There was no need for much deliberation before the verdict came in on Donald Trump’s “Liberation Day”, when the US president placed tariffs on the whole world, even parts of it inhabited only by penguins. As the White House effectively ended an era of economic globalisation, global markets tanked. At the time of writing, they are tanking still.
By the close of the first week, American shares had lost some $5.4 trillion in value. In London, the FTSE ended the week down by more than 7%. Japan’s market fared even worse.
For no real reason other than his unshakeable belief that tariffs work – a belief not shared by the vast majority of economists, or even Trump’s Dark MAGA guru Elon Musk, the president has decided to break the world’s economic system, a system that just so happens to sustain America’s economic pre-eminence.
This is Trump’s Liz Truss moment – a masterpiece of hubris, a self-inflicted disaster. It is also his Humpty Trumpty moment. It will be impossible to put the old global economy back together again. The world will be poorer as a result.
Trump and other tariff true believers – who have already started using the Thatcherite “no turning back” as a motto as their policies explode on contact with reality – think that America’s huge trade deficit is down to tariffs imposed on the US by other countries, along with unfair competition practices, and discrimination against US firms. They believe the trade war has been running for years – with America under attack from everyone else.
But none of these things is the case. What is actually happening is encapsulated in the decision of Jaguar Land Rover to suspend exports of its cars to America. The US has been removed from the global economic system. The world’s two largest economies, America and China, are now locked in a trade war and the third largest economy, the EU, is considering its own retaliation.
The consequences are going to be dire. The chances of a global recession have now increased to 60%. America is going to be hit with a massive inflationary shock. If all the tariffs are passed on, then an iPhone alone will increase in price by 30-40%.
Interest rates will have to rise to keep inflation down and the American consumer will suffer. American exporters will be hit hard and domestic manufacturers with global or even regional supply chains will face disaster.
In a cruel twist, the highest tariffs are being placed by Trump on the poorest countries, merely because their citizens cannot afford American products and so they import the least from the United States. The way Trump has calculated his tariffs means that countries like Vietnam, Cambodia and Bangladesh will face a severe economic shock.
There is the possibility that some or all of these tariffs might be waived, lowered, or negotiated away depending on how much sucking up to the president you are willing to endure. But more worrying even than this is the thought that the world economic order is over. The most successful 80 years in global economic history, during which hundreds of millions of people across the world have been lifted out of extreme poverty, has been destroyed.
Mark Carney, the Canadian PM who was formerly governor of the Bank of England, put it best when he said: “The global economy is fundamentally different today than it was yesterday… We are living in a new world now.”
One of the greatest dangers is that we have no idea what this new world will look like. But a return to the anarchic conditions of the early 20th century is unlikely.
Ahmet Kaya, the principal economist at the National Institute of Economic and Social Research think tank, explains: “Compared to the 1930s, we have regional trade deals and also the European Union… so even if the US wants to make itself independent from the world trade system, if other countries do not impose tariffs on each other, then we won’t see that damaging 1930s-style trade war.”
The best way ahead would be for like-minded countries to form their own free trade world – one that just ignores America. But even here Trump is determined to assert himself, threatening that: “if the European Union works with Canada in order to do economic harm to the USA, large scale Tariffs, far larger than currently planned, will be placed on them both in order to protect the best friend that each of those two countries has ever had!” But besties don’t do these things to their friends.
Apart from tariffs, the other thing that Trump firmly believes in is that the US must bully and the world must bend. It is a suicidal strategy, echoing his stubborn conviction during Covid that he was right and the world was wrong. No wonder Republicans like Ted Cruz, who saw Trump defeated in 2020 partly because of his dismal pandemic response, are looking nervously ahead to the 2026 midterms that could render Trump a lame duck in orange sauce.
While Trump rages, nations everywhere go in search of new friends and allies. China will reap the benefits and so might the EU.
The UK will bounce around on the outside, in a sea of troubles. The British right wing obviously – and absurdly – thinks we should cut a deal with Trump. But appeasement comes at a cost. We cannot negotiate a special deal with Trump if it means annoying the EU. As Michael Gasiorek, professor of economics at Sussex University puts it, “the UK would be foolish to do anything that compromises its relationship with the EU, a far more important and reliable partner.”
Whatever happens, UK economic growth this year is pretty much dead, as are Rachel Reeves’s spending rules. Defence spending will have to soar. Taxes will probably have to rise or the spending cuts are going to be savage. We are all going to be worse off. This is the Trump Slump.
