Richard Baldwin on Trump's Trade War: Why It Will Fail and Persist

Trump's Trade War: A Historic Turning Point

• ⚡ Donald Trump's trade policy is described as a historic turning point, not merely a trade war, but a war on the global trade system itself.
• ⚠️ The initial announcement on April 2nd caused significant market turmoil, suggesting the policy was too damaging to the US economy and unsustainable in its original form.
• 🧠 Trump's approach is driven by a consistent emotional logic rooted in a belief that America is being victimized by foreign trade, a sentiment present since the 1980s.

The "Great Trade Hack" and Its Logic

• 🛠️ The term "hack" signifies an attempt to change the source code of the trading system in a rushed, assault-like manner, rather than through gradual reform.
• 🎯 While economically incoherent and chaotic, Trump's policy has an emotional coherence based on a sense of victimhood and a desire to strike back against perceived exploitation.
• 📈 Tariffs were calculated based on bilateral deficits, with those perceived as "stealing the most" receiving the largest tariffs, reflecting an emotional, not economic, logic.

Bipartisan Shift Towards Trade Hesitancy

• 📉 The shift from a pro-trade stance under Reagan and Clinton to trade hesitancy under Obama and hostility under Trump is a bipartisan phenomenon.
• 🏦 The 2008 financial crisis and subsequent bailouts fueled a narrative of the elite rigging the system, leading to globalization being blamed for middle-class struggles.
• 🚫 Fixing these issues would require social policies and tax increases, which are politically unfeasible in the US, making protectionism a politically convenient placebo.

Near-Term Outlook for Tariffs

• 📉 The US economy is in a fragile state with slowed growth and rising inflation, creating a strong incentive to avoid further damaging tariffs.
• 🎭 Trump's strategy involves appearing tough, making outrageous statements, and then declaring victory by claiming concessions, regardless of actual outcomes.
• ⏸️ It is speculated that deadlines will be extended, victories declared, and the immediate snapback of tariffs on July 9th is unlikely.

The Enduring Impact of Higher Tariffs

• 📊 While Trump views tariffs as beneficial, history suggests an open trading system fosters innovation and prosperity.
• 🌍 The US, accounting for less than 15% of world trade, may see a slightly more closed economy, but the impact on the rest of the world is limited.
• 📉 The long-term interruption of market forces due to protectionism is expected to be detrimental to the American economy.

Global Reactions and the Future of Multilateralism

• 🔄 Trump's actions are causing ripples, leading to cascading protectionism in some areas (e.g., EU measures on Chinese EVs) and domino liberalization in others (e.g., new FTAs).
• ⚖️ As long as these actions comply with WTO rules, they represent trade disputes rather than the destruction of the system.
• 🇨🇳 China's potential retaliation and the US push to strip China from supply chains pose risks, but China's new tools might prevent a 1930s-style trade collapse.

The Erosion of the Multilateral Trading System

• 💥 Trump aims to destroy the most favored nation (MFN) principle, viewing it as a rule that undermines American power.
• 🎯 The focus is on bilateral relationships and anti-China sentiment rather than a global assault on multilateralism.
• 🌐 While the US has stepped down from leadership, WTO rules are embedded in national laws, providing a foundation for global commerce.
• 🤝 Leadership is shifting towards informal consensus and group leadership (leadership herds) among countries with similar interests, rather than a single dominant power.