Trump's tariff storm brings the world closer to economic Armageddon

Tariffs and countermeasures are fracturing the system of globalisation on which the post-Cold War world was built. Prosperity and interconnectedness may break with it. The world stands on the brink.

Brian Stauffer

Trump's tariff storm brings the world closer to economic Armageddon

Toufic Chanbour

last update on 14 Mar 2025

In 1983, German-born American economist Theodore Levitt published an article titled The Globalisation of Markets. He had coined a term that meant the integration of the world’s economies, politics, and cultures.

And on September 1995, a select group of world leaders, economic thinkers, and diplomats gathered at the Fairmont Hotel in San Francisco. They included former USSR President Mikhail Gorbachev and former US President George Bush. While reporters were banned, it emerged that globalisation was key to their discussions.

Earlier that year, on 1 January 1995, the World Trade Organisation (WTO) began operations. It was created to promote trade, investment, and the movement of people—and it succeeded. The world witnessed the rise of a strong and prosperous trade system that fuelled unprecedented growth.

Globalisation would go on to define the policies and rhetoric of the years following the collapse of communism, and over the years, its benefits became apparent. Woven networks emerged, linking production and consumption across nations, driving investment flows, expanding markets, and enhancing supply chain efficiency. Governments engaged in mutually beneficial partnerships. Borders blurred. Advancing technology prompted a rapid shift towards remote work.

Inflection point

The benefits of free markets were expected to extend beyond economics, helping to end international conflicts and strengthen democratic forces around the world, but the global financial crisis of 2007-08 was a major earthquake few expected. For the first time, serious questions about globalisation were asked.

After 2007-08, the share of trade in global GDP (gross domestic product) began to shrink, and international capital flows never returned to their pre-2007 levels. A decade later, the COVID-19 pandemic and Russia’s war against Ukraine sent further tremors through the system.

The raft of sanctions levelled against Moscow and the weaponisation of the international payments system were unprecedented, as is the tariff war between the US and China, triggered by US President Donald Trump.

Brian Stauffer

In election campaigns around the world, not least in the US, globalisation was being blamed, as policymakers failed to address the imbalances caused by poor resource redistribution and the lack of robust social safety nets. Entire communities and social groups were left behind, fuelling feelings of marginalisation and exclusion.

Then came the inevitable backlash against globalisation. This led (at least in part) to Britain's withdrawal from the European Union, the rise of right-wing parties across Europe, and Donald Trump's election victories in 2016 and 2024. Trump's calling card has always been protectionism, summed up in the phrase: America First.

American reset

Less than two weeks after taking office in January 2025, Trump implemented a series of decisions aimed at reshaping the United States' economic and trade relationships. Chief among them was the imposition of hefty tariffs on China, Canada, Mexico, and other nations (all campaign promises).

Trump wants tariff revenue to fix America's trade deficit, boost its competitiveness, encourage domestic investment, and create jobs for US citizens. US Commerce Secretary Howard Lutnick told CBS: "These policies produce revenue. They produce growth. They produce factories being built here."

Since coming into office, Trump has placed two rounds of 10% tariffs on China, 25% tariffs on certain goods from Mexico and Canada, and a global 25% tariff on steel and aluminium, which covers derivative products made from the metals. On 2 April, he plans new and as-yet unspecified tariffs on agricultural products and foreign cars.

Whether it works remains to be seen. Tariffs have varied effects. They can benefit some industries but harm those that rely on imported inputs. Even rising profits may not translate into investment or jobs. Sometimes it simply leads to bigger payouts for executives and shareholders. Yet the issue is even more complex.

Tariffs interact with other economic factors. Reducing demand for imports, for example, pushes up the exchange rate, which ultimately makes foreign goods cheaper again. Moreover, the US depends on globalisation for both the technology and financial resources needed to manage its trade deficit and sustain growth. High tariffs jeopardise these crucial mechanisms.

Tariffs are rarely the best solution, even though they can sometimes boost the domestic economy

Tariffs can sometimes benefit the domestic economy, such as when they support emerging industries, protect strategic sectors, or address national security concerns, but even then, tariffs are rarely the best solution, because while the benefits of open markets tend to be felt domestically, the costs of protectionist policies also fall primarily on the home front.

This explains why many big US firms supportive of Trump are now protesting his tariffs—they will need to pay more for imported goods, undermining their competitiveness in global export markets. That is because Trump's tariffs have triggered retaliation.

Retaliation measures

China reacted by hitting US agricultural imports with new tariffs of 10-15% on chicken, beef, pork, wheat, and soybeans, while the stock markets reacted badly to talk of a possible US recession. Losses on the S&P 500 topped $4tn, while the dollar collapsed in value.

This week, the European Union imposed "countermeasures" on around $26bn of US goods, including steel, aluminium, textiles, home appliances, and agricultural products. European Commission chief Ursula von der Leyen called Trump's tariffs "unjustified", saying the countermeasures were "to protect consumers and business".

Speaking in Geneva, WTO director-general Ngozi Okonjo-Iweala said: "Thirty years ago, when this system was put in place, the US bound its tariffs at a rate that was quite low, maybe around 2.5%, to benefit its population and the outside world—and it has benefited. Now, the US is saying 'this doesn't work for me anymore.'"

His calls for countries not to engage in tit-for-tat measures are falling on deaf ears, however. Some may even restrict their citizens and businesses from investing in the US—a plausible response to an escalating trade war and a challenge to the dominance of the US dollar.

