Since his second coming, US President Donald Trump has not ceased to shock and surprise the world.
I woke up at 1.30am to listen to his speech on tariffs on 3 April. The choreography was striking, with craftily chosen invitees ready to applaud him rather frequently.
Trump declared that the day would be celebrated as America’s ‘Liberation Day’.
For 50 years, he claimed, the rest of the world (ROW) has been ‘ripping’ America off, while his predecessors did nothing.
America will prevail; jobs that were taken will return as corporations, facing higher tariffs, will be prompted to invest domestically.
He claimed a total of $6 trillion in new investments from Apple, NVidia, Johnson & Johnson, and Meta.
It was intriguing to see a worker from the Union of Auto Workers (UAW), who was invited by Trump, praise his policy despite the auto sector being likely to be hit hard.
Trump’s table of tariffs
Trump appears to have relied on artificial intelligence (AI) without adequate human oversight for his tariff decisions.
For example, the Heard and McDonald Islands region, inhabited only by penguins and sea birds, has been asked to pay 10% tariff.
Similarly, Norfolk Island, which does not export to the US, has been slapped with a 29% tariff.
Obviously, an exceptionally inferior variety of AI was used.
Now, is this an example of what is left after Elon Musk removed so many in the US civil service?
Trump’s philosophical base
It is true that globalization, promoted since 1945 and with increased vigor in the Raegan-Thatcher era in the 1980s, needs correction. However, Trump by attempting to put the clock back, might just break it.
Initially, the US, accounting for 50% of manufactured products after World War II, benefited, and later Western Europe, too, when its economy was resurrected, thanks to the Marshall Plan.
The Marshall Plan was a US program providing aid to Western Europe following the devastation of World War II to rebuild economies and prevent the spread of communism.
Still later, China after being admitted to the World Trade Organization (WTO), benefited the most and emerged as the biggest trading power; American factories, as many as 90,000, had been shut down, thanks to NAFTA, according to Trump.
NAFTA, the North American Free Trade Agreement, was a treaty between the US, Canada, and Mexico that eliminated most tariffs and trade barriers between the countries, increasing economic integration.
It is important to remind Trump of the theory of comparative advantage propounded by David Ricardo (1772-1823).
The carmaking factories were shut down because it was cheaper to produce in Mexico, Canada, China and elsewhere.
There is a fundamental flaw in Trump’s approach.
He wants zero trade deficit with America’s 60 and odd partners.
His method is akin to adding zero 60 times to get zero.
Instead, a balance can also be achieved by adding a set of positive and negative numbers.
Moreover, Trump should consider the deficit holistically, including trade in goods, services, and arms.
The surplus in services stood at $282 billion in 2024.
Arms exports added up to $318.7 billion.
Taking all the three into account, the total deficit works out to $600 billion, half of what Trump claimed.
Let us add the advantage the US gets by being the global central bank, an advantage rather difficult to quantify.
Thus, the total deficit is less than half of what Trump has claimed.
Trump also misstated history.
He said the federal income tax was introduced in 1913 to replace revenue lost from reduced tariffs.
This is incorrect.
The Democrats, who won the 1912 election, did pass a bill to halve tariffs in 1913, but World War I, breaking out next year in 1914, hindered the Act’s implementation.
Federal income tax was first introduced in 1862 to fund the Civil War, which began in 1861.
The response of rest of the world
So far, only China and Canada have retaliated by announcing counter-tariffs on US exports.
The EU, despite ample notice from Trump, has not decided on immediate retaliation, although there were hints of such.
EU Commission President Ursula von der Leyen noted that the new tax imports will create an “uncertainty spiral” with “dire” consequences “for millions of people around the globe.”
Von der Leyen has vowed that the EU will take a unified approach and warned that the European Union—subject to a 20% tariff—is preparing countermeasures if negotiations fail.
The EU could impose tariffs on US goods first and then seek talks.
This would be a wiser choice.
India incorrectly believed that personal rapport between Prime Minister Narendra Modi and Trump would exempt it from tariffs.
Delhi hastily reduced tariffs on goods of interest to the US, a move that, in hindsight, was unhelpful.
India should leverage its position as a major arms buyer from the US Military-Industrial-Congressional complex, of which Trump is a keen promoter, and adopt a more comprehensive strategy.
What’s next?
If the rest of the world unites, Trump will be forced to act reasonably.
However, there is currently no sign of such unity.
The New York stock market dropped over $6 trillion in just two days, and since its peak in February, it has fallen by $8 trillion.
Trump expected trade partners to rush to Washington for negotiations.
Unfortunately for him, he was mistaken.
China, adhering to its Middle Kingdom mindset, will not seek talks, although it would respond to an invitation for dialogue.
The EU’s response remains uncertain. If it retaliates, Trump will be ‘out-Trumped.’
Canada has imposed tariffs on US-imported cars. A stronger move would be to halt car exports to the US temporarily, increasing prices for American buyers.
Stellantis, a Dutch conglomerate that owns Fiat, Chrysler, and Peugeot, has already laid off 900 workers in the US.
It remains to be seen how long the UAW will continue to support Trump.
A few Republican Senators have begun to revolt. Without a course correction, Trump is heading straight for his Waterloo in the mid-terms.
The decision by the EU, expected on 9 April, is crucial.
If EU decides to seek talks without retaliation, Trump can get tough with Canada and China, though China is responding by stages. Its first response will hurt the states that voted for Trump. Canada alone will not be able to take on Trump.
