Trump’s Tariffs, Making America Poorer Again

 Featured Image: Trump with his Tariff Board, 2 April 2025, Whitehouse-Facebook

  Breadtag Sagas ©: Author John, 23 May 2025

Preamble

The present article is a first for me, I am showcasing another author. Many articles have been written about 2 April 2025, President Donald Trump’s ‘Liberation Day’ but John Madden I think clarifies the history and the issues better and more clearly than anything else I have read.

John has told me that he has kept writing and has now doubled the size of the article based on more recent events. I have had to trim a small part of John’s earlier version. It is much longer than any of my recent articles but worth reading in full, if you’ve wondered what the impact of Trump’s tariffs is all about.

My purpose here is to provide a snapshot of what Trump’s tariff actions on 2 April 2025 have meant. Despite backing off incredibly, and even if Trump  abandons his tariff policies entirely, the damage has been done. I want this snapshot to look back on in 12-18 months. I think John has done an incredible job in writing this article and I commend it to you. The draft was written in April and finished at the end of April.

I have known John for years but only recently joined the U3A ‘Dissent’ discussion group that he moderates. The group is named after a defunct Australian Magazine of the same name published from 2000-2014. Dissent magazine published three times a year was devoted to the analysis of politics, economics and issues in Australian society in general. The discussion group follows this approach loosely. One member proposes and presents a topic each week.

An even broader overview of trade and world economic history, which may provide a larger context, is given in the early part of my article and the first diagram in What is History World Economic History based on the book the Great Convergence by Richard Baldwin 2016.

Main Points

• The Bond Market
• The US Trade Deficit
• US Government Debt
• Trump’s Tariffs
• The Bond Market Reaction
• The Impact on US Government Debt
• A Pause in the Tariffs
• Why is Free Trade Important?
• Who Will Win the Trade War?
• What Next? 

Trump’s Tariffs — Making America Poorer Again

by John Madden

During the Clinton administration, the US Congress voted to normalise trade relations with China and agreed to let it join the World Trade Organisation — the body which set the rules for global trade. From 1999 to 2005, US imports from China nearly tripled. American manufacturers had to pay higher wages and meet stricter safety standards than China, so they couldn’t compete in low tech manufacturing.

What became known as the “China shock” wiped out millions of American jobs. But American consumers had access to much cheaper goods, inflation dropped to low levels and stayed there (until COVID) and the remaining American businesses grew bigger and more profitable.

The Bond Market

Over that time, the US government ramped up its debt, because it was spending more than it got in taxes and other revenue. When a government has to borrow money, it usually sells bonds to investors. Bonds are essentially IOUs. An investor buys the bond from the government and is paid interest at specified times over a number of years. After a set time (3, 10, or 30 years for example) a final payment is made as the bond “matures” or expires.

For 80 years, the safest place for money managers in times of uncertainty had been US government bonds. They knew that they would be repaid because there is no risk of default: US government bonds are classed as “no risk” assets in the (informal but influential) international financial regulatory standards called “Basel III”.

That’s because America is the world’s biggest economy, in dollar terms. The US dollar is considered to be the world’s “reserve” (or backstop) currency and investors want to buy dollars. It is the major currency for invoices and international transactions, including trade around the world, so is used for much more than US domestic spending.

With so much demand for dollar-denominated assets, the US can borrow at lower interest rates than other countries and undertake domestic and foreign policies with less restraint from international bond markets. Bond markets frequently act to bring wayward governments to heel. The latest was when UK prime minister Liz Truss tried to increase her government’s debt, while reducing taxes. The British financial market seized up and she was forced to resign.

The interest rate that the United States pays on its foreign liabilities is two to three percentage points less than the rate of return on its foreign investments. This pushes down the cost of borrowing for the US government and businesses and the mortgage interest rates for American households. It is unsurprising that foreigners see themselves as supporting American living standards and subsidising American multinationals.

