You don’t have to be a Donald Trump fan to grudgingly note that his moves may not always be driven by pure stupidity, lunacy, or his need to be constantly in the limelight. Unlike what his critics think, things are not going as badly for the United States as imagined, though the economic damage is already visible in the markets. When somebody holds a gun to your head and also his own, you cannot ignore his demands.
If one can divine a method in the US madness, not only under Trump but even under earlier administrations, US strategy is based on a simple reality: you win if others lose more. A foolish tariff policy may hurt the US all right, but if it hurts others more, the US emerges stronger after a while. So it is pointless telling the world’s superpower that no one gains from a trade war; the US does gain more at the end of the madness.
Right from the start, China was probably Trump’s main target, and in leaving the country out of a 90-day reprieve from tariffs, he has managed to, at least temporarily, drive a wedge between China and the rest of the world. He has calculated, possibly correctly, that if left to choose between a wayward American and a potentially dangerous Chinese hegemony, most countries will choose the former. The US is the devil they know. Trump’s claim that many world leaders were “kissing my a**” to get trade deals done may be an exaggeration, but it is no secret that Japan, South Korea, Vietnam, and India are in the queue for trade deals, with the former three more vulnerable to a closure of the American market to their exports than India.
Despite Trump’s temperamental ways, there is evidence to suggest that what he has done is not too different from what his predecessors would have done, perhaps with less brashness and more panache.
US gains from the madness
Trump’s tariff shock is indicative of three things about Uncle Sam and his attitude to the world. One, despite being the predominant superpower, its actions are largely driven by local politics and concerns, without taking into account the interests of even friends or partners. Two, the US belief in its own economic and political power is partly delusional. And three, despite the devastation caused by unilateral, and often ill-considered actions, the result is often that the US ends up being more powerful, as the resultant devastation ruins the prospects of the rest of the world more than the damage done to itself.
We will know in a few months whether this holds true for Trump’s moves on tariffs, which have led to uncertainties all around and lowered confidence in Uncle Sam. But as the markets, both stocks and bonds, have already reacted massively negatively to the prospects of a tariff war, politicians, including many in his own Republican party, have begun worrying whether Trump will lead them to political and economic disaster. This means that sooner rather than later, both Congress and the courts may step in to rein him in. So, one can hope that Trump will ultimately fail to achieve his stated aims – though not before doing damage to the rest of the world – including, especially, the interests of his allies and economic partners.
The fact is, Trump’s actions are not decided by economic advice, but by the expectations of his angry political base – often White males who have lost out from globalisation, and who may want to see political and economic damage inflicted on their real or imagined enemies. This includes the woke elite who view them as “the deplorables” – the last being Hillary Clinton’s description of the Trump support base, which then turned up in droves to defeat her in 2016.
This base quietly cheered as Wall Street fat cats and the US’s allies and enemies got sucker-punched. Trump’s real economic target is China, which has managed to run up huge trade surpluses with the US and also sneak up on technology. But the tariffs will hurt allies even more, as Europe, Canada, Mexico and Japan realise.
Also read: US-China tariff war will send ripples through global economies. India should gear up
Don’t fight with bare hands
The best course of action for both allies and enemies is not to retaliate, which will only make things worse, but to accept a temporary loss of growth and jobs (maybe for about six to nine months) to give the US time to come to its senses. Rushing to do something macho, like raising your own tariffs, is going to worsen things, not improve them. The US will course-correct once its own citizens and politicians start realising Trump’s follies. When you have a rampaging Godzilla armed with bazookas, the best thing to do is to save yourself, not seek to fight it with bare hands. If the allies and China retaliate, as they have already done or were about to do so before Trump announced his 90-day moratorium, it will drive the world into a recession and, worse, China will gain as it sends more products to Europe and the rest of Asia as the US market gets closed.
The reason why doing nothing is better is because of the second point made above: that the US’s belief in its own political, military and economic invincibility is partly delusional. It is best to let the delusion work itself out before sanity prevails.
Consider military might. When was the last time the US really won a war after the Second World War? Korea, which resulted in the partition of the country, can be seen as a draw. But Vietnam and Afghanistan were clear defeats, despite initial successes. East Pakistan (now Bangladesh), where then-President Richard Nixon fully backed the Pakistan Army and even sent the seventh fleet to intimidate India, ended up being sliced away from Pakistan. The US did succeed in dethroning Saddam Hussein in Iraq and Muammar Gaddafi in Libya, but not without leaving chaos all around, and making Iran the key factor in Iraq. Now Syria, too, is gradually sliding into the hands of former Islamic State supporters. Even in the Ukraine War, apart from from generating profits for the military-industrial complex, the US has only managed to drive Russia into the arms of China.
