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Your guide to what Trump’s second term means for Washington, business and the world
If bathos were an Olympic sport, Donald Trump would be in line for a gold. Last Friday he threatened to savage China’s economy by banning all critical software exports in retaliation for Beijing’s controls over rare earth minerals. By Tuesday the trumpets of trade war had been muted and Trump was muttering about the US boycotting Chinese cooking oil and making its own.
When Trump announced massive tariffs on his so-called “liberation day” of April 2, there was a genuine fear his trade war would turn off the engine of global import demand and plunge the world into recession. It hasn’t happened. This week, the IMF, albeit wrapping it in gloomy language, predicted the global economy would slow modestly from 3.3 per cent growth last year to 3.2 per cent this and 3.1 per cent next.
The Trump administration’s vision of remaking the world using tariffs was always a fantasy. The US is simply not big enough, and tariff powers have practical and political limits. Manufactured goods may dominate international trade but not the global economy. The real risks are in other sectors: extractives, in the form of the US turn back towards fossil fuels and China’s control over rare earths, and services in the form of artificial intelligence (AI).
As some of us predicted, the soi-disant Tariff Man’s powers are weaker than he thought. Since a relatively small part of the American economy is traded, the US share of global final import demand (after calculating the value added in each economy) is only 17.5 per cent. In particular, the fantasy that Trump would use the leverage of tariffs to disrupt the world economy with a Mar-a-Lago currency accord has mercifully evaporated.
In any case, in various sectors such as electronics and with various trading partners including Mexico and Canada, Trump has been forced to carve out exemptions to protect consumers and producers. The equity market sell-off in April, briefly echoed last week, has also warned him off rapid escalation.
US tariffs against China are indeed high. But while Beijing has retaliated hard against the US, neither it nor other countries have started a general protectionist spiral, and China has managed to increase exports to other economies. China would not be hurting the US with a soyabean boycott and threatening rare earth restrictions if it couldn’t endure US tariff retaliation.
When all’s said and done, average US import duties under Trump have reached only 16 per cent. On the eve of the Trump presidency, Doug Irwin, one of the world’s foremost trade academics, told me that Trump’s trade policy would probably end up like Richard Nixon’s, with broad but not devastatingly high tariffs. That prediction still looks somewhat optimistic, but more realistic now than it did on “liberation day”.
More worrying is that the narrow economic path the US has chosen will dissolve beneath its feet. Trump has turned the federal government’s efforts away from advanced green technology, particularly renewable energy and electric vehicles. He’s also proved an inept guardian of what advantage the US still retains in semiconductors by allowing Nvidia and AMD to export chips to China in return for paying 15 per cent tax on the proceeds.
Instead the president has focused on fossil fuels and the AI boom. Missing out on the huge productivity and cost improvements in renewable energy is a bad idea on pure economic grounds: the idea that green principles cost money is definitively being disproved. Even worse, a huge amount of capital has been poured into AI projects — equipment for data centres is a non-negligible part of US imports — which are yet to show returns. A bursting of that bubble will probably have consequences for US growth far bigger than the tech bust of the late 1990s.
China poses its own threats to the world economy. One is overplaying its hand with rare earth restrictions and other controls and causing real damage to supply chains. Since its export controls were first announced in April, the bureaucracy for controlling user licences has not exactly been perfectly calibrated, but nor does it seem clumsy enough accidentally to cause production processes worldwide to collapse.
Another threat is that China returning to an export-led growth model will create unsustainable global imbalances. Those risks are no doubt real, but China is at least targeting growth over climate denial ideology. The voices in Xi Jinping’s ear, the engineers and technicians who famously run China’s government, are more constructive than the tech bros and fossil fuel executives to whom Trump is in thrall.
While it’s still relatively early days — the liberation day tariffs didn’t actually come in until August and other sectoral duties are on the way — Trump’s interventions have so far proved to be an annoyance rather than a genuine threat to trade. The financial market and economic constraints that have moderated them will continue.
The global economy can survive interruptions to bilateral US-China goods trade. A collapse in AI, the sector of the US economy in which investors and Trump himself have placed so much faith, will be a harder shock to endure.
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