Because of the strength of the US dollar, the trade in US government bonds establishes the “risk free” global interest rate. This influences interest rates across the entire international financial system.

As more bonds are bought, the price goes up, interest rates (bond “yields”) fall and the US dollar gets stronger compared with other currencies. It creates an automatic buffer against any uncertainty elsewhere in the global system. And allows the US to run sustained balance of payments deficits (ie it spends more on imports than it earns from exports, leading to a net outflow of money).

The US Trade Deficit

Since the end of World War II, and especially since the 1994 Uruguay Round of trade negotiations, the US has successfully driven the establishment of legally agreed protections for cross-border investment and intellectual property. This has allowed it to extract and repatriate significant value (cash) from its investments in “intangible assets”.

America is particularly adept at generating value through these assets: ideas, intellectual property, organisational capabilities, technological innovation and expertise.

Traditional accounting fails to measure the value embedded in these knowledge-based assets. But they have allowed global networks of US company subsidiaries to consistently deliver returns high enough to nearly offset the US current-account deficit.

The current account deficit measures how much the value of goods and services imports exceeded the value of exports. In 2024, the US ran a trade deficit in goods of US$1200 billion. And a trade surplus in services of US$295 billion. This has been developing for decades. It looks like the country is living beyond its means. Trump certainly thinks so. But things aren’t as bad as they seem, and the reasoning for Trump’s tariff hikes is based on a very simplistic reading of the data.

A country can remain solvent while running a current account deficit if it uses external debt to finance investments that have higher returns than the interest rate on that debt. Developed countries all tend to run deficits for this reason.

US subsidiaries in foreign countries generated US$2100 billion in sales and US$632 billion in net income in 2024. (The subsidiaries of foreign companies operating in the US generated US$1500 billion). So, together with the surplus of US$295 billion in its services exports, the US actually had a net services surplus of US$895 billion, against a trade deficit in goods of US$1200 billion.

As a result, the US has been able to run persistent trade deficits without suffering significant consequences, such as higher interest payments. This may all change. By not knowing the causes, drivers and beneficiaries of the US trade deficit, Trump risks turning a misunderstanding of trade statistics into a very real economic crisis.

US Government Debt

The US government’s outstanding stock of debt is about twice as high now as it was in 1992, relative to the size of its economy. It owes over US$36,000 billion in total, while its GDP is estimated to be about US$29,000 billion per year (early 2025). Servicing this national debt will cost more than a $1000 billion dollars and rising in 2025, getting close to the level of the entire Defense budget.

The US relies on foreign investors to fund part of this US Government debt. They hold about a quarter of that debt, or $US8500 billion, in the form of government bonds. Japan with $US1060 billion, China with $US770 billion (down from $1300 billion in 2013), and the UK with $765 billion are the largest foreign bond holders. It is estimated that China’s government and its domestic banks together own $3000 billion in US debt of all forms.

This system works provided the players, other governments’ central banks, super funds and particularly financial traders like “hedge funds” or shadow banks, are not scared off by increased financial volatility. The financial regulations introduced after the GFC were focused on regulating banks, restricting what they can do in financial markets. So other forms of financial trading came in to fill the gaps. The hedge funds’ business is based on moving money around by swapping one form for another, and making a few fractions of a per cent profit on each deal. And they borrow against bonds they own to make other deals. But they are very lightly regulated compared with banks, which until recently provided stability for financial markets. Hedge funds have become increasingly dominant in financial deal making but the regulatory structures have not caught up, making the US financial system inherently unstable.

So if financial markets get less predictable and more volatile, hedge funds can quickly get scared and the system starts to break down. That’s because liquidity (easily available money) is harder to find and fewer people want to swap their assets. The financial risks they have taken on then get higher. What they hold cannot be as easily swapped for other forms of wealth: bonds for currency for example.

If this situation gets really bad, financial markets start to seize up: no-one wants to buy anything because the risks of losing money are so high. So the Federal Reserve or the US Government would eventually have to step in. They would have to buy the trillions of dollars of bonds that the system can’t sell off itself.

