Trump’s trade bomb: Collateral damage to the global order

US President Donald Trump unveiled a sweeping set of tariffs on 2 April under the banner of “Liberation Day”, marking a significant escalation in his trade policies. These tariffs, designed to be reciprocal and aimed at rebalancing global trade, have sent shockwaves across the globe, particularly in Asia, where many countries are heavily reliant on exports to the US.Countries like Vietnam, Cambodia and China have seen tariffs imposed at rates significantly higher than the baseline 10% applied to most US imports. Vietnam, for instance, faces a 46% tariff, while Cambodia is subject to a 49% rate. The focus on these two countries is not coincidental as they happen to assemble a large share of Chinese exports, especially Vietnam.In that regard, these tariffs do not only threaten to undermine Asian countries’ competitiveness but it also makes it harder for China to bypass US tariffs on their products by using other locations for assembly and re-export. In other words, compared with the previous administration, Trump seems determined to hit every economy in Asia — and beyond — especially those with which the US has a large trade deficit.China expected to take tariffs in its strideChina, long a focal point of Trump’s trade ire, now faces a combined tariff rate of 54% on its exports to the US, up from 20% previously. This increase is expected to have a profound impact on China’s economy, potentially shaving off one percentage point from its GDP growth in 2025. The effects will be felt across various sectors, including high-tech industries such as electronics and semiconductors, which are critical to China’s economic strategy.China is expected to react, not only by retaliating against the US, but also by easing monetary and fiscal policies to mitigate the negative impact on the economy. In other words, notwithstanding the size of the shock, which is quite massive and possibly comparable to that of 2008 if these huge tariffs are maintained, China should manage to still grow around 4% by lowering interest rates, expanding liquidity and also offering tax breaks to its exports. The latter is obviously deflationary as producer and export prices will remain negative, if not more, to continue to export.Japan and South Korea, both significant US allies, have also been impacted, with tariffs of around 25% imposed on their exports. Even Taiwan has been hit with even higher tariffs even if they are very likely to be passed on to the US consumer, at least for high-end semiconductors given the very low price elasticity of such products, basically offered by Taiwanese companies.Finally, even India, which is currently negotiating a bilateral investment agreement with the US, has been hit, but it seems likely that some of the tariffs currently imposed on India may be lifted if the negotiation ends with a deal. It goes without saying that India will be more ready than ever before to accept the US conditions of market access to its companies so that the tariffs are lifted.Double whammy: reciprocal tariffs and sectoral tariffsAs if this were not enough, reciprocal tariffs have been accompanied by sectoral tariffs. Firstly steel and aluminium tariffs, imposed already but reaffirmed during “Liberation Day”. These primarily impact South Korea and Vietnam, aside from China, which has faced challenges since the first Trump administration and has limited exports to the US in this sector. For the automotive sector, also hit a few days ago, Japan and South Korea are the big losers. In contrast, China’s automotive industry might see a slight reprieve given its focus on electric vehicles, but the reciprocal tariffs are so high that the relative gain virtually disappears.The imposition of all of these tariffs has prompted warnings of retaliatory measures from affected countries. China has already vowed to respond, emphasising that raising tariffs does not solve US economic problems and promising countermeasures. The EU has also signalled readiness to retaliate if necessary and China, South Korea and Japan gave some hints at a joint response, which Japanese officials have quickly put aside.A new era of protectionism and heightened geopolitical tensionsAll in all, this escalation in trade tensions threatens to unleash a new era of protectionism, not only potentially undermining the global trading system but also hurting the US economy both in terms of higher inflation and lower growth. The bad news does not end there.Beyond the economic impact, Trump’s tariffs have significant geopolitical implications as they confirm the move away from cooperation which has underpinned globalisation trends. It seems quite likely that the Trump administration’s approach to the world will prompt other nations to reevaluate their trade relationships and seek alternative markets, weakening US influence in Asia.Beyond the US’s waning power, the tariffs could also exacerbate existing tensions in the region. For instance, the South China Sea disputes might see increased militarisation as countries seek to secure strategic trade routes. Furthermore, the Belt and Road Initiative, China’s massive infrastructure project aimed at connecting Asia with Europe, could gain more traction as countries seek alternatives to US-led trade agreements. In this context, the Association of Southeast Asian Nations (ASEAN) faces a critical challenge. ASEAN has long been a proponent of free trade and regional integration, but the tariffs could undermine these efforts.In conclusion, Trump’s “Liberation Day” tariffs mark a pivotal moment in global trade relations, with profound implications for Asia and beyond. While the tariffs are intended to rebalance trade and boost US manufacturing, they risk triggering a cycle of retaliation and protectionism that could harm economic growth worldwide. The end result of all this is clearly a downturn in Asian economies but also for the US, which will also see rising inflation.An American economy in stagflation can probably make the Trump administration even more dangerous. Very few factors can stop this vicious cycle, but an important one is the market reaction. The more the US stock market penalises Trump’s measures, the more likely it is that Trump will rethink them. *This is a reprint. This article has been published by ThinkChina./politics/trumps-trade-bomb-collateral-damage-global-order?ref=home-latest-articles