London (CNN) – When the United States raised tariffs on most goods entering the country…
London (CNN) — When the United States raised tariffs on most goods entering the country almost a century ago, the consequences were serious. World trade plummeted and American exports sank, while other countries retaliated in kind, worsening one of the worst economic recessions in history: the Great Depression.
The tariffs in question, imposed under the Smoot-Hawley Tariff Act of 1930, would be dwarfed by tariffs that Donald Trump has promised to impose if he wins a second term in the White House.
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Along with other radical ideas, including mass deportations of undocumented immigrants and interference in the independence of the Federal Reserve, Trump has said he wants to impose tariffs of 10-20% on all goods imported into the United States. That would mean a sharp increase compared to the current average of 2% on non-agricultural, or also called industrial, goods, half of which enter the US tariff-free, according to the Government.
For Chinese imports, Trump has proposed an even steeper 60% tariff.
“For me, the most beautiful word in the dictionary is ‘tariff.’ “It’s my favorite word,” he said during an interview with Bloomberg last week at the Economic Club of Chicago.
Most economists do not share Trump’s fondness for tariffs because they act as a tax on imports, harming consumers in the country that imposes them, as well as companies that depend on imported raw materials and intermediate goods to make products. finishes.
Many economists have warned that Trump’s planned tariffs will hurt global economic growth and boost inflation in the US, as well as abroad if other countries introduce higher levies on US imports in response.
Moving ahead with the higher tariffs “would antagonize U.S. allies and partners, provoking global trade wars, damaging global economic well-being, and undermining national security,” researchers at the Peterson Institute for International Economics wrote in a recent note. based in Washington.
Although predictions about the damage from Trump’s new tariffs vary in scale and scope, depending on the level of the levies and any retaliatory tariffs from America’s trading partners, forecasters are overwhelmingly negative.
Republican presidential candidate Donald Trump speaks during an interview with Bloomberg at the Economic Club of Chicago on Oct. 15, 2024. Credit: Evan Vucci/AP
For example, UBS analysts estimate that a 60% tariff on imports from China and a 10% tariff on goods from the rest of the world would reduce global economic growth by one percentage point in 2026, when it is likely to the tariff increases have been applied in their entirety. This would reduce growth by almost a third, based on current trends.
Corporate profits would fall by an average of 6% and global stock indices would also decline, with particularly sharp declines in European, Chinese and other emerging market equities, according to UBS. This could deplete people’s pension funds and other invested savings.
The International Monetary Fund (IMF) also sees a hit to global gross domestic product from rising tariffs around the world, according to its latest World Economic Outlook report.
The European economy would suffer a considerable blow. If the US raises tariffs to 10% on all goods, the damage to the GDP of the eurozone – the 20 countries that use the euro – would be similar to that of the energy crisis triggered by the Russian invasion of Ukraine in 2022, according to ABN AMRO. The economy narrowly avoided a recession as a result, and the Dutch bank expects stagnation in 2026 as a result of the tariffs.
“Assuming (Trump) follows through with what he proposes, no one will come out unscathed,” said Maurice Obstfeld, a senior fellow at the Peterson Institute and former IMF chief economist.
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There will be no “world peace” without trade
In Chicago last week, Trump, who presents himself as a tough-headed business magnate, boasted of getting tough on his allies, including Japan, France and South Korea, with tariffs, or simply the threat of tariffs, during his first term as president.
If he returns to the White House, his winner-take-all approach to trade relations would further undermine the principles of trade openness and competition that have driven global economic growth for decades.
In the last 40 years, in which trade as a percentage of global GDP has increased by half, inflation-adjusted per capita income has doubled and more than a billion people have been lifted out of extreme poverty, he wrote earlier this year Kristalina Georgieva, the director of the IMF.
“It is true that not everyone has benefited from trade, so we must do more to ensure that the gains are shared fairly. But closing our economies would be a mistake,” he said.
Rising protectionism around the world means that open trade is already under threat and the ability of its champion, the World Trade Organization, to resolve international trade disputes is severely limited.
Trump’s approach would lead to “a global trading system that is a patchwork of bilateral agreements,” Obstfeld told CNN. “How that system would work is anyone’s guess, but it’s a good guess that we would see less trade, the gains from trade would be reduced, and that trade relations between countries would continue to be more fractious than they (have been) in the past.”
Petros Mavroidis, a professor at Columbia Law School and a longtime legal advisor to the WTO, sees an even bleaker outcome.
“I think it is unrealistic, if we look at world history, to think that we can have segmented trade and world peace,” he told CNN. “The world has to be connected both economically and non-economically. “If you’re not connected, then you pay a price.”
Other countries are likely to not only impose retaliatory tariffs on U.S. imports, but also introduce tariffs on imports from elsewhere to protect their markets from the flood of goods that would otherwise have ended up in the United States. .
When Trump announced tariffs on steel and aluminum imports in March 2018, the European Union followed with its own tariffs on certain steel products four months later, citing the risk of increased imports.
It also hit back directly at its transatlantic ally with tariffs on more than $3 billion worth of U.S. goods, including motorcycles, denim and whiskey.
More recently, the European Union has raised tariffs on electric vehicles from China, a move that analysts said was partly aimed at preventing a flood of electric vehicle imports after US President, Joe Biden would impose 100% tariffs on Chinese electric vehicles.
“You can enter a spiral of trade measures, initiated by the US but then amplified by other countries,” said André Sapir, a senior fellow at Bruegel, a Brussels think tank.
Expect a “more radical” Trump
In addition to tariffs, economists are also irritated by Trump’s desire to exert greater control over the Federal Reserve.
Although he avoided answering a direct question from Bloomberg about whether he would dismiss Fed Chairman Jerome Powell, whose term ends in May 2026, he already threatened to do so on one occasion because Powell “kept rates too high.”
“I think I have the right to say, ‘I think it should go up or down a little bit,’” Trump said in Chicago. “I don’t think I should be allowed to order it, but I think I have the right to comment on whether interest rates should go up or down.”
Any attempt to weaken the Fed’s independence, considered sacrosanct by investors, would shake global financial markets and have a destabilizing effect on the dollar, the world’s main currency for trade turnover and foreign exchange reserves.
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That’s because investors would doubt that a committed Fed could effectively combat high inflation, which typically weakens a currency and can hurt economic growth if left unchecked.
“If you move the Fed into some kind of political control, that’s really going to change the rules of global finance,” Obstfeld said, adding that there was “no good substitute” for the dollar and therefore messing with he was “a bad plan.”
Edward Alden, a senior fellow at the Council on Foreign Relations, a Washington-based foreign policy think tank, says Trump is unlikely to interfere with the Federal Reserve’s independence, given the risks such a move poses to the U.S. economy. .
Still, his actions during a second presidential term are likely to be more extreme than during his first stint in the White House, when “there was an active group of more conventional Republicans working very hard to stop Trump from doing crazy things,” he told CNN. .
“None of those people are going to have a job in the second administration.” Nor will it limit him from a possible re-election bid, since a US president can only serve two terms, he noted.
Trump “is going to be much more unleashed and has a much better sense of how to work with the bureaucracy to get his way,” Alden added. “What we would see in Trump 2 is much more radical than what we saw in Trump 1.”