Trump’s Tariffs

On 2 April 2025 (what he called “Liberation Day”) Trump decided to side-step the cooperative rules of global trade and use tariffs (taxes on imports) as a tool to confront other countries and blatantly exercise US power. He ranted about how the United States has been taken advantage of by the rest of the world for years, which was reflected in its economic decline and foreign exploitation (when the opposite is actually the case). It was all part of his more general revenge and retribution mantra. He was convinced that the US trade deficit with any country represented the “sum of all cheating”.

So he announced “reciprocal” tariffs to correct it, using a simplistic formula for setting new tariff levels on every country (and some places that weren’t). The US trade deficit with each country was divided by twice its imports from that country — with a minimum of 10%. Cambodia had a tariff of 49%, Serbia 37%, and South Africa 30%. China was hit with a tariff of 34%. Even the penguins on the Australian Antarctic territory of Heard and McDonald Islands were caught up in the mess (supposedly because it has a distinct internet designation which the AI that was asked to devise the formula interpreted as a separate country…).

A rational approach would have been to sit down with America’s largest trading partners and negotiate new “win-win” trade deals that benefitted both sides. Instead Trump went ballistic and hit everyone with trade-killing tariffs on their exports to the US.

The pretext — because a president needs a national security emergency to impose tariffs — was the flood of fentanyl, a synthetic opioid, into the US. But the precursor chemicals to make fentanyl are still free of tariffs. Then the emergency changed to become the large trade deficits the US runs with (most of) the rest of the world. The real aim was to assert economic dominance over China — and as an afterthought the rest of the world. This includes putting tariffs on products, like coffee, that the US doesn’t even produce.

The US imports 13% of all of the world’s traded goods and Trump imposed tariffs on almost all of them. It was the largest increase in US tariffs in nearly a century. Almost overnight, he essentially erected a blockade against the import of goods. His actions completely severed most of the trade in goods between the US and China, because no business could absorb the costs these tariffs represent. Trying to use trans-shipments through third countries like Mexico and Vietnam to avoid the tariffs may be cut off if the US can apply “rules of origin” effectively. Trump also unilaterally broke all of America’s free trade agreements. It was the largest single negative shock to global supply chains since early in the pandemic. And it was deliberate. Whether he knew what the consequences would be is unlikely.

If they continue, the tariffs will represent one of the largest increases in taxes paid by Americans in peacetime. But that assumes that imports will arrive at the same level as before. They won’t. Trade will drop and the tariff revenue will be much smaller than predicted (and certainly nowhere near big enough to pay for Trump’s tax cuts for the rich and big business — thereby increasing government debt).

The biggest victims of the tariffs are US-based multi-national companies manufacturing in China for the US market. The fewer goods that do arrive in the US will be more expensive because of the tariff and the devalued US dollar. This will shrink sales and profit growth, causing shares to drop. Many commentators said it was one of the most spectacular examples of economic self-harm a government has ever made.

The Bond Market Reaction

Once Trump announced his tariff regime, financiers around the world (big financial institutions like super funds, money managers and central banks) found that the US government, once a bastion of financial stability for the world, had become the preeminent source of global economic volatility and unpredictability. Bond markets became acutely sensitive to Trump’s decision making. The rule of law and financial neutrality were being compromised. They “lost confidence” and feared they could quickly lose money. So they started looking for safer places to keep their assets.

The bond market reversed its usual process. Bond holders started to sell off US government bonds, reducing the price and increasing the interest rate — so the US dollar got weaker compared with other currencies. The automatic buffer against any uncertainty elsewhere in the global system had failed.

In addition, share prices started to slide. More than US$10,000 billion was erased from global markets in a few days. 93% of the New York Stock Exchange traffic two days after Liberation Day was sales of shares. Share market traders had to cover their losses by finding money from other sources, including bonds. So there was a big and rapid sell off US bonds and other assets to buy other currencies (euros, yen, Swiss franc) or commodities (like gold) and invest elsewhere.

