In his first term in the White House, President Donald Trump was enamoured by tariffs. He had employed them indiscriminately without macroeconomic prudence. He weaponised them as a geopolitical weapon, igniting a trade war with China.
In a free-wheeling three-hour interview with the popular podcaster Joe Rogan, as part of his 2024 election campaign, Trump reiterated his fondness for tariffs, describing them as “the most beautiful word” in the economic lexicon. He rated it more beautiful than “love” and “respect” but less beautiful than “religion.” As a true cultist demagogue, he subordinated tariff to religion, vigilant of a backlash from his voter base, who are predominantly evangelical white Christian nationalists.
Eric Voegelin, the German political philosopher, defined stupidity as a loss of reality. To evaluate the financial sustainability of tariffs in a globalised market with interdependent economies, a comprehensive analysis of the global economic order is warranted.
President Trump and his team of economic advisors have determined that the US trade deficit in 2024, amounting to $918.4 billion, suggests trade partners worldwide benefit disproportionately from the current trade agreements, which they believe are unfair and unbalanced.
The singular course correction of such a misaligned US trade policy is to impose punitive tariffs on trading partners, regardless of whether they are adversaries or allies. Elon Musk, the chainsaw-wielding “tech-support” and “special government employee” to the US government, leads the fray in promoting this flawed theory, using his $288 million campaign donation.
An elementary knowledge of macroeconomics entails that multilateral trade deficits, defined as the difference between exports and imports, result from the disparity between aggregate domestic savings and investments. If these numbers are not addressed, the trade deficit will persist regardless of tariff imposition. Additionally, Trump’s proposed plan of providing substantial tax cuts, estimated at $4.5 trillion in the next decade, to wealthy corporations and economic elites will further widen the fiscal and trade deficit.
It is a ludicrous decision to impose a 25 per cent tax on Mexico and Canada, two long-term trading partners of the United States and partners to the regional trade agreement of NAFTA. Amendments to NAFTA were renegotiated and implemented during Trump’s first presidency in January 2020, citing it as outdated and renamed it United States-Mexico-Canada (USMC). Upon returning to office in January 2025, afflicted with historical amnesia, he castigated the USMC treaty as stupid and unfair, adding, “Only an idiot would sign it.”
US policymakers, including President Trump, are adopting a myopic, partial equilibrium approach to tariffs. This raises concerns about whether they are considering the ramifications of international trade and the broader implications of the financial and industrial sectors and monetary policy, which may spill over and impact America’s diplomatic relations and foreign policy.
The process of imposing tariffs on Mexico and Canada involves multiple steps and considerations rather than being a straightforward, one-time taxation on imports into the United States. Global supply chains allow a single product part to undergo various stages of value addition in different countries before becoming a finished product or part of the original equipment.
For instance, economist Dr. Steve Keen illustrates this with a circuit board manufacturer in Michigan that purchases a capacitor from a company in Colorado. Initially, the part is shipped from Asia to Ciudad Juarez, Mexico, for rework, after which it is inserted into a circuit board.
The part is then sent to El Paso, Texas for import-compliance documentation before being shipped back to Matamoros, Mexico. There, it is assembled into an actuator used to fold automobile seats. The actuators are subsequently shipped to seat manufacturing plants in Arlington, Texas, and Mississauga, Ontario, Canada. Once completed, these seats are sent to automobile assembly plants.
Consequently, under Trump’s tariffs on Mexico and Canada, each time the part crosses US borders, it incurs a cumulative 25 per cent taxation levied on Mexico and Canada. The unpredictable President Trump has become a daily surprise, imposing tariffs today and revoking them tomorrow, leaving the bewildered business community in a perpetual state of uncertainty and chaos.
In the annals of history, the demagogue has always been an idiote, a zeitgeist evolved out of economic deprivation and subsequent societal degeneration. Economic prosperity and social stability are indispensable for fostering virtues and maintaining peaceful societies, failing which social unrest and anarchies may ensue.
Historically, there has been a disconnect between Trump’s words and actions. However, during the current term, he is adamant to fulfill every promise outlined in the election manifesto, regardless of how preposterous or impractical some may be, aiming to appease his MAGA supporters.
On 3 March 2025, Trump issued an executive order to increase taxes on China from 10 per cent to 20 per cent. He plans to impose retaliatory tariffs on the European Union, whose tariffs on US exports are among the lowest for regional trading blocs.
According to Nobel laureate economist Paul Krugman, Value-Added Taxes (VAT) on US products have been misconstrued as tariffs. These errors in understanding and oversight are costly, primarily reflecting poorly on US competence and undermining cordial economic relations with long-term trading partners.
Canada, Mexico and China have slapped retaliatory tariffs on US exports, and this conundrum has deteriorated into a full-blown trade war. These developments are reminiscent of the 1930 Smoot-Hawley Tariff Act, and the resultant tariff wars aggravated the Great Depression.
Trade wars are invariably zero-sum games. Tariffs are sales taxes applied to goods and services, which are paid by the importer. Exporters typically do not adjust the prices of traded goods in direct proportion to tariffs owing to cost and margin pressures or risking dilution of brands and their market positioning. The increased prices are generally transferred to the consumers, reducing their disposable income and disincentivising the marginal propensity to consume.
As a consequence, private corporate investments fall as a percentage of GDP, which is a key engine of economic growth. This will adversely impact employment generation, and coupled with rising inflationary pressures, it could lead to disastrous stagflation or prolonged periods of secular stagnation, as posited by some neoclassical economists like Lawrence Summers. Trump’s campaign promises of containing inflation and reducing prices of goods and services will be jeopardised by the economic reality of across-the-board inflation.
