Last week, President Trump announced a hike/imposition of tariffs on most of the USA's imports. As per the proposed tariffs that are presently scheduled to come fully into effect from 9th April 2025, the Trump administration has proposed a 10% base tariff on all imports into the US. Over and above the base tariff, higher rates of tariff are applicable on several countries based on the trade deficit of the US with each such country.
The global reaction to the tariff announcement has been varied. Some trade partners like China have responded aggressively by announcing matching higher tariffs; whereas the others, like India, have adopted a wait and watch approach, hoping to find a middle path.
Apparently, the calculation of the proposed indiscriminate tariffs has been done through mindless spreadsheet application, using the recent US trade data. Though President Trump had made tariffs a key issue in his poll campaign, the administration appears mostly unprepared for this. The explanation offered by the US administration for taking steps is not convincing. For example, the arguments presented in an interview of treasury secretary Scott Bessant, remind of an old folklore that goes like this:
“Once a little lamb walked to the river to quench his thirst. At that time the king of the jungle, a Lion, was also drinking water from the river a few meters upstream of the lamb. The smell of this small soft lamb whetted lion’s appetite. He wanted to eat the lamb immediately, but the farce of being a just and kind king, he has perseveringly created over years, prompted him to look for a valid excuse to kill this small creature.
After thinking for a moment, he roared "How dare you make me drink dirty water?”. Not sensing the trouble, the lamb politely replied, my Lord, I am downstream, while you are drinking water upstream. It is me who is drinking your dirty water!”
Determined to kill the lamb, the lion retorted, “but why did you laugh at me last summer when I passed by your abode?". Now sensing some trouble, the lamb meekly replied, "My lord, it could not be me, because I was only born just a couple of months ago”. Unable to control his urge, the lion lamented, “If it was not you, it must be your mother. You must pay for her sins.” Saying this he jumped on the lamb and killed him.”
A career hedge fund manager, who has been feasting on the miseries of others all through his adult life, suddenly speaking the language of Karl Marx, and rooting for the hungry and homeless, would make sense only if he wears the rob of a monk and speaks from a monastery. It sounds even more unconvincing when seen in tandem with the DOGE’s move to end humanitarian aid, in some cases a couple of million dollars, to the world’s most poor and disease prone people.
Listening to President Trump and his team members, I get a vivid impression that Tariff tantrums they are throwing are just an ill-thought excuse being used for a bigger design. This is clearly a fight to stay relevant in the emerging world order. The US economics and demographics do not support its pole position in global geopolitics – a position they have enjoyed and greatly benefitted from for over 80 years now.
The US gained its pole position by dropping “Fat Man” (Nagasaki) and “Little Boy” (Hiroshima), eighty years ago, and has been repeatedly shocking the global community through economic, financial and geopolitical shocks to retain this position. The latest tariff tantrums may just be part of that series.
I do not subscribe to the conspiracy theory doing rounds on social media that this may just be a ploy to push the US yields down, to ease the fiscal pressure and facilitate smooth refinancing of the debt maturing in the next couple of years, for three simple reasons:
(i) The US mostly borrows in its own currency. A simple quantitative easing (USD printing) would be sufficient to refinance debt.
(ii) Bond yields are mostly a function of demand and supply for the underlying bonds. Tariff war would certainly weaken the US economy - at least in the short term (2-3years), if not structurally. Besides, it will also trade linkages of the US. Weaker growth (weaker USD) and declining external linkages would invariably result in poor demand for bonds, hence higher yields. To the contrary, a strong economy with contained inflation (cheaper imports) and stronger external linkages is more likely to stimulate higher demand for the US bond and hence lower yields.
(iii) Approximately, one third of the US public debt (US$8-9 trillion) is owned by the foreign entities. Out of this, Japan (US$1.1 trillion) China (US$800bn) and the UK (US$700bn) are major holders of the US debt (US Treasuries). A full-fledged trade war could result in these holders optimizing their UST holdings and might further reduce demand for the US debt.
There is also a serious disconnect between the immigration policies and the objective to make the US a manufacturing power again. The US wage structure, average US citizen skill levels, the cost of imported raw material and capital goods post tariffs, and a weaker USD may not be conducive for an efficient manufacturing ecosystem. The US would need cheap foreign labor, strong USD, strong trade linkages with suppliers of raw material and engineering goods for at least one decade to relocate manufacturing back to the US.
Notwithstanding the brouhaha over the US$5mn gold card, in the absence of an assurance of a free, liberal, diversified, inclusive and equitable society and stable policy environment, not many investors and highly talented workers may find the US a suitable investment/career/study destination. The European competitors may be happy to host these investors/workers.
In my view, Trump’s tariff tantrums are part of the traditional US ‘shock and awe’ tactics. They will test waters with this sometimes and stage a strategic retreat, if it does not show the desired effects, viz., reinforce the US position as undisputed superpower; achieve fiscal correction without triggering a deeper demand recession, and probability of putting Trump’s face on the Mount Rushmore. However, if it does show the desired results, no one should have any strong reasons for worrying.
In the worst case, if the US stays committed to tariffs and its trade partners prefer to contest rather than yield, we must be prepared for the end of the rule-based global order that has prevailed since the end of WWII. The age of Vikings returns. All powerful nations begin campaigns to acquire territories and resources. The weak nations get subjugated. Poor and starving people are made slaves. Indentured laborers would rebuild empires, before the disease and death destroys it all.
In this context, it is important to listen to the warning of the Prime Minister of Singapore.