The stability of the euro market made it an attractive safe haven to hedge against global uncertainty, rather than the US. And China may have dumped bonds to pressure the US to back down on tariffs. Therefore, cash began pouring out of the US.

This weakened demand for the US dollar and it devalued relative to the currencies now in demand. It has dropped by nearly 10% since Trump got back to power. Usually, increasing tariff rates increases the value of the currency, unless other countries retaliate. But the flight of capital from the US overwhelmed this effect.

The Impact on US Government Debt

Thanks to the increasing level of uncertainty, fewer people wanted to buy US bonds in devaluing US dollars, so bond yields, essentially their interest rates, began rising sharply. The interest rate for US government bonds over 10 years shot up from 3.9% to 4.5%, while the 30-year yield hit almost 5%. Movements of more than 0.2% in either direction are very unusual.

Therefore the cost of US government debt went up. As a result, its massive debt became even harder to repay, and the US dollar started to fall even further. US bond yields going up while the dollar (and the share market) goes down is highly unusual — and typically only occurs when there is a financial crisis.

Investors could not rely on the return they might get from supposedly safe assets — US government bonds — so instead of swapping them for cash (depreciating US dollars), they moved their money out of the US altogether. And all of this was happening very quickly. If it continued the financial position of the US government would rapidly become unsustainable. America came very close to the brink of economic breakdown.

That’s because an extreme fall in the price of US government debt (bonds) would mean prohibitively expensive interest costs to fund its budget deficit (more than 4.5% of GDP or US$1300 billion) and refinance more than US$8000 billion of debt that will mature over the next 12 months. These bonds were issued when interest rates were near-zero. New bonds will be much more expensive.

The interest rate on bonds flows through to other interest rates in the economy. While most homeowners in the US have fixed-rate mortgages of between 15 and 30 years, businesses will be hit hard by increases in the cost of borrowing. Banks are likely to be more cautious in their lending. With credit harder to get, investment will be diminished, economic growth will slow and and job losses will increase.

So increasing borrowing costs, a slow down in the economy and tax revenue, and a loss of financial credibility could make America’s budget deficit unsustainable.

The US came very close to a sovereign debt crisis, where the government would be unable to meet its debts. Which would then have taken down the entire global financial system. And some US hedge funds were just days away from going broke.

Even if this doesn’t happen, foreign investors are less likely to buy US bonds in future. The reduced demand for them will result in US interest rates going up. While bond yields have temporarily settled, they remain higher than before the blanket tariffs were imposed. And this is at a time when the introduction of tariffs alone will also increase interest rates and inflation, and US government debt is out of control.

America’s privileged credit status, where government debt was seen as risk-free, will start to unravel, also increasing interest rates — for consumers as well as the government. The standard of living for most Americans will suffer.

A Pause in the Tariffs

Trump must have received worrying advice about what his decisions had done to the financial markets, so on April 9th he announced a “pause” on most of his tariffs for 90 days. Most of them were dropped to 10%, but still 25% for cars and steel and aluminium and products made from them (like nuts and bolts). But he increased tariffs in stages for China — America’s third-biggest trading partner after Canada and Mexico. He had started the tariff play with those two countries, despite signing a free trade agreement with them in his first term. The headline rates for China have risen from 22% to 34% to 145% and for some goods to 245%.

China countered with a 125% tariff for US goods entering China, and banning imports from Boeing and exports of rare earth minerals and magnets, the market for which it largely controls. These are used in everything from glass to ceramics to catalytic converters to electric motors. They are are essential for manufacturing and military production, for things like drones, cars, planes, and wind turbines.

On April 12, Trump cut tariffs on finished electronics and solar panels back to 20%, about a quarter of the US imports from China, but kept much higher rates on intermediate components. This is ludicrous if the aim is to encourage manufacturing in the US.