Koichi Hamada, professor of economics at Yale University, said: "What Trump seems not to understand is that markets function well when one party buys more than it sells to a partner, and vice versa. If trade deficits are no longer allowed, the world economy will regress essentially to a barter system, and countries' ability to capitalise on their competitive advantages will be diminished."

In 1930, the US raised tariffs to protect its industries and farmers, but retaliatory measures from trade partners led to a 66% collapse in global trade

The US has tried protectionism before. In 1930, it raised tariffs to protect its farmers and industries, only to be met with retaliatory measures from its trade partners. The result was a 66% collapse in global trade from 1929-34. Economists now warn the US Congress not to repeat the mistakes of the past.

Since Trump and his Republican allies in Congress appear determined to couple tariff hikes with substantial corporate tax cuts, the global minimum corporate tax rate—negotiated by the Organisation for Economic Cooperation and Development (OECD)—is now at risk.

If Trump cuts corporate tax rates, Europe will likely respond, perhaps by raising taxes on US firms operating in Europe and on their own companies' investments in the US. This could drive European capital back to Europe, leaving the US struggling to balance its current account.

Negotiating tactic?

One possibility is that Trump's tariffs are simply a negotiating tactic, aimed at extracting concessions from trade partners. If so, this would align with the principles outlined in his book, The Art of the Deal. For instance, linking tariff increases on Canada and Mexico to their efforts to curb illegal immigration and fentanyl smuggling into the US could prompt their compliance (this approach is unlikely to work with major economic powers such as China).

Illegal immigration has been one of Trump's key election themes, using populist rhetoric to blame trade and immigrants for many of the country's woes. Artificial intelligence (AI) technology is a far bigger long-term threat to US jobs, but its impact has hardly been featured in Trump's speeches.

According to Anne Krueger, former World Bank economist and former deputy managing director of the International Monetary Fund (IMF), economic decline may, in fact, be a result of anti-immigrant policies. She argues that immigrants are typically drawn either by higher wages (the dominant driver) or the need to escape persecution.

US immigration and visa records reveal that migration figures fall when living standards in their home countries improve. This was evidenced after the North American Free Trade Agreement (NAFTA) came into effect, with a sharp decline in the number of Mexican migrants to the US.

This suggests that the best way to curb immigration from poorer countries is to promote economic growth in those countries by opening advanced economies to more trade with them, but Trump is doing the exact opposite. For instance, Trump could ease US sanctions on Venezuela to let it export more oil, thus stabilising its economy and reducing the incentive for Venezuelans to migrate.

Brandon Bell / AFP — Migrants from Mexico and Guatemala are apprehended by US Customs and Border Patrol officers after crossing a section of the border wall into the US on January 4, 2025, in Ruby, Arizona.

Economic self-sabotage

Trump has also promised "the largest deportation operation in US history," aiming to expel around 11 million undocumented migrants. Yet this would harm key US sectors such as construction and agriculture, forcing Trump's business supporters to scale back investments and job creation.

Given that the working-age population in the US (as in most developed countries) is projected to shrink over the next 50 years, leading to slower economic growth, immigration could help counter the effects, contributing to productivity and innovation. Indeed, Trump supports legal immigration of highly skilled workers to boost US competitiveness.

Michael Strain, author of The American Dream Is Not Dead (But Populism Could Kill It), argues that highly skilled and creative immigrants are key to economic growth, noting how they register patents at a higher rate than native-born Americans.

In recent years, foreign-born students in the US earned more than a third of all PhDs in science and engineering, more than 45% of PhDs in physics, and more than half of PhDs in computer science and economics, yet only a small fraction of these graduates was allowed to stay in the US, despite their potential to make significant economic contributions, something Strain calls "economic self-sabotage".

Dani Rodrik, a politics professor at Harvard, says Trump treats tariffs like a Swiss Army knife, in that he assumes they have multiple uses, such as fixing America's trade deficit, strengthening its competitiveness, boosting investment and innovation, supporting the middle-class, creating jobs, and curbing illegal immigration.

The goal of these tariffs and other measures (including value-added taxes, currency devaluation, and reliance on the US dollar) is to deter any country from challenging American dominance, and to preserve the status quo. Yet Kristalina Georgieva, the IMF's managing director, recently acknowledged that US policies may reshape the global economic landscape in the coming period.

The goal of Trump's latest tariffs is to deter any country from challenging American dominance

Her deputy, Gita Gopinath, said it was still too early to understand the potential consequences of increasing tariffs, yet one thing is certain: globalisation's rupture is on the horizon. As such, the markets are bracing for several grim scenarios, some reminiscent of the 1930s, when countries and economic blocs turned inward, fragmenting trade alliances.

If global trade wars ignite, there will be multipolar competition, currency wars, rising inflation, slowing growth and possibly contractions due to restrictions on trade, supply chains, investments, and capital flows. If the price of gold is an indicator, signs of this phase are already visible.

What may prevent this doomsday scenario is the interdependence of the global economy. Prof. Joseph Nye of Harvard says the roots of economic globalisation run deep and have manifested in different forms throughout history. Today, it is stronger than ever, bolstered by the information revolution, global connectivity, and communication technologies.

The world faces global challenges, like pandemics and climate change, that need global solutions, so understanding the future of globalisation means looking beyond economic considerations alone. That is not how Donald Trump sees it.

This week, the US President bought a Tesla as a public show of support for Elon Musk—the pro-Trump billionaire owner of Tesla whose company's sales have slid since his public interventions on behalf of nationalist, populist politicians in the US, UK, Germany and elsewhere. So, as we hurtle towards economic Armageddon, at least we know who is at the wheel and what car they are driving.

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