The world is staring at the threat of an economic recession since April 2 when US President Donald Trump announced “Liberation Day” by imposing sweeping tariffs on all countries.
Trump's aim was to target countries enjoying a high trade surplus with the US and bring manufacturing back to the country.
The so-called reciprocal tariffs, ranging from a baseline 10 per cent to as high as 46 per cent on Vietnam, 36 per cent on Thailand and 34 per cent on China, have caused turmoil in global markets, prompting major sell-offs of stocks.
The US later increased the tariff rate on imports from China to a total of 145 per cent, including the 10 per cent Trump had first imposed on February 1 within a month of the start of his second term.
Undaunted, China has retaliated with tariffs of its own on US goods and services, until it reached a final rate of 125 per cent. Beijing has said it does not intend to respond any further as the current rate would already render US products uncompetitive.
The 10 per cent universal tariff rate took effect on April 5 and country-specific reciprocal tariffs on April 9.
Adding further uncertainty to jittery markets, just hours after the country-specific reciprocal tariffs against around 60 of America’s trading partners came into effect on April 9, Trump paused the tariff hike on most countries for 90 days, while retaining the baseline 10 per cent rate.
He, however, excluded China from the concession as a punishment for Beijing's tariff retaliation.
Experts believe that the turmoil in the US bond market and the plunge in the value of the US dollar had forced Trump to suspend the high tariff rates for most of the countries. The dollar index, based on a basket of currencies, is currently at a three-year low as on Friday (April 11).
Will Trump change course?
Trump and his team were said to be worried about a surge in 10-year Treasury yields — a benchmark for government debt, mortgage rates and other loans to consumers and businesses.
The value of the dollar dropped sharply, as investors lost confidence in both the US Treasury and the currency, both traditional safe-haven assets.
Nobel laureate economist Paul Krugman wrote on the substack.com platform: “When it comes to taking the pulse of financial markets, amateurs talk about stocks, but professionals talk about bond and currency markets.
That is because bond and currency markets are generally less driven by emotion. There is ‘no meme investing’ in bond and currency markets. And these markets are both signaling major loss of faith in America.”
Many analysts say investors are now taking refuge in gold, the Japanese yen, the Swiss franc and the euro, as they flee US bonds and the dollar.
Tariff exemption on electronics goods
On April 12, Trump did another about-turn, exempting smartphones, computers and other electronics products from reciprocal tariffs. Krugman argues that a high tax on intermediate goods used to make other final products would discourage manufacturing in the US.
Secondly, the uncertainty created by ever-changing tariff plans is arguably a bigger problem than the tariffs themselves. Third, the stench of corruption around these policies keep getting stronger, hinting at massive insider stock trading. The tariff exemptions allegedly benefit big donors to the Trump campaign.
Past US tariff policy
High tariffs were a consistent feature of American policy from the Civil War through 1933, says Krugman, but in 1934 the US turned to a policy of reducing tariffs on other countries’ exports in return for lower tariffs on US exports.
This policy was successful in overcoming opposition to tariff cuts. By the beginning of the 21st century, average US tariff rates were down to the low single digits, with comparably low tariffs in other wealthy nations.
Developing countries generally had much higher tariffs until the 1980s, but these became unfashionable with the rise of the so-called Washington Consensus, and many began slashing their rates. By the time Trump took office in 2017, the world had transitioned to relative free trade.
According to Krugman and other economists, Trump’s initial round of tariffs made only a small dent in this system in his first term as president, but the tariffs he is proposing in his second term would turn the clock back 90 years.
The overall tariffs would be higher than the infamous Smoot-Hawley levels in 1930 when the US faced the Great Depression.
Trump sees tariffs as a way to reduce the US trade deficit and boost domestic manufacturing. Economists widely agree that his tariffs would not achieve these goals.
How tariffs work
A tariff is a tax levied on foreign goods when they cross the importing country’s border. In a direct sense, the tax is usually paid by the shipping company, but neither supporters nor opponents of tariffs believe that the shippers actually bear the burden of the tax — just as nobody believes that your local grocer, who must collect a sales tax, pays that tax out of his or her own pocket.
In fact, the easiest way to think about a tariff is that it is a selective sales tax, imposed only on goods produced abroad, Krugman explains.
As with any sales tax, the burden of the tax falls either on consumers, who pay higher prices, or on producers, who receive lower prices, he wrote in The New York Times in October last year.
A brief history of tariffs
The US began systematically using tariffs to protect local industries from foreign competition during the Civil War. Franklin D. Roosevelt, who served as US president from 1933 to 1945, made a fundamental break with the previous tariff policy.
It was widely agreed that extremely high tariffs had become counterproductive. Also, tariff-setting had become a swamp of special-interest politics.
And some of Roosevelt’s officials, especially Cordell Hull, his long-serving secretary of state, believed that closer trading ties between nations were a force for world peace, Krugman recounted.
So, in 1934, Roosevelt signed the Reciprocal Trade Agreements Act under which Congress gave the president the authority to negotiate tariff deals with other countries, cutting US tariffs in return for lower tariffs on US exports.
This American system then became the template for a global trading system — the General Agreement on Tariffs and Trade (GATT).
The World Trade Organization, created in 1995, is largely dedicated to enforcing the GATT and resolving trade disputes. Under the GATT, countries engaged in rounds of mutually agreed tariff reductions and committed to rules intended to prevent backsliding on these agreements.
“This system was hugely successful in overcoming political resistance to tariff reductions,” says Krugman.
Krugman says that he often hears arguments that tariffs have remained high in other countries, but these assertions are decades out of date.
It’s true that after World War II, many developing countries imposed high tariffs in an effort to foster industrialization. But these days developing countries generally have tariff rates considerably lower than those Trump is suggesting.
Rising risk of global recession
Amid the ongoing trade tensions, China has not backed down yet on its retaliatory 125% tariff rate on US goods. The EU has delayed its response.
Thailand and other countries have rushed to Washington to negotiate with the US administration. The WTO warned earlier that intensified trade tensions between China and the US could reduce global trade and GDP growth significantly.
“The escalating trade tensions between the United States and China pose a significant risk of a sharp contraction in bilateral trade. A division of the global economy into two blocs could lead to a long-term reduction in global real GDP by nearly 7 per cent,” according to a statement by WTO director-general Ngozi Okonjo-Iweala.
Many Thai economists have warned that Thailand, which is a small, open economy, would not remain insulated because of its heavy dependence on the US market for exports. How things would play out is hard to predict.
Optimists foresee the average US tariff rate at around 10 per cent, but many observers are worried the rate could be much higher.
Due to uncertainty in the next three months, investors worldwide would delay their investments and consumers would be cautious about spending, leading to an overall slowdown in economic activities, raising the risk of an economic recession.
Inflation may rise higher and some countries may face stagflation, but a global recession is unlikely in the near future,” says Anusorn Tamajai, dean of the University of the Thai Chamber of Commerce’s Economics Faculty.