The new tariffs were just as bad as the original tariffs, but the share and bond markets were convinced that their impact was less. So the perceived financial volatility decreased and there is a view that the crisis has eased. The “pause” will, nevertheless, provide some breathing space for a battered trading system.

The policy inconsistency of three massive, radical but different tariff regimes in the space of two weeks is a really big problem. Nobody seems capable of stopping Donald Trump from making stupid decisions.

And nobody knows what will happen after 90 days. Trump hasn’t the faintest idea where tariff levels will get to, which industries will receive the greatest level of protection, or which countries will be engaged in negotiations in that time. In addition, his advisers don’t seem to know what they’re doing, what they can agree on or even what they want.

The World Trade Organisation thinks that if Trump reimposes the reciprocal tariffs, global goods trade could shrink by 1.5% for the rest of this year, with North America being the hardest hit.

Are the tariffs only bargaining chips or will they become permanent at some significantly high level? Are tariffs just threats of economic punishment to force other countries to do what the US wants? What are the aims and how will they measure success? And what do they really want?

Trump and his advisers dismiss the widespread view among smaller countries that neither the US nor any other power has the right to dictate a world order that ignores their interests (or sovereignty). Their transactional power plays that are trying to merge coercive geopolitics with economic bullying may come unstuck as a result.

Businesses that are trade-exposed or have high levels of debt, or both, have no idea where interest rates or the tariff rates that apply to them are going to be in a few months, making decisions impossible. And allies have been antagonised for no good reason. The tariffs have provoked widespread boycotts of US goods, particularly in Canada and Europe, reducing sales and profits.

To meet one of Trump’s goals of persuading companies to reshore manufacturing to America, high tariffs would have to be re-established and stay high. Which will limit the trade concessions other countries are willing to offer in any bilateral negotiations. Trump will have to decide which policy goal is more important — zero trade deficits or more American manufacturing. He can’t have both.

Why is Free Trade Important?

For [more than] two decades most countries have been reducing import controls and taxes to allow goods and services to move around the world to places that value them the most. When countries impose tariffs they hinder this “free” trade.

Trump thinks that other countries are treating America unfairly and cheating on trade — because the US has trade deficits with most of them. This simplistic thinking has persuaded him to rectify the situation with tariffs. But trade is positive-sum game. Usually, when one country benefits from trade, its trading partner does so as well. Each country imports the goods and services it wants to buy, which are often of more value to it than to the seller. And they export stuff so they can earn the money to buy the things they do not have or are too expensive to make at home.

Trade barriers might provide support for struggling industries in the short term, but they increase operating costs, decrease efficiency and stifle innovation. If you want to promote manufacturing, or any other economic activity, you should try to do so as directly as possible. Like using strategically targeted subsidies. Not via tariffs. But in the US system it is much easier to impose tariffs (by executive fiat) than to provide subsidies which need to negotiate Congress to get the necessary legislation.

If you have to impose tariffs, like in response to sudden surges in imports, it makes sense to place an upper limit on them, arrange a gradual phase-in, give exemptions for critical goods or those not available in your country, allow carve-outs for allies or developing countries, and ensure that tariff revenue is invested in productive activities to strengthen the economy (increasing efficiency, driving down costs and enhancing innovation). Trump has avoided all of these.

Trump thinks that tariffs are the key to American prosperity and trade wars are easy to win. But as well as being stupid, trade wars are wars of attrition. The winner is the country that can sustain the resulting pain the longest.

Who Will Win the Trade War? (Spoiler: China)

The US is the world’s biggest consumer of manufactured goods. In 2024, US imports from China were $462.5 billion, largely made up of electrical equipment and electronics including chips, laptops and smartphones (mainly by US-owned companies); machinery; and toys, games and sports equipment. Some of these products are low cost and expendable from an economic standpoint. But many are consumer-focussed and unavailable at scale from any other country. Any slowing in the export of these products just hurts US companies and US consumers.

