Michael Roberts explains what is driving Trump’s trade wars

Today, President Donald Trump implemented his new range of tariffs on US imports called reciprocal tariffs.  In addition to those announced last Wednesday (Liberation day), Trump included an extra levy on Chinese imports in retaliation to China’s decision to impose a 34% tariff on US imports, which in turn was a retaliation against Trump’s 34% hike on Chinese imports proposed last week.  So US imports from China now have a 104% tariff rate, in effect a doubling. And as I write, China has announced a further 50% hike on US imports, taking Chinese tariffs on US exports to 84% in this tit-for-tat retaliation war.

Where is all this going?  Well, it means a slump in production in the US and most major economies; and it means a revival of inflation, particularly in the US.  This is madness, no? Well, as I said last February when all this kicked off, there is method in this madness. Trump and his accolytes are convinced that the US has been robbed of its economic power and hegemonic status in the world by other major economies stealing their manufacturing base and then imposing all sorts of blockages on the ability of US companies (particularly US manufacturing companies) to rule the roost.  For Trump, this is expressed in the overall deficit in the goods trade that the US runs with the rest of the world.  

He is not concerned, it seems, by services trade, where the US runs a surplus.  It is manufacturing and commodities trade that concerns him.  The aim is to close this deficit by imposing tariffs on US imports of goods.  Using a crude formula for each country (the size of the US goods trade deficit with each country divided by the size of US imports from that country, then divided by two), Trump’s team arrived at the tariff hikes for each country.  This formula is nonsense for several reasons: first, it excludes services trade, where the US runs surpluses with many countries; second, a tariff of 10% has been imposed even for countries where the US runs a goods surplus; third, it bears no relation to any actual tariff or non-tariff barriers that a country has on US exports; and fourth, it ignores the tariff and non-tariff barriers (of which there are many) that the US itself has on other countries’ exports.

These ‘non-tariff’ barriers may yet also come into play.  Trump’s Maga trade envoy Navarro made it clear: “To those world leaders who, after decades of cheating, are suddenly offering to lower tariffs — know this: that’s just the beginning,” citing a laundry list of unfair practices he said included currency manipulation, “opaque” licensing, “discriminatory” product standards, “burdensome” customs procedures, data localisation and so called “lawfare” of taxes and regulation hitting US tech firms.

Trump’s aim is clear.  He wants to restore America’s manufacturing base within the US.  Much of imports into the US from countries like China, Vietnam, Europe, Canada, Mexico etc are from US companies based in those countries selling back to the US at lower cost than if they were based inside America.  Over the last 40 years of ‘globalisation’, multi-national companies in the US, Europe, Japan moved their manufacturing operations into the Global South to take advantage of cheap labour, no trade unions or regulations and the use of the latest technology.  But what has happened is that countries in Asia have dramatically industrialised their economies as a result and so gained market share in manufacturing and exports, leaving the US to fall back on marketing, finance and services.

Does that matter?  Trump and his crew think so.  Their eventual strategic aim is to weaken, strangle and gain ‘regime change’ in China and to take full hegemonic control over Latin America and the Pacific.  To do that, they must have a strong and overwhelming military force. Trump has announced a record military budget of $1trn a year.  But US arms manufacturers cannot deliver on that budget.  So US manufacturing must be restored at home.  Biden was keen to do that through an ‘industrial policy’ that subsidised tech companies and manufacturing infrastructure.  But that meant a huge rise in government spending that drove up the fiscal deficit to record levels.  Trump reckons that imposing tariffs to force American manufacturing companies to return home and foreign companies to invest in America rather than export to it is a better way. He reckons that he can increase manufacturing, spend more on arms, reduce taxes for corporations while cutting back on government civil spending and still keep the dollar stable – all with tariff hikes.

Is this going to work?  It seems that some analysts, even leftist ones, think it might.  It’s true that many semi-vassal states of US imperialism will probably try to concede to Trump’s terms: already South Korea and Japan are attempting to do so, and the UK too.  But that won’t be enough to turn things round. Those who think Trump can succeed argue that, in the past, when the US opted to change the balance of global economic forces in its favour, it worked. 

Nixon took the US off the gold standard in 1971 and established the dollar as the hegemonic currency with the ‘exorbitant’ privilege of being the only issuer of this currency, to pay for its imports and its capital investments abroad.  But that did not stop the US losing market share in manufacturing through the 1970s.

And then in 1979, the then Federal Reserve governor Paul Volcker hiked interest rates to 19% to control inflation, which led to a deep slump both in the US and globally.  The dollar rose so much that US manufacturing began to move its locations abroad – it was the beginning of the neo-liberal period.  In 1985, the US got other trading nations to agree to strengthen their currencies against the dollar through the so-called Plaza accord.  This eventually destroyed Japan’s industrial leadership built up in the 1960s and 1970s, but it did not work in restoring US manufacturing at home. 

