A recent New York Times article argues that Donald Trump is winning the trade war. “As major economies fall in line to sign agreements that include the highest tariffs in modern history, the president’s vision for global trade is rapidly being realized.”
Ostensibly this is because EU, Japan and other countries have made peace with 15 to 20 percent tariffs. While these tariffs are certainly lower than what was proposed earlier, they are still much higher than the approx. 3 per cent that prevailed prior to this. These tariffs are also at their highest level since the early part of the 20th century.
In an earlier article I pointed out that those protectionist policies in the years between the two World Wars quite likely resulted in the Great Depression. This time around the results will be less catastrophic because the intervening years have seen the rise the Asian Tigers, India, China and other middle-income countries. Consumer demand from these countries will prevent worldwide stagnation. But the effects will be felt, and in fact are being felt, globally in terms of slower output and higher prices.
Trade deficits are not always bad
Typically, tariffs are promoted as a way dealing with trade deficits. We are importing more than exporting. Foreigners are buying less from us than we are buying from them. This must be bad. This type of “mercantilist” thinking was prevalent between the 15th and 18th centuries but faded away after that as people and countries began to realize that if you can buy something more cheaply from another country than make on your own, it makes sense to do so.
Often, the cause of trade deficits lies elsewhere. For instance, if lots of foreigners wish to invest in the US market then they will need to buy US dollars. This demand for US dollars pushes up the value of the dollar against other currencies. As the dollar gains value US exports (things Americans sell) become more expensive while imports (things Americans buy) become cheaper. The net result is a fall in exports and a rise in imports, voila, a trade deficit. But notice that this has nothing to do directly with exports and imports. The whole process is driven by foreign investors investing in the US, something that typically increases US productivity and standards of living.
Trade deficits also come about when a country does not save enough to satisfy the demand for investible funds. When household savings fall short of what businesses want to borrow, then the gap is met by funds coming from overseas. The exact same process outlined above plays out, resulting in trade deficits.
Countries like the US that do not save enough to meet the demand for funds from businesses will have a trade deficit. Countries like China that save a lot will send much of that money overseas and will have a trade surplus.
Tariffs have little to do with this and do not address the structural issues behind trade deficits.
The US is not winning
It is also not clear to what extent Trump’s vision, if there is a vision at all, for world trade is being realized.
The climb down from the very high tariff rates proposed back in April were caused by a massive sell-off of US Treasury bonds leading to a fall in bond prices and a corresponding rise in the interest that must be paid on those bonds.
This is putting upward pressure on US interest rates and explains the fight between Trump and Jerome Powell, the Chairman of the Fed. Trump wants interest rates lowered, while Powell is opposed and has held interest rates steady, in face of rising interest rates on the US Treasury bonds.
In the meantime the Euro has been gaining while the US dollar slides. And while the Euro is probably not going to replace the US Dollar as the world’s reserve currency, that prospect has certainly improved in recent times. Investors are certainly looking more favourably at Europe given the uncertain investment atmosphere in the US. This is not good news for long term US productivity or prosperity.
At the same time, other countries are gradually putting together their own regional groups. There are now ten members of BRICS (which started with Brazil, Russia, India, China and South Africa). Indonesia became a full member in early 2025. There are eight other countries who are on track to become full members. This group now represents roughly half of the global population and 41% of world’s gross output in purchasing power terms. It is an economic powerhouse, with top producers of key commodities like oil, gas, grains, meat, and minerals.
American is no longer the future.
As I pointed out elsewhere, increasingly America is no longer the future.
The events since Trump’s April 2 Liberation Day have not been favourable to long-term US interests. But I take little pleasure in these developments.
It is highly likely that as the US loses economic influence, China will emerge as the economic hegemon. Since the second World War, by and large the expansion of US economic hegemony was coupled with democratic advances globally. But with China we have a decoupling of economics and democratic values; the idea that economic development does not need democratic institutions, that there is no democratic dividend. The result will be greater democratic backsliding.