The Trump Tariffs - The Day After - Democracy the Casualty

For all the grandstanding, little over two months down the line Mr. Trump has virtually reversed all tariffs (barring the de minimis 10 percent on all countries and 20-25 percent on steel, aluminium and automobiles). Even the most targeted tariffs on China on computers, phones and electronic peripherals have been reversed for the moment with promise of “more to come!”. It was not too difficult to predict some of these reversals (see my article, Trumps Shakeup of World Trade: Much Ado about nothing, Mint, Jan 19, 2024).

It is now well known that the markets were spooked by a fall (rise in yields) of US T-bill prices indicating a lack of faith in the US economy as buyers of US Treasury bills turned sellers. This was huge as US trade deficits are financed by an inflow of foreign capital and services exports. If this capital inflow reversed, his plans to keep his budgets balanced were under threat as also the primacy of the dollar. At the same time, China has been pushing the Yuan as an alternative to the dollar. The prospect of a resulting rise in inflation in the US as interest rates rose made even his own supporters in the business community vote with their feet against his tariff policies. Yet he has persisted with one issue: raising China tariffs to a ridiculous 250 percent.

So, in the end, it boils down to a US vs China game. The question: was it only about tariffs or does he (and his team led by Peter Navarro) have a long term plan? Is there any method to this madness? What is the role of geopolitics in all this?

To understand this it is necessary to go back to the early 1990s when Gorbachev’s “perestroika” policy led to a breakup of the Soviet Union. One consequence was an end to the US-Soviet “cold war” reflected in political and economic standoff between the NATO group of countries (the OECD) and the Warsaw Pact countries (the subsequent COMECON group). In other words, a confrontation of ideologies — democracy vs communism.

But this “cold war” was excellent for most countries (including the developing ones) as they could use the trade-off to resist economic pressures from the developed world. To take an example, developing countries were exempt from tariff reciprocity under GATT in 1947. The US actually extended to all countries more tariffs concessions than it got merely to bring them into the fold of democratic countries.

To take another example, despite the close economic and political relations between India and the Soviet Union in the 1960s, it was the USA which lent a helping hand during the Indo-China war of early ‘sixties and the food crisis of late ‘sixties. President Kennedy actually termed India a “strategic ally” vis-à-vis the Chinese though what Nixon thought about India (as now known) was probably the correct political position. Many other such examples can be found.

This came to an end in the 1990s with the end of the Cold War. In the establishment of the WTO it was clear that “non-reciprocity” for developing countries had come to an end and economic relations have been frosty in WTO ministerials. There was some hope that the socialist EU might form the basis of a new “cold war.” Growth of a prosperous Europe in the 1980s had led to an economically strong EU group of 15 countries to potentially challenge the US.

However, the end of the “cold war” forced the economic EU plan to change to a “security” one as the Maastricht Treaty of 1993 expanded EU15 to EU27 by 2003, bringing in the countries of East Europe that had broken away from the former Soviet Union. The subsequent EU economic crisis has left EU unity in tatters.

Finally, the possibility of China emerging as the new “countervailing force” always existed. However, ever since China joined the WTO in 2001 it was far more interested in furthering its economic development (based on US trade) than participating in international politics. To China, economic prosperity via trade was important to further its internal politics.

In his declared unilateralism, Trump has now made it clear that the old cold war trade-off is gone, and the issue now is one of economic hegemony. So, as far as he is concerned, it is USA vs China in economic terms (the rest is a diversion and hence frequent tariff suspensions) and countries must pick sides in the new conflict.

Unfortunately, the anti-immigrant stance and the suspension of many civil liberties within the US seems to be the price he feels he needs to exact to make America great again. If Mr. Trump’s civic agenda persists, the casualty in this war for economic hegemony is clearly democracy — economic domination at any cost.

It is likely that most developing countries will choose to side with the US. On the other hand, once again the EU countries (with significant economic giants like Germany) have been asked to stand up and be counted. Will the EU once again emerge as a countervailing force given the strong democratic ethos in most constituent countries? Will the “lazy European” wake from his slumber to challenge Trump?

The geo-political war could end in many ways. The only casualty globally will be democracy.

Manoj Pant
Visiting Professor, Shiv Nadar University