The US belief in economic sanctions has also not worked. They did not stop Iran from doing its own thing, and, in fact, made it more self-reliant in defence. It has not abandoned its nuclear ambitions. Sanctions against Russia, imposed after the launch of the Russia-Ukraine War – a war provoked by endless NATO expansion to Russia’s very borders – have not worked either, as Russia is closer to winning the war than ever before. Worse, it has devastated Ukraine and set its development back by a quarter century.
Sanctions against India did not work after the Pokhran nuclear tests; the US soon realised that its knee-jerk reaction to the blasts only pushed India deeper into Soviet arms, even while prompting it to reform and grow faster. The high growth era during the first term of the United Progressive Alliance was driven less by what the UPA did and more by what the National Democratic Alliance (NDA) did in the six years it ruled before 2004.
Last, and this is a sobering thought for all of us who are not US citizens – the US has a history of poorly thought-out economic actions that have backfired on the country but damaged the rest of the world even more. Bad US decisions often leave the US itself stronger at the end of the folly season. This is why I say that Trump’s attempted self-goals are not unique in American history.
Also read: Cholas and Chaulukyas understood tariffs and taxes better than Trump does
Lessons from history
In the late 1920s, a banking and stock market crisis was turned into a Great Depression as President Herbert Hoover launched massive import tariffs (the Smoot-Hawley Tariff Act) and worsened the crisis, damaging large parts of the European economy. It finally ended, despite massive doses of spending, only when the Second World War made all economies more focused on militarisation. These investments led to ultimate economic gains for the US, which became the predominant power of the non-Communist world.
In 1971, Richard Nixon, faced with huge inflation, delivered a massive economic shock to the world, which, according to many, compares unfavourably with the one Trump is administering now. The dollar, which was till then linked to a specific price of gold, was taken off the standard, leaving holders of the greenback with pieces of paper instead of underlying gold. There were wage and price freezes of the kind only ‘Third World’ economies attempt, and surcharges were imposed on imports.
Yanis Varoufakis, briefly Greek Finance Minister when his country faced an ouster from the European Union for failing to keep its economic policies in line, notes in an article in Unherd.com that the Trump shock is nothing compared to what Nixon delivered in 1971, as it devastated Europe. But this devastation helped America reign supreme. Wrote Varoufakis: “And precisely because of the economic devastation caused, its (the Nixon Shock) architects achieved their main long-term objective: to ensure American hegemony grew alongside America’s twin (trade and government budget) deficits.”
All American shocks end up helping America do better than the rest after a short setback. The 2000-01 dotcom boom and bust roiled US tech stocks, but its after-effects impacted everyone. The 2008 Lehman crisis dented US stocks more than anybody else, but the massive doses of liquidity injected into the economy to rescue failing financial giants ended up strengthening the US dollar, not weakening it. Eswar Prasad, the Tolani Senior Professor of Trade Policy at Cornell University, noted in his book, The Dollar Trap, that when emerging economies faced extreme economic volatility after the Lehman crisis, they had an even stronger reason to fortify themselves with safe-haven reserves like the dollar. So, a country with huge internal and external deficits – usually a recipe for a weaker currency – ended up having a stronger currency than ever, and it could borrow from the world at near-zero rates for more than a decade after 2008.
In the Russia-Ukraine conflict, while former US President Joe Biden’s decision to back the underdog with military hardware and economic aid benefited America’s military-industrial complex, the rest were losers. Not just the Ukrainians, but the whole of Europe lost out as the US forced Europe to abandon cheap Russian gas.
The resultant cost inflation devastated the competitive strengths of Germany, among others. To punish Russia, the US weaponised global finance by confiscating the reserves of the former. This wrecked the confidence of the world in the global financial system, and sent gold prices through the roof as countries tried to find alternatives to the dollar. When the US holds a gun to its head, everyone pays a price. The shift in reserves from a stable dollar to a volatile yellow metal will not come without costs for other nations.
The lesson from this is: the US is the most irresponsible superpower the world has seen in peacetime, but trying to fight it politically and economically will end up damaging you more than Uncle Sam. It is best to let the American system fight itself and then come to a more sensible policy framework. Till then, head for the storm shelters.
R Jagannathan is an editor and the former editorial director at Swarajya magazine. He tweets @TheJaggi. Views are personal.
(Edited by Zoya Bhatti)
A twisted way of saying we dont want to fight the US because we are afraid of the consequences. This silent surrender was not expected from the current government.
I will split the proposition, agree with the first part, disagree with the second.