US exports to China were $199.2 billion (less than 1.5% of GDP), predominantly goods, and largely made up of aircraft, mineral fuels, oil seeds (mainly soy beans for pig feed) and electrical machinery. So America had a trade deficit with China of $263.3 billion. This means the US contributes over a quarter of China’s annual trade surplus with all countries, that amounts to a total of around US$1000 billion.

At their peak in 2006, China’s exports made up 35.5% of its GDP. But it is no longer an export-intensive country. By 2024, exports of goods and services made up 21.2% of its GDP. They fell to 19.2% in the first quarter of this year. Exports account for about double that in Germany, France and Korea and about half that for the US.

China’s trade surplus has halved, with net exports contributing 4.37% of GDP last year, down from the high point of 8.55% in 2007.

While Trump’s aim is to punish China, only 14.5% of its goods exports go to America. Total exports to the US peaked at 7.5% of its GDP in 2007. Now they account for only 2.7%.

The actual proportion may be higher as some products are exported through other countries, like Vietnam. But those exports have also been steadily declining as a share of the total since 2018, when Trump first imposed punitive tariffs. The countries of ASEAN overtook the US as China’s largest export market in 2023.

If tariffs on its exports to America continue, China will face a reduction in sales and income. But adjusting to the change will be relatively easy. The average value-added content of Chinese goods exports to the US increased from 56% in 2010 to 71% in 2023. A rough estimate of the damage to China’s economy from a complete decoupling from the US can be made by multiplying the value-added content of its exports to the US (71%) by the trade surplus percentage of GDP (1.74%). This results in a potential cut to China’s GDP of 1.2%, or about 0.9% if the exemption of electronic products continues. The hit to China’s growth will not be this big because exporters will sell to alternative markets.

China will not suffer any critical shortages in materials and inputs. The government is providing a stimulus to domestic consumption, which will soak up some of the production once destined for the US. Already China sells most of what it produces to its own people. And it will speed up the policy to reduce low-value manufacturing, which Trump, incomprehensibly, is trying to bring back to America to provide more jobs. It can divert even more of its exports away from the US by:

• re-exporting via countries that are facing only 10% US tariffs
• exploring new markets such as Southeast Asia, the Middle East and Latin America
• and diverting more manufacturing into accelerating its military buildup to compensate for its loss of the US market.

China saves more than it invests and has too much locked away in savings. It can draw down on those savings. It can cut back on spending to offset its loss of income, spread the pain across the country, and manage higher unemployment. It is very good at using the state to mobilise the resources of the nation (but less good at using them with maximum efficiency, like building too many apartments).

Things are not looking so rosy for America. It will be harder and take longer for the US to produce everything domestically, and find new foreign suppliers at similar prices and quality for goods once sourced from China.

The United States is up to its eyes in debt. By imposing tariffs, Trump is increasing the price of goods the US needs but does not produce competitively or at all. There are no quick or easy substitutes.

America has so streamlined its manufacturing to keep costs low that it is reliant on components made by other countries and supply lines being kept open. In times of peril this is a critical security deficiency, given China’s strengths in many areas of manufacturing.

China is the source for about 20% by value of components for finished US goods. As the tariffs bite, US factories won’t be able to source the necessary components and other inputs. Specific industries will face shortages and production will slow or stop altogether. Domestic consumers will face a shortage of things to buy. Retaliation by other countries will also hurt demand for the products of US factories. So some companies will shut down their US factories and lay off workers, and some will move their factories to other countries.

The American industries that sell most of their goods to China, particularly some small and medium sized farmers, will be be cut out of that market. They will have to compete on the world market, and many will go broke (unless there is a repeat of the US$23 billion government bailout program for agriculture that Trump brought in to compensate for his 2018 tariffs).

Trump’s tariffs will raise the prices on nearly all of the goods the US imports (he seems to ignore services). Theoretically, they should raise about $350 billion a year from American consumers for the US Treasury — with about $100 billion from the goods coming in from China. That’s assuming trade flows do not change as a result of their imposition.