It is paradoxical that the dominance of the US dollar within the global financial system—as a medium of exchange in international transactions, as a unit of account in individual, corporate and sovereign global investments, and as a store of value in foreign exchange reserves of central banks—has been sustained through the maintenance of large trade deficits since the 1950s. The trade deficit is a prerequisite for maintaining the US dollar’s status as a global reserve currency.
The current account trade deficits that the US incur with its trading partners allow these countries to access and utilise US dollars. The exchange rate of the US dollar will appreciate in the scenario of a US trade surplus, and in such a scenario reversal, the US dollar will experience a shortage in international trade and finance. This will have severe repercussions on the global economy.
Contrary to popular belief, the US dollar is not solely used for trade but is predominantly used in global financial transactions in the capital account. A significant portion of international debt, whether sovereign debt owed by governments to governments or to bondholders, is denominated in US dollars.
If the dollar appreciates relative to other currencies, servicing debt in US dollars will become challenging, requiring countries—especially the Global South—to expend more of their domestic currency to procure dollars. This situation will inevitably place significant strain on a nation’s fiscal policy.
Due to increased fiscal outlays on US dollar debt servicing, there is limited capacity for public expenditure on welfare programs and public-private partnerships in infrastructure development. This further restricts capital expenditure engagements by large corporate and private businesses, thereby negatively affecting labour productivity, income, employment, and wages.
If Donald Trump aims to terminate the US dollar’s status as the global reserve currency, it would be economically prudent to address the trade deficit and transform it into a trade surplus. But he is intimidating the dollar area countries—especially the BRICS+ alliance that has taken nascent steps in de-dollarisation—through punitive tariffs of 100 per cent and terminating export contracts with the United States.
If a countervailing response of suspending US debt servicing and defaulting due to prohibitive tariffs, then the IMF will come down with a sledgehammer retaliation, drawing up an elaborate roadmap for imposing austerity measures, proposals for dismantling trade unions, pushing neoliberal policies of privatisation of public entities, lifting capital controls and opening up of industrial sectors for hawkish American buyers.
Tariffs on countries like Mexico combined with Trump’s implacable deportation of undocumented immigrant labour will likely engender a debt crisis. Mexico relies heavily on remittances from expatriates to maintain its peso exchange rate against the US dollar.
Deporting millions of low-income Mexican workers in sectors such as construction, retail, food services, and seasonal labour in California would lead to wage inflation in the US and hinder Mexico’s debt repayment and procurement of expensive inputs like crude oil, natural gas and raw materials.
This applies to most Latin American countries, such as Argentina, Colombia, and Venezuela, which depend on US dollar remittances to keep their national currency buoyant. In 1982, the Mexican tesobono debt crisis precipitated a wave of Latin American debt defaults, raising concerns that history may be on the verge of repeating itself.
A depreciating US dollar will not augur well with 13 billionaires in Donald Trump’s cabinet. It would decimate the book value of their financial assets and hurt Wall Street.
A critical question remains: How would President Trump reverse the trade deficit, achieve an export surplus, watch the natural depreciation of the dollar, and enhance the competitiveness of US exports while simultaneously safeguarding the value of US capital markets and financial assets?
His broad assertion that US trade partners are exploiting the country is not entirely accurate. While the US does have a trade deficit in goods, it recorded a net surplus in services amounting to $300 billion in 2024.
And US trading partners are not ballistic about that. While trade often involves brute force negotiations and rarely symmetrical, it is essential to maintain checks and balances to prevent it from relegating into a win-lose proposition, as advised by Maynard Keynes.
Trump wants to restore manufacturing to the United States. He is coaxing the global community and American businesses to relocate production facilities to the US in exchange for one of the lowest tax rates and economic incentives and benefits.
But what is the economic rationale for the UK, Germany, France or India to relocate their manufacturing to the US amidst an overvalued dollar?
Which country will forfeit the opportunity to industrialise, innovate its own economy, re-skill its labour force and raise the standard of living of its citizens? The US did it 40 years ago when it eschewed industrial capitalism in favour of financial capitalism.
After World War II, the US earned the moniker of “the factory of the world. ” Exporting goods and services globally in a war-ravaged world, the US enjoyed a trade surplus.
Even if the dollar is strategically depreciated—disregarding its global ramifications—it may take several decades to restore the industrial capacity and prominence outsourced to foreign locations.
The US has deindustrialised, and its financial fortunes are not made on profits from production but through capital gains in stock prices. Equity analysts on Wall Street, Dow Jones, and Nasdaq set quarterly P/E targets. Obsession with shareholder value upends real economic value creation.
All companies in the US, whether they are auto companies, software enterprises, consulting services, energy companies or FAANG behemoths, have the singular aim of increasing the price of their stocks. For S&P500 companies, stock buybacks and dividend payouts take precedence over reinvesting in productive endeavours.
Influenced by the principles of neoclassical economist Milton Friedman and the Chicago School, shareholder capitalism is deeply entrenched in the American business landscape. Maximising shareholder profits has become the sole purpose of any business in the US, even if it comes at the expense of employee welfare, violating consumers’ rights and trust, burgeoning social and economic inequality, or “beggar thy neighbour” policies.
Tariffs can have unintended consequences and collateral damage. The United States needs to develop a coherent industrial policy that focuses on enhancing and deepening its technological infrastructure and prioritises complexity over specialisation. This entails departing from the principles advocated by neoclassical trade theorists.
If Donald Trump pursues insidious financial warfare, it will disrupt the global economic order and challenge the US hegemony within a unipolar world. This may lead to the formation of new alliances, trade agreements, and a radical redefinition of the global financial system, thereby accelerating the shift towards a multipolar world.
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