Trump’s trade wars tread a fine line with allies’ patience

Although US tech companies dominate the New York Stock Exchange with market capitalisations of $1tn+ for the biggest firms, they are still far from offsetting the $1.2tn goods deficit. In December alone, US foreign trade recorded a $123bn deficit, reflecting America's role as a "cash cow" in global trade.

China had a $295bn net trade surplus with the US last year, while the European Union (EU) recorded a $235bn surplus, Mexico $172bn, Vietnam $123bn, Ireland $87bn, Germany $85bn, Taiwan $80bn, Japan $68bn, South Korea $66bn, Canada $63bn, India $45bn, Italy $44bn, and the UK $12bn.

This enormous US trade deficit is driving national debt, which is now roughly equivalent to the combined economies of Japan and Spain. Economically speaking, strength and indebtedness cannot co-exist, so the first step towards restoring America's economic and financial power begins with addressing the trade imbalance.

Problems near home

Most markets where the US recorded trade deficits are those of allies. Some are fellow members of the G7, founded in 1973 after the October War and the OPEC energy crisis. These countries are bound by the principles of capitalism in opposing socialism and communism in the East and South. Others are in the G20, established after the 2008 financial crisis, led by China, the world's largest exporter ($3.6tn in exports).

America's trade problem is seen as a problem of its own making after the US largely outsourced its industries abroad in pursuit of greater profit and lower costs, focusing instead on high-value-added sectors like defence and technology. 

Still, the US has no tech monopoly. The New York Stock Exchange (NYSE) recently lost nearly $1tn in a single day after the unveiling of a Chinese AI chatbot. Services remain the most significant US export, at just over $1tn, followed by energy ($320bn) and agricultural products ($170bn) based on 2023 figures. 

When Trump recently postponed tariffs on Mexico and Canada, analysts think it was more out of concern over a potential collapse of the NYSE. The markets know that the US economy cannot afford to abandon its neighbours (who will co-host the World Cup with it next year). At $575bn, US trade with Mexico and Canada surpasses that with China. Consumer goods like cars, clothing, and household appliances often come from Mexico and Canada. 

"America still needs Mexico for car manufacturing and securing the southern border," said former Treasury Secretary Larry Summers. "Tariffs are ineffective both domestically and internationally. They offer no strategic advantage and are effectively a gift to President Xi Jinping."

Turning on the world

The World Trade Organisation (WTO) in Geneva believes that "the reversal of the General Agreement on Tariffs and Trade (GATT) could dismantle the foundations of globalisation established over the past 30 years". 

The Organisation for Economic Co-operation and Development (OECD), a group of rich-world nations, has expressed concerns about a global trade war, which could impact growth, trade, supply chains, prices, inflation, and financial markets, including stocks, bonds, and currencies. Global economic growth may slow to below the 3.3% forecast for 2025-26 if trade and supply chains are hit.

Rachid Sari, head of the Africa Centre for Strategic Studies, said the return of global inflation and rising prices "is possible due to the restriction of global trade flows and the imposition of higher tariffs, threatening to ignite a new trade war".

China recently announced reciprocal tariffs on US imports, including 15% on coal and 10% on oil, gas, and other raw materials, in response to the additional 10% tariff imposed by the US on Chinese goods. The EU could be the next target of US tariffs. Brussels appears to be the weakest link in this struggle among major powers.

Trade dynamics 

The US remains the world's largest economy, its GDP exceeding $30tn, but its exports as a share of GDP have fallen from 12% to 11% over the past decade. China is the world's largest trading power, with exports of $3.6tn, accounting for around 16% of its $19tn GDP, but the Chinese economy is unlikely to reach the size of America's in the next five years if trade restrictions slow domestic growth.

The EU is the world's third-largest economic bloc but is vulnerable to trade wars due to weak growth, war in Ukraine, disputes on its eastern borders, and divergent views from member states. Economist Pierpaolo Benigno from the University of Bern said Italian industrial and food exports to the US could suffer if Trump imposes tariffs on Europe.

Paris and Berlin argue that any new tariffs on EU exports to the US would benefit Chinese companies, which are already expanding into critical industrial sectors. China's BYD, for instance, is a leader in electric vehicle (EV) production.

Germany set a record in exports to the US last year, becoming America's top trading partner for the first time since 2016, according to the Destatis Statistical Institute. Yet Trump accused Europe of not buying American goods. "You won't find American cars on the streets of Munich, yet they sell us Mercedes and Volkswagens," he said.  

An analysis of American imports reveals that more tariffs could harm the US economy and US citizens, who may have to pay thousands of dollars more for a German car or hundreds of extra dollars for a Chinese-made smartphone or laptop. Inflation would hit middle- and working-class Americans hardest, but the effects will be felt worldwide. Risking trade also risks causing detrimental social and environmental effects. 

Middle East impact

Under Trump, the US has embraced insularity, suspending its membership in several agreements, treaties, and organisations, withdrawing from the Paris Climate Agreement, the World Health Organisation (WHO), and UN agencies supporting Palestinians. It has also reduced its financing of civil society organisations, humanitarian aid services, and sustainable development programmes.

The Middle East and North Africa (MENA) region appears to be particularly affected by the suspension of aid agencies, including the US Agency for International Development (USAID). Over decades, USAID—which was established by the late president, John F. Kennedy, in 1961 to foster cooperation between the global North and South—has distributed over $50bn.

The Washington Institute for Near East Policy revealed that last year USAID gave $5.6bn to 10 Arab countries. Jordan got $1.3bn, Yemen $833mn, Lebanon $454mn, Iraq $342mn, Egypt $224mn, Morocco $175mn, Tunisia $150mn, the Palestinian territories $112mn, and Libya $73mn, while $900mn went to Syrian refugees, according to Ben Fishman, a professor at Georgetown University in Washington.

Elon Musk, a tech entrepreneur and close ally of Trump, is combing through the funding of federal institutions, including USAID, in a bid to cut costs. Democrats say USAID contributes positively to America's soft power in international relations and that targeting it damages America's global reputation. Tariffs don't help much, either.