Liberation Day After - Trade Treasury Payments

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Liberation Day After

The clue is in the name: Liberation Day. When President Trump announced at the beginning of his speech that he was declaring the independence of the United States from the global trade system, this was not a negotiation. The rhetoric used was violent: “America has been looted, pillaged and raped by other countries.” The scale of the tariffs imposed was unprecedented—a minimum of 10% and for some, notably China, much higher. 

All this was designed to shock the rest of the world, and it did. His electoral mandate is to deliver on his campaign pledges—that he and his team would “break things”. From the outset they have explicitly stated they would conduct a “comprehensive overhaul” of the global trading system on American terms. 

In case there were any doubts, this is the end of the Bretton Woods system that has governed international trade since the end of the second world war. It is also the end of the multilateral trade system. This system was built around the concept of globalisation, the World Trade Organization (WTO) and the free movement of goods and services, finance, people, and technologies around the world. Yet America is declaring it dead, even as the BRICS nations led by China at their Kazan summit last year reaffirmed their commitment to it.

President Trump and his team have declared the so-called “international rules-based order” irrelevant to America; they have brushed off the market reaction to all of this as short-term before they adjust to the reality that is new US trade policy: according to Marco Rubio in a speech at NATO, “Markets are crashing because markets are based on the stock value of companies who today are embedded in modes of production that are bad for the United States”.

The world is now dealing with the Day After. 

Economists are wondering about the calculations. Nauru, for example, has a tariff of 49% imposed on its $1.16 million of light ignition engines and lifting mechanisms to the US, while a range of small uninhabited islands in Antarctica have all had tariffs imposed – for example, the Norfolk Islands at 29%; even though the administration there says that there are no exports to the US from the island. A quick fact-check with Comtrade shows there to have been some $123,073 of exports in 2023, suggesting that maybe the de minimis tariffs on small parcels are being applied, not just to China but also to smaller nations. Meanwhile, Russia has not had tariffs imposed on it because, apparently, the sanctions already imposed on it are sufficient.

ING economists estimate that the value of world trade affected by the tariffs is around $600 billion globally. World trade in 2024 was around $33 trillion, so around 1.8% of world trade will be directly impacted by tariffs. However, China has already hit back with 34% tariffs on US goods and launched a complaint against the US at the WTO. While the other nations, including the EU and the UK, have yet to make announcements on retaliation, it is likely that a greater proportion of world trade will be affected than $600 billion if a trade war begins in earnest. The IMF estimates that global GDP will be about 0.5% lower as a result of the US tariffs alone and does not forecast a recession. Whether this ends up being the case will ultimately depend on how trade partners and allies of the US react.

We know the effects will be negative and significant in the short term because of the impact on global prices as supply chains adjust and US production scales up to substitute for the imported goods. As good monetarist economics will tell us, it is the fact that the supply side takes time to adjust after a boost in demand (in this case, for US goods by US consumers) pushes prices up. Here, consumers will immediately pay the higher prices. Unless the dollar appreciates, pushing down the price of imports, the inflationary impact will also be immediate on US prices and stay high until the supply side adjusts. Economic history tells us that this is a slow process and that prices are “sticky” downwards anyway. And it doesn’t look as though the dollar is playing the game at the moment—the dollar had its biggest one-day drop since 2022 in the immediate aftermath of the tariffs as investors looked for other “safe haven” currencies in the yen and the euro. 

Yet this does not bother the Trump administration. They are prepared to do what it takes to exit the international rules-based system that they helped to create. This is a mystery to everyone who does not have a Trumpian perspective on the world. So, how can we explain what is happening?

First, the Trump administration sees its deficit as a national security problem—the America First Trade Policy memo published in January mentioned “deficits” three times and “national security” 12. Only by pulling the US out of the Bretton Woods institutions like the IMF, the World Bank, and the Multilateral Banks will America stop spending its hard-earned money on other nations—hence, USAID has been stopped, and US funding for multilateral development banks, including the IMF is under review. This is Project 2025, and it sits at the heart of both the campaign trail promises and the executive orders since. This also explains why it is wavering in its support for Ukraine and, indeed, its own support and funding for NATO.

Second, tariffs as a tool of preference are seen as an ideal way both of closing the deficit and of forcing the rest of the world to either pick up its own spending on security and defence or to give something to the US in exchange for the provision of security. For example, the EU and the UK may expect higher and more punitive tariffs if there is no further increase towards America’s 5% of GDP targets for defence spending. The use of tariffs is not new—trade protectionism resting on the fact that a nation should provide itself with a protective shield in the form of tariffs and quotas to protect domestic industry has a long history in trade economics, although it has debatable success in practice. The use of tariffs as a coercive tactic is also not a new feature of economic statecraft, but its use on this scale is.

Third, why the shock and awe tactics like this against the apparent disregard for the economic and geopolitical impact it will have? The answer to this is key to understanding the whole MAGA approach to economic policy. President Trump and his administration are using a “rational expectations” theory to manage their economic relations with the rest of the world. In other words, there will be a shock when a policy like this is announced, but everyone will catch on to the idea that this is serious and, hence adapt their behaviours immediately. This explains why everything is being done in such a rush with little obvious concern for the short-term impact: everyone will come around to the idea that America is rebuilding itself successfully and, in the end, will start to invest again in the US more quickly if they know that this is not a negotiating tactic.

Finally, there is still one mystery for anyone who has studied or believed in the benefits of international trade—isn’t it supposed to be about comparative advantage? Don’t we trade because one country is better at producing something than we are and vice versa? 

Well, yes, except that this is not how trade is viewed by the key influencers over President Trump’s policy. Because the US is rich in resources and because it could be self-sufficient, a MAGA approach says that the US can produce substitutes for a lot of the things it imports, and the fact that it has a deficit is due to other countries behaving unfairly. The deficit is a reflection of globalisation’s inequalities and unfair practices, therefore, and not a reflection of the fact that global supply chains have evolved to improve the productivity of global businesses—not least American ones.

The Gorilla experiment in psychology helps us understand what’s going on. In Europe, the basketball-passing game of tariffs is being watched with stunned focus: Will there be a slowdown? Or a market crash? Or de-dollarisation? Or a major trade war? The Gorilla at the back of the stage is the collapse of Bretton Woods and the globalisation of the last 35 years. The world was warned of this on the campaign trail, but its willful “sustained inattentional blindness” made it hope that tariffs were just a negotiating tactic. 

Everywhere that is, except China. Why has it appealed to the World Trade Organisation? Perhaps because, as Europe, in particular, looks for answers in its own multilateralism, China realises it may be time to reinforce its stated belief in the International Rules-Based Order of globalisation just as America pulls away.