GLOBAL BOOMERANG

The tariff war orchestrated by US President Donald Trump against virtually the entire world has sent stock markets into turmoil and triggered shock and confusion among experts and politicians alike.

When flexibility is needed

At first glance, the situation appears straightforward. The American president has announced his intention to impose duties—a form of tax on imports—to eliminate the US trade deficit with other countries, including its closest geopolitical allies. He has repeatedly stressed that Washington trades at a loss with everyone, claiming that trillions of dollars are lost and branding the situation as profoundly unfair.

However, the imposition of duties could spark a process that is unpalatable to all, especially the Americans themselves. Warnings abound that a global trade war could lead to a slowdown—or even a recession—in the American economy. It is estimated that the new tariffs will cost each American family an average of $3,800. Analysts at Goldman Sachs increased their estimate of the likelihood of a US recession in the coming year by 10 percentage points, bringing it to 45%. JPMorgan put the probability of recession in both the US and globally at 60%.

As Trump described it, imposing duties is akin to taking a bitter but necessary medicine. You may not want it, you may be afraid, but you must take it. When investor panic escalated to the point where they began offloading US government bonds—traditionally considered the safest of securities—Trump appeared to soften his stance and even spoke of the need for flexibility. It was announced that tariffs affecting around 60 countries would be delayed for 90 days, and Trump extended an invitation to negotiate. It appears that more than 75 countries promptly decided to take up that offer.

Stock markets, particularly in the Asia-Pacific region, initially plummeted following these developments but then began to recover. Asia proved especially vulnerable to Trump's tariff war—Vietnam and Bangladesh, which export billions of dollars' worth of garments to the US, were among the most affected.

The European chance for the United States

As for the tariffs on imports from the European Union, Trump proposed a rate of 20%. This would compel Europeans to pay billions of dollars more for their goods sold in the US.

"We acquire their cars—we acquire millions of their cars. But they don’t take any of our cars. They don’t buy our agricultural products. They don’t buy anything. Europe is behaving very, very badly with us," Trump complained, adding that the European Union ought to purchase significantly more American energy.

The European Commission prudently opted not to immediately retaliate. Instead, EU leaders deliberated on whom to send to negotiate. They appeared to converge on Italian Prime Minister Giorgia Meloni, widely regarded as one of Trump’s key allies within the EU.

"We want to give the negotiations a chance," European Commission President Ursula von der Leyen posted on X (formerly Twitter).

Shift towards China

At the same time, the EU seemingly began taking active steps towards China. According to the South China Morning Post, citing informed sources, EU leaders plan to visit Beijing in late July to meet with Chinese President Xi Jinping. Reuters reports that the EU and China have initiated negotiations concerning the removal of EU tariffs on imports of Chinese electric vehicles.

The primary target of the US tariff war remains China, which is the leading exporter of goods to the US. Consequently, Beijing—accounting for 14% of all US imports—has been hit with tariffs of 125%. In addition, the exemption that allowed online retailers to ship parcels under $800 to the US without tax or customs checks has been abolished, representing a significant financial change.

The US indeed has a colossal trade deficit with the Middle Kingdom. Last year, bilateral trade amounted to approximately $585 billion, with the US importing $440 billion from China, while China imported only $145 billion from the US. Trump’s rationale for confronting China as the "global factory" was to bring jobs back to Americans. Social media quickly responded with a flurry of memes depicting unhappy Americans assembling smartphones in workshops.

A full-scale trade war between China and the US now appears increasingly inevitable. Beijing has declared that it will "fight to the end" rather than capitulate to US "blackmail" and has raised tariffs on US goods to 84%.

Towards slower global growth

As is well known, China harbours its own ambitions for global industrial leadership, particularly in high-tech sectors. Beijing has appealed to other nations to defend global trade freedom and has filed complaints with the World Trade Organisation. Given that the US and China together account for approximately 43% of the global economy, the fallout from a full-blown trade war will affect the entire world and contribute to a slowdown in global growth.

China is one of the largest foreign holders of US Treasury securities. The global trade network is so deeply intertwined that imposing tariffs cannot yield unequivocal benefits for any one party. However, as previously mentioned, it may give rise to new trade routes and supply chains. Some analysts believe China could ultimately benefit from the tariff war, as European and Asian countries begin to seek stronger ties with Beijing. In general, anti-American sentiment and global distrust of the US may rise—an outcome that would favour China.

Beijing is expected to pursue new trade routes outside US control, promoting advantageous transport flows and supply chains. Conversely, Europe and other markets may have to shield themselves against dumping, should unsold Chinese goods originally destined for the US flood their markets. This would escalate the trade war further, producing reverberations and consequences worldwide.

On April 6, mass rallies were held simultaneously in Washington, New York, Los Angeles, and other US cities, with roughly 400,000 participants, according to preliminary estimates. Protesters voiced their dissatisfaction with Trump’s policies, including cuts to social programmes, stricter migration controls, and, notably, the new tariffs. The organisers of these demonstrations—reportedly Democrats—brought together a wide array of civil society groups, trade unions, students, and minorities under the collective slogan "Hands Off".

Protesters also called for the resignation of Elon Musk, who heads the government’s efficiency department and is considered the chief architect behind many recent policy changes. Notably, the protests were even described as a trial run for a "colour revolution" in the US.

It is worth noting that dissatisfaction with Trump’s trade policy was not limited to Democrats. Some Republicans also opposed it, joining Democrats in voting against tariffs on Canadian imports. Senator Ted Cruz—one of Trump’s staunchest allies—even warned that if tariffs cause a recession, Republicans would suffer a "bloodbath" in the upcoming mid-term congressional elections.

So-called "solidarity actions" were held in Canada, Mexico, and across several European countries. Bloomberg suggested that such protests undermine the international credibility of the United States.

In this context, experts have begun discussing the possibility of a new Great Depression, plunging oil prices, the collapse of globalisation, a weakening dollar, and the decline of US global dominance into that of a mere regional power.

It remains unclear whether Trump’s actions pose a threat to globalisation and the dollar, or whether the American president has simply been forced into drastic measures by inevitable structural changes.

What is clear, however, is that under Donald Trump’s administration, Washington is attempting to revise the international system of rules—financial and otherwise—of which it has long been the principal beneficiary. This appears to be a response to the rise of China, accumulated economic imbalances, and persistent trade deficits, including with its closest allies.

Whether Trump and his team possess the resolve and capacity to sustain this so-called "war" remains an open question. It is likely—indeed, almost certain—that there are many intricacies yet to be revealed.