily reliant on U.S. trade, tariffs on car imports represent a serious threat. Shares in European automakers have already fallen 5% since Trump’s victory, reflecting anticipated profit declines. Moreover, Trump’s unclear stance on Ukraine and NATO could undermine recently stabilized economic confidence across Europe, adding further uncertainty to the region’s outlook.

A threat to the global economy

Many other countries could also find themselves in the crosshairs: Vietnam, Japan, and South Korea each have an annual trade surplus with the U.S. exceeding $50 billion. Should Trump fully enact his protectionist policies, the consequences in East Asia could be dire.

Sustained demand from the U.S. is not only critical for exporting nations, but also a cornerstone of the global economy. A tariff tsunami emanating from Washington would unleash a wave of global inflation. While rising prices might eventually subside due to reduced demand, an economic slowdown would be unavoidable. The situation could also be exacerbated if other countries retaliate by imposing their own tariffs on U.S. imports.

The only potential winners in this scenario might be those U.S. allies that do not have a significant trade surplus with America. Thus Britain and Israel may emerge relatively unscathed, even as many of their own trade partners suffer.

Yet a glimmer of hope for global trade can be found by looking back at Trump’s first-term course of action. His extravagant fiscal policies — tax cuts for most Americans and generous stimulus benefits — made U.S. residents wealthier and allowed them to spend heavily on imports, despite the rise in prices caused by his tariffs. As a result, the U.S. trade deficit doubled during Trump’s first term.

However a repeat performance this time around seems unlikely. The newly established Department of Government Efficiency (D.O.G.E.), led by Elon Musk, has pledged to cut $2 trillion in “excess” federal spending. Musk himself has hinted that these plans will lead to “temporary financial hardships” for Americans, dimming any hopes for a boost to global trade.

The dollar as a weapon

Trump has other means of damaging the economies of many countries, particularly developing ones. Trump has promised to scale back environmental regulations while reducing domestic electricity costs. This makes European goods less competitive, as strict environmental standards and high energy prices prevail on the continent.

Meanwhile, U.S. stock markets are experiencing a surge. Investors anticipate rising profits for major corporations under the new administration due to tax cuts and deregulation, giving American companies a further competitive edge over foreign ones. In the four days following the election, the U.S. stock market rose by 5%, while markets around the world declined.

At the same time, the dollar is significantly strengthening, impacting countries as far away as Russia. Despite Trump’s assurances that “inflation will completely disappear,” many of his policies are inflationary. Tax cuts, despite a massive federal budget deficit, market deregulation, plans to integrate loosely regulated and volatile cryptocurrencies into the financial system, and the imposition of trade tariffs will all put immense pressure on the Federal Reserve, potentially forcing it to maintain higher interest rates than it otherwise would have.

In November, the Fed slightly lowered its key interest rate, but chairman Jerome Powell left open the possibility of maintaining rates at their current level at the December meeting, rather than continuing reductions. This time, the accompanying statement did not express “great confidence that inflation is steadily approaching 2%,” as it had previously.

Higher interest rates, in turn, make U.S. dollar-denominated assets more attractive, giving the dollar strong growth prospects. Since the election, the dollar index against a basket of major currencies has risen by more than 4%.

This is a problem for everyone except the U.S., and the problem is especially acute for emerging markets. A 10% appreciation of the dollar against national currencies reduces output in emerging economies by 1.9% within a year, according to IMF research. Wealthier countries fare slightly better, with production typically declining by only 0.6%.

A significant portion of global trade, even trade not involving U.S. entities, is conducted in dollars. A strong dollar raises costs for importers, reduces demand for foreign goods, and lowers overall trade volumes. As a result, dollar fluctuations often matter as much as the behavior of local currencies. Research by American economists shows that a 1% increase in the dollar’s value against a basket of major currencies reduces trade between other countries by 0.6%.

For countries and companies that borrowed in dollars without dollar-denominated income sources, a rising exchange rate automatically increases their debt burden and interest expenses. Higher U.S. interest rates, coupled with a strengthening dollar, also make investments in the rest of the world less attractive. Capital tends to flow out of emerging markets, forcing them to raise their own interest rates, further slowing already struggling economies.

The list of winners in such a scenario will be short. Besides allies with neutral trade balances, it might include only the cryptocurrency industry. Following Trump's victory, Bitcoin's price surged from $67,000 to a record $99,000. Dogecoin, the meme coin frequently promoted by Elon Musk and the namesake for his government department, rose 200% in value following the election.

Market participants believe that Trump's promotion of cryptocurrencies during his campaign signals favorable treatment from the new administration. Trump accepted campaign donations in cryptocurrency and, despite significant risks, supported creating a national Bitcoin reserve to help pay down public debt. He also promised to loosen regulations to make the U.S. the “crypto capital of the planet.”

What could go wrong

First, Trump is known for his unpredictability, and without reasonable checks in government, his policies could shift rapidly — and global economic prospects right along with them. He could wield tariffs in a “Godfather-style” approach, granting exemptions to countries and companies based on their willingness to comply with his demands. In this case, the White House would become a lobbying hub, undermining global competition and quickly eroding America's reputation, which would also trigger global upheaval.

Second, Trump has vowed to lower interest rates during his presidency and seeks to assert control over the Federal Reserve, which has so far remained an entirely independent institution. Politicizing the central bank could undermine confidence in the dollar and U.S. financial markets, leading to a further catastrophe for global financial stability.

Third, while many of America’s trading partners may simply hope to avoid Trump’s wrath, a bolder and more effective response would be for countries to band together in trade blocs, even without U.S. involvement. Such agreements could sustain international trade at acceptable levels until the U.S. is willing to return to a more mainstream policy regime.