Donald Trump’s decision to impose a 125% tariff on Chinese imports into the US has raised stakes in the struggle between the world’s two biggest economies. If the markets have been spooked by the events of the past week then that’s hardly surprising.
Over the past few decades, phoney trade wars have been commonplace. Rival nations have squared off against each other, indulged in a bit of sabre-rattling, but eventually agreed on a deal. Headlines that screamed “trade war looms” were quickly replaced by those that read “trade war averted”.
This time it’s different. The battle between the US and China prompted by Trump’s tariffs is no pretend trade war. It is the real deal – and it will have real consequences. Tariffs operate as a tax, adding to the costs of doing business and raising prices for consumers. Growth will slow and inflation rates will rise. The global economy was already growing only slowly. As things stand, it is now heading for recession.
Trump seems prepared for this, making it clear that he is ready for some short-term pain for what he thinks will be long-term gains: a revitalised US industrial base and higher exports. This also represents a shift in approach. In the past, US policymakers have tended to take fright at big falls on Wall Street and have eased policy to limit the damage.
But only up to a point. The spread of the panic to the bond market seems to have forced something of a rethink. Hence the announcement of a 90-day tariff pause for all countries other than China. Perhaps this is Trump’s Liz Truss moment, where he has been forced into a partial U-turn by a sell-off in US assets. Important though they are, the market turmoil and the heightened risk of recession are only part of the story. Trade will continue despite Trump’s tariffs and China’s tit-for-tat response to them. Talk of the end of globalisation is exaggerated. Rather, the dawn of a new protectionist era represents the end of a particular model of globalisation, an imagined liberal nirvana in which all barriers – to movement of goods, people and money – would be dismantled.
This hyper-liberalised dream world has been on its way out ever since the global financial crisis of 2008, and all that was needed was a final shove, which Trump has just administered. From now on, migration will be restricted, supply chains will be shorter, hands-on industrial strategies will be back in favour, trade barriers will be removed only slowly.