The Budget Lab at Yale University says that during the Biden administration the overall average tariff rate was 2.3%. Before the “pause”, Trump’s tariffs increased that rate to 27%, the highest since 1903. It is currently about 22%. It estimated that the 27% average tariff would cost the typical US household an extra $US4700 (A$7470) a year.

More generally, high tariffs will shrink the economy, making it harder for the government to generate tax revenue to pay back America’s unsustainably high national debt. And high tariffs should also increase long-term interest rates, making it even harder to finance that national debt and business expansion. High tariffs make people poorer, so they will buy fewer things and hold on to the stuff they have already bought — cars, TVs, phones and so on. And they will buy more services, which won’t have risen in price as much.

Many American communities have suffered job losses, stagnant wages and social dislocation as a result of globalisation. Trump thinks that a high tariff regime will force companies to do more manufacturing in the US. However, the process of increasing investment in manufacturing is a very costly and long (up to a decade), with uncertain returns. And the investment is made riskier by Trump’s inconsistent policies. Supply chains will also have to be reconfigured and renegotiated, which will also take time.

There is a high chance that tariffs will reduce rather than increase the number of Americans employed in manufacturing and contribute to further deindustrialisation. The putative increase in manufacturing jobs would be difficult to achieve anyway, with insufficient Americans with the skills required and immigration being suppressed.

Attempts to achieve or retain global technological leadership also require a constant process of long term, high risk investment. China’s government thinks in decades and plans to build methodically and strategically. It has cornered the market in rare earths, which are essential for high technology products. It has a global lead in photovoltaics, electric vehicles, and robotics. It is investing billions in artificial intelligence, quantum computers, bio-manufacturing, new materials, thorium reactors, passenger planes, computer chips, and more high tech. Biden tried the same with renewables, artificial intelligence and re-shoring chip manufacture, but Trump has defunded these programs. He is also menacing universities and cutting research funding. There is therefore a high chance that US technological leadership will falter, never to achieve the same dominance ever again.

Trump’s bluff has been called. China has reportedly included “greater respect — specifically, reining in disparaging remarks by Trump’s cabinet members” as one precondition for talks with the United States. The US will soon learn that it needs China far more than China needs the US. And that it has lost a trade war it was not prepared for and should never have started.

What Next?

We are in a severe crisis. Trump is foolishly determined to dismantle the rules that have let the US get enormously wealthy, extend its global influence and avoid great power conflict for 80 years. He is willing to abandon the principles that have underpinned open markets and global trade and investment for decades. The geopolitical consequences could be profound.

He has started a full-blown trade war with China and his tariffs are causing extreme financial instability in the US and across the globe. The flow on effects could cause recessionary conditions worldwide.

The collapse of trade between the US and China would only accelerate the increasing decoupling of the two economies. The global economy will stop being an efficient, single integrated system. Whatever develops we can expect some variant of the common pattern of economic and financial systems that continue to be focussed on capitalist growth and technological competition, where some dominant countries subordinate smaller ones. This follows through to security arrangements.

Trump sees a clear link between imposing tariffs and making allies “pay” more for their defence, particularly Europe and now Japan. Unless his tariff policies are reversed, it will broadly mean the end of US participation in globalisation, and risk its drifting into strategic isolation.

Other countries are no longer sure that the US will remain a reliable guarantor of the rules-based international order. International relations could become more chaotic, while no single nation or institution has the power to enforce global rules. Every country will have to reassess its trade policies as well as its strategic assumptions. They will have to act to maintain their own security and place in the world.

Canada’s Prime Minister Mark Carney has said that Trump’s “unjustified trade war” is an attempt to weaken Canada. He wants new military spending and other ways to bolster his country against Donald Trump’s expansionist vision. Canada is building up its trade ties with ASEAN and Latin America. He wants to “protect the rules-based international order from those who want to destroy it”. Canada and the European Union are already hedging against Trump’s unpredictability by strengthening ties with each other and with China. Latin American countries are doing the same. Universities around the world are trying to attract US-based researchers (while we reduce the number of academics). And China is continuing to shrink its reliance on the US market.