It is not going to work this time either, especially just through tariff hikes. US manufacturing can only compete in world markets because it has superior technology and so can reduce sharply labour costs in production.  Although the US still has the second largest manufacturing sector in the world at 13% of world output (after China at 35%), US manufacturing employment has fallen sharply since the end of the golden age in the 1960s, mainly because US manufacturing profitability declined and technology replaced labour – not because of trade liberalisation. Indeed, the Trump’s team is talking about increasing manufacturing capacity at home through robots and AI and so delivering little extra jobs in the sector. So much for Trump’s claim that he was “proud to be the president for the workers, not the outsourcers; the President who stands up for Main Street, not Wall Street”.

The reality is that Trump cannot turn clock back to make the US the leading manufacturing economy in the world.  That ship has passed.  Globalisation has meant that the manufacturing value chain is now global, with components and raw materials spread across the world.  As the Wall Street Journal pointed out: “Even if US-manufactured exports increased enough to close the trade deficit—an extremely unlikely event—and if employment grew proportionately, our manufacturing-workforce share would climb only from 8% to 9%. Not exactly transformational.”

If Trump wants to restore US manufacturing, the sector needs massive investment at home and US companies, already experiencing relatively low profitability outside the Magnificent Seven, are unlikely to oblige, except for military hardware paid for in government contracts.  The reaction of Trump’s erstwhile adviser Elon Musk to the tariff hikes is symptomatic of the reaction of US big business: Musk attacked Navarro, calling him a “moron” and “dumber than a sack of bricks” after Navarro suggested the Tesla boss’s opposition to tariffs was self-interested (which indeed it is).

Despite the inevitable failure of tariffs as a solution to re-industrialising America, Trump seems set on going through with his protectionist strategy.  This can only be a trigger for a new slump both in the US and in the major economies.  It’s a trigger because already the major economies had been slowing to a crawl, even the US.

The manufacturing activity index (PMI) has been in contraction territory for over two years, while Americans’ inflation-adjusted earnings have gone nowhere post-pandemic (up just 1% in the last five years, as measured by real average weekly earnings).  The much followed Atlanta Fed GDP Now model forecasts for US economic growth that in the first quarter ending March, the US economy contracted 1.4%, with domestic sales slowing to just 0.4% on an annualised basis. JPMorgan has slashed its 2025 GDP forecast from +1.3% to -0.3%, with unemployment projected to rise to 5.3%.

The ‘war against inflation’ is also being lost by the US Fed. The Fed’s target is 2% a year for US personal consumption expenditure (PCE) price inflation. In February, the PCE stayed at 2.5% and core PCE (excluding food and energy prices) rose to 2.8% a year. As I pointed out last February, in the major economies, there is an increasing whiff of stagflation ie low or zero growth alongside rising price inflation. And the impact of Trump’s import tariff hikes are still to be felt.

Indeed, the US Federal Reserve is now in a serious dilemma.  Should it keep interest rates steady to try and control inflation; or lower them to try and avoid a slump?   Prices in American shops will soon be rising sharply from imported consumer goods from Asia, including leather and apparel. Smartphones, laptops, and video game consoles are likely to become more expensive for US consumers, particularly as many of Trump’s highest tariffs are focused on countries such as Vietnam and Taiwan. Rice prices will rise by 10.3 per cent in the coming months, according to the Yale Budget Lab. The think-tank also forecasts a 4 per cent increase in the price of vegetables, fruit and nuts, many of which are imported from Mexico and Canada.  Overall, the Yale Budget Lab estimates US households will spend an average of $3,800 more each year from 2026 as a result of tariff-induced inflation.

And back in ‘Main Street’, as Trump calls it, US companies are defaulting on junk loans at the fastest rate in four years, as they struggle to refinance a wave of cheap borrowing that followed the Covid pandemic. Because leveraged loans — high yield bank loans that have been sold on to other investors — have floating interest rates, many of those companies took on debt when rates were ultra low during the pandemic and have since struggled under high borrowing costs in recent years. Now their profit will be further squeezed by tariffs while interest rates stay high.

Usually when a recession is in the offing, government bond prices rise as investors look to a ‘safe haven’ from a stock market crash.  But this time, bond prices and the dollar rate are also diving – as fears of rising inflation and worries about the security of holding dollar assets take over. The fall in the stock and bond markets are presaging the big fall in production and employment in the US and elsewhere (it is estimated that China’s current real GDP growth rate of 5% a year could be reduced by 2% points – it will be even worse for others). And a slump in the ‘real economy’ will lead to a further crash in financial assets. 

Trump and his MAGA team believe that all these shocks are a price worth paying to restore US manufacturing hegemony.  Once the dust settles, America will be great again, they argue.  The destruction of world trade will have a ‘creative’ outcome (at least for America).  But this is a delusion.  US imperialism’s hegemony has been weakening as far back as Nixon in 1971 or Volcker in 1985.  Trump’s slump will only confirm that trend.

Reposted from Michael Robert’s blog: link here.