On March 3, Donald Trump made two highly significant decisions. One was to impose tariffs on Canada and Mexico at a rate of 25 per cent, as well as on Chinese imports at a rate of 10 per cent on top of the 10 per cent imposed last month. A 25 per cent tariff on imports from the EU is expected to follow. Together, these four economies produce 61 per cent of US imports of goods. The other and more significant decision was to suspend US military aid to Ukraine, giving the beleaguered country what appears to be a Hobson’s choice between surrender and defeat. Trump’s friend Vladimir Putin must be ecstatic: the US president is tearing the west apart before his happy eyes.
These are merely two sets of decisions in the whirlwind that has accompanied the second Trump presidency. But for the outside world, they are of huge significance. They represent the end of liberal, predictable and rules-governed trading relationships with the world’s most powerful country and also the one that created the system itself. They also represent the abandonment by the US of core alliances and commitments in favour of a closer relationship with an erstwhile enemy. Trump clearly thinks Russia more important than Europe.
In both cases, he is sorely mistaken. As Maurice Obstfeld, former chief economist of the IMF, has noted, the US’s trade deficits are not due to cheating by trading partners, but to the excess of its spending over income: the biggest determinant of America’s trade deficits is its huge federal fiscal deficit, currently at around 6 per cent of GDP. The Republican-controlled Senate’s plan to make Trump’s 2017 tax cuts permanent guarantees that this deficit will persist for at least as long as markets fund it. Given this, attempts to close trade deficits with tariffs are like trying to flatten a fully-filled balloon.