If Japan and China decide to sell off some of their US bonds, or even choose not to refinance them when they mature later this year, that could cause a real disaster for the US. It could result in another crippling spike in bond yields (interest rates), which could not be as easily reversed as the rise in early April. So bond investors in Japan, China, Europe and elsewhere now know they have the means and power to stop Trump from imposing tariffs, or any other economic measures, they don’t like.

China may take this opportunity to require more bilateral trade to be settled in yuan (China’s currency) rather than US dollars. This would force other countries to buy Chinese currency on a larger scale, while significantly strengthening its exchange rate against the US dollar and undermining the dollar’s global dominance.

International capital traders are already reassessing the risks of operating in the US. As they see more trade being conducted in yuan rather than US dollars, they are likely to increase their holdings of yuan assets. This would further increase capital outflows from the US and into China.

Without the discipline of the World Trade Organisation, countries may decide to scale back or remove intellectual property protections, ensure US subsidiaries pay taxes on their income in the country where they operate, impose stricter regulations, or even expropriate entire subsidiaries. Big US firms in technology, pharmaceuticals, and entertainment could suffer the most. And the income that helps offset America’s current-account deficit could dry up.

To avoid the worst of these outcomes, saner people will have to try to resolve the crisis and bring about a sense of financial stability, even for a short time. That will be difficult with Trump in charge. So the US may have to be worked around.

(John continued by analysing in detail the consequences for America, China, the EU, Africa, ASEAN and Australia.)

Conclusion

However, the damage Trump has caused with his irrational convictions, inept and capricious policy swerves and contradictions cannot be easily or quickly undone. The high levels of trust and certainty that underpinned the global economy have been replaced by extraordinary levels of volatility and confusion. The damage to the global economy is already immense. Companies will wait for the dust to settle before making any big commitments in terms of trade and investment. And when trade finally starts to increase again, traders will have to overcome and repair all kinds of disruptions. This will take years to resolve while rebuilding trust and developing fairer, more effective trade regulations. The world is now on a very different trajectory into the future.

John Madden

Closing Comment

I think this snapshot of what Trump’s tariffs mean will be important to look back upon in future. Much has happened since 30 April when this version of the paper was finished. And, tariffs are not all that Donald Trump has done to damage America’s status and position in the world.

On 16 May Moody’s the rating agency downgraded the USA’s credit rating one notch to Aa1. Moody’s first gave the United States its pristine “Aaa” rating in 1919 and is the last of the three major credit agencies to downgrade it. This ratings downgrade is momentous and the rise in Government debt is cited, but the true reasons are outlined in John’s article above.

I don’t think that Americans have paid much attention to this downgrade and possibly won’t, but it is frightening. (On a minuscule scale the local ACT government in Canberra was also downgraded by Moody’s from AAA to AA+ in September 2024. This also did not raise much concern in the community, but it should have).

What will happen only time will tell!

Further Information

Kenneth Rogoff a Harvard professor and ex-Senior Economist at the IMF has written a book in 2025 called Our Dollar, Your Problem (self-explanatory). In a lengthy interview on the Ezra Klein Show (podcast), he covers an issue raised in the article above on dollar dominance in great detail.

Rogoff felt that dollar dominance and all the benefits it provides to the USA, which Giscard d’Estaing called exorbitant privilege, was on the decline. However, he thought the process might take a decade or more, whereas Donald Trump has contracted it into months or even weeks.

Key Words: Donald Trump, Trump, politics, economy, tariff, free trade, bond, bond yield, US government bonds, US dollar, trade deficit, US government debt, liquidity, US Trade Deficit, hedge fund, central banks, China shock, World Trade Organisation, Basel III, Uruguay Round, global interest rate, currency, imports, exports, goods, services, intellectual property, technological innovation,  expertise, knowledge-based assets, current account deficit, GDP, volatility

Published in Canberra