Trump’s Tariffs and the Announcement of a New Global Economic Order

The normal purpose of customs tariffs on imported goods is to ensure that certain sectors of the economy are able to maintain levels of production and prices above those which they would be capable of sustaining under conditions of free competition in the world market. The effectiveness of tariffs in achieving this objective is greater in new and expanding industries, and is more difficult to achieve in declining industries, where the incentive for new investment is weak. Trump’s tariffs have the peculiar characteristic of applying to all goods imported by the United States from a large number of countries. Through his tariff schedule, Trump aims to achieve an extremely ambitious objective: correcting the US current account deficit with the rest of the world, which has persisted chronically for more than sixty years and currently stands at around 800 billion dollars annually. This contrasts with the surpluses recorded by China, amounting to 400 billion dollars, and by the countries of the European Union as a whole, amounting to 120 billion dollars. A prolonged external deficit leads to the weakening of a country’s currency in external markets, and its devaluation is one of the means of correcting such a deficit. The dollar is the exception to this rule, as it has served as an international reserve currency since the end of the Second World War. This international role of the dollar has conferred upon the United States a monetary power enjoyed by no other country, allowing it to attract foreign capital with great ease in order to finance its economy, while also contributing to the fact that a large proportion of global financial flows pass through its financial market, which, together with the London financial market, largely dominates the global export of financial services. In this way, the stability of the international value of the dollar rests, to a large extent, on its role within the global financial system, and is only weakly dependent on the balance of the American current account.

On the other hand, a sharp depreciation in the value of the dollar would have a negative impact on the functioning of the American financial market, given the losses that domestic and foreign holders of financial assets denominated in that currency would suffer. Consequently, it is unlikely that we shall witness a policy aimed at devaluing the dollar, which could only be implemented by the Federal Reserve System (the central bank), and not by the American government.

The fact that the American financial system contributes to maintaining the stability of the dollar’s value does not prevent the current account deficit from negatively affecting the country’s economy. Indeed, the excess of American imports over exports has been one of the causes of the decline of some of its industries and the worsening of asymmetries between different regions of the United States. This economic context generates pressure for the American government to attempt, in some way, to reduce the current account deficit, and with recourse to a devaluation of the dollar ruled out, protectionism — in this case through the imposition of tariffs on imports — emerges as an alternative means of achieving this objective. These tariffs may contribute in different ways to correcting the external imbalance of the American economy. Firstly, by causing imported goods to become more expensive, they encourage American consumers to reduce their imports. At the same time, American industries become more protected from external competition, thereby expanding their domestic market and creating conditions for at least some of them to increase production. There are also benefits which tariffs may offer to a large economy and which are difficult for small economies to access. One of these arises from the importance of the American market to many foreign suppliers, which may lead them to lower their prices and bear part of the cost of the tariffs themselves. Another such benefit is the possibility for large American companies, taking advantage of the protection of their domestic market, to raise the prices of their exports. This change in the terms of trade (an increase in export prices and a reduction in the pre-tariff prices of imported goods) also results in an improvement in the current account balance. Finally, the tax revenues generated by the new tariffs may be allocated as subsidies to exporting companies, thereby increasing their competitiveness in the international market, or distributed as tax benefits to consumers, who may then be left with the impression that “America is wealthier again”, the slogan used by Trump when announcing the tariffs.

As for the negative effects of tariffs, in the short term one of them is the risk of inflation resulting from the increase in the prices of imported goods. This risk, which is relatively high in a small open economy, is lower in a large economy more closed to the outside world, such as that of the United States. Moreover, should any inflationary process triggered by the new tariffs arise, the Federal Reserve System could easily implement monetary policy measures capable of combating it rapidly. Another negative effect concerns exporting industries whose products incorporate imported components and which see their production costs rise as a result of the tariffs. Nor should we overlook the risk of a tariff war if a significant number of countries retaliate by creating or increasing their own tariffs, which would lead to major instability in world trade.

In the long term, the correction of the external imbalance from which the American economy cannot escape, and towards which it is now preparing to take the first steps through increased protectionism, will remain a feature of the global economy over the coming decades. This process will be influenced by factors such as changes in the economic cycle, the declining importance of the dollar within the international monetary system, changes in the structure of the American and global economies, geopolitical tensions and instability, and domestic political factors. The major transformations in the global economic order are therefore still to come, and what we are witnessing now is merely their announcement.