Trump’s self-inflicted trade disaster

Kaushik Basu

ITHACA, NEW YORK – U.S. President Donald Trump’s return to the White House has been accompanied by dramatic economic-policy shifts, setting countries around the world on edge. The new administration has imposed sweeping tariffs on Chinese, Mexican, and Canadian imports – pausing, reinstating, and later granting temporary exemptions for goods compliant with the U.S.-Mexico-Canada Agreement (USMCA). In response, both Canada and Mexico have announced retaliatory tariffs on key U.S. industries, while Trump has vowed to impose “reciprocal” tariffs on “everybody across the board.”

Since no other country wields as much influence over the world economy as the United States, these abrupt and unpredictable policy shifts have fueled fears of a global slowdown, triggering a stock-market selloff – starting in the U.S. itself. In fact, Trump’s trade policies may inflict even greater damage at home than abroad. While some of his moves – especially his administration’s efforts to boost domestic semiconductor manufacturing – could prove beneficial, his erratic policy shifts jeopardize America’s economic stability, undermining its competitiveness and long-term growth.

Trump has long been frustrated by the fact that the U.S. runs trade deficits with many countries. During his recent meeting with Indian Prime Minister Narendra Modi, he specifically raised concerns about America’s $45.6 billion trade deficit with India. In response, Modi pledged to increase energy imports from the U.S.

But not every trade relationship needs to be perfectly balanced. Trade imbalances are a natural part of global commerce, enabling economies of scale that ultimately benefit all countries.

Consider everyday transactions between individuals. Adam buys groceries from a neighborhood store owned by Eve, who spends that money at various other stores and online platforms. Now imagine that one day, a furious Adam barges into Eve’s store and declares, “I keep buying from you, and you buy nothing from me!” He then demands to “balance” their business relationship. If everyone insisted on such terms, commerce would grind to a halt, effectively dragging society back to the barter system.

Although striving for balanced trade with every country is uncalled for, America’s overall trade deficit does raise legitimate concerns. At the start of this year, the deficit reached an all-time high of $131.4 billion. What that means is that other countries are selling goods to the U.S. and retaining a portion of the dollars earned, planning to use them for future purchases.

But it is important to recognize that this is the price of having a currency the world trusts and depends on. No one would willingly sell goods to North Korea and stockpile North Korean won for future use. The U.S. dollar, on the other hand, serves as a global reserve currency precisely because of the world’s confidence in its stability. Trump’s tariffs now threaten to undermine the dollar’s global role.

Pointing to the high tariffs some countries impose on U.S. goods, Trump has repeatedly threatened to retaliate with “reciprocal tariffs,” that is, matching those countries’ tariffs product by product. While such an approach may appeal to him and to rallygoers on the campaign trail, its effectiveness is questionable.

Trade, after all, is fundamentally driven by comparative advantage, which means that the goods a country exports to one trading partner are typically different from those it imports from that partner. For example, one country might export pharmaceuticals while importing airplanes. Thus, matching another country’s import tariffs on a specific good would be futile, especially if the US does not import that good in significant quantities to begin with.

But let’s set aside these nuances. We already know what will happen if the US were to apply this policy “across the board,” as Trump suggests. Canada and Mexico will raise tariffs on US goods, leading the U.S. to retaliate, creating a vicious cycle.

This dynamic is already playing out between the U.S. and Canada. In February, Trump announced 25 percent tariffs on Canadian steel and aluminum. In response, Ontario levied a 25 percent tax on electricity exports to the U.S., prompting Trump to declare a national emergency and double his steel and aluminum tariffs to 50 percent. Within hours, Ontario Premier Doug Ford suspended the surcharge after the U.S. rescinded the tariff hike and agreed to negotiate.

The same retaliatory cycle would likely unfold with the European Union, China, Brazil, and many other trading partners. As a result, the U.S., which relies heavily on imports, will find itself behind a tariff wall – a strategy once favored by many developing countries, often with disastrous consequences. Trump’s tariff wall will drive up domestic inflation and increase U.S. production costs, thereby making American goods less competitive and enabling Europe and China to outpace the U.S. in key markets.

Notably, Trump’s tariffs have already sparked intense discussions among other countries about strengthening economic collaboration. India and the EU, for example, are close to finalizing a new trade agreement. There is also talk of deepening business and trade among Mexico, Canada, and China. In the short term, Trump’s trade policies will undoubtedly cause economic hardship worldwide. But in the long run, the greatest damage may be inflicted on the US itself. Ironically, by trying to promote his MAGA agenda, Trump could end up driving a global shift that makes other countries great again.

Kaushik Basu, a former chief economist of the World Bank and chief economic adviser to the Government of India, is professor of economics at Cornell University and a non-resident senior fellow at the Brookings Institution. This article was distributed by Project Syndicate.