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There are exogenous shocks, and then there’s what Donald Trump has just done to the world economy and the global political order.
The common political thread in US engagement through economic globalisation, from the signing of the General Agreement on Tariffs and Trade (GATT) in 1947, to the negotiation of the ill-fated Trans-Pacific Partnership in the 2010s, was a recognition that it was instrumental to securing US global leadership.
‘We should beware of the demagogues’, said Ronald Reagan in a 1988 radio address, ‘who are ready to declare a trade war against our friends … while cynically waving the American flag. The expansion of the international economy is not a foreign invasion; it is an American triumph, one we worked hard to achieve, and something central to our vision of a peaceful and prosperous world of freedom.’
Donald Trump may have been nothing more than a shonky real estate tycoon when Reagan spoke those words, but Reagan’s call for vigilance against what he termed ‘the siren song of protectionism’ is as resonant today as it was in the 1980s, amid a backlash against Japan’s emergence as an economic rival to the United States in which Trump was a vocal participant.
The erection of the Liberation Day tariff wall around the US economy is arguably the biggest milestone in the story of global economic integration since the signing of the GATT in 1947. Assessing the potential damage to come is hard as it will take time to understand the complex second and third-order effects of the tariffs, and the reaction functions of national governments to dealing with them. These include the impact on Chinese growth and import demand, the diversion of trade flows and the political responses to these shocks across the world.
As with everything the Trump administration does, there is the added layer of confusion around whether Trump’s tariff policy will stick or whether he will try to use it as a bargaining chip to extract concessions from individual firms or national governments of some kind or another.
The administration’s mutually incoherent justifications for the tariffs — they’re a permanent foundation for economic autarky, or a replacement for the income tax, or a negotiating gambit, or all of the above — give few clues on this question. As with so much of what this administration does, it’s doubtful whether Trump’s unilateral application of tariffs at this scale is even legal.
The consequence for our region is nonetheless clear: Liberation Day represents a US effort at economic decoupling not only from China but the entire Asia-Pacific economy. Both close US allies and the non-aligned Southeast Asian countries where the United States was hitherto trying to compete with China for goodwill — good luck with that now, Marco Rubio — have been hit with the highest average tariffs of any region. Southeast Asia, where trade with the United States has become an important element in export-oriented growth strategies, has been hit especially hard, with tariffs that range from 30 to 50 per cent.
For the developing world more broadly, the US offering as of now is no aid and no trade. Trumpism sees no role for the United States as a partner in economic development — and if policy continues to reflect this, we have just seen the point at which Washington decisively forfeited its position in the contest for influence with China throughout the Global South.
The question now is what the world, and in particular what East Asian economies hit hardest by the Trump tariff wall, should do in response to Trump’s economic and political madness.
The first step is to dispense with whatever fantasies governments might have about being able to negotiate favourable bilateral deals with the White House.
Leave to one side the ways in which such behaviour both sells out regional partners, and undermines the principles of rules-based, mutually negotiated economic integration that has been fundamental to the region’s economic development and success. It would also be foolish from a self-interest perspective — who in their right mind would believe that any deal struck with this White House, even if it were possible to strike one, would be faithfully honoured given the United States has now effectively invalidated every free trade agreement it has ever signed?
The second principle is to resist wholesale retaliation against the United States, as well as the erection of new trade barriers in response to the diversion of tradable goods away from the US market in response to reduced demand there — a temptation now confronting leaders in Southeast Asia, which is a key alternative market for Chinese goods now subjected to debilitating US tariff rates.
Just as the G20 came into its own amid crisis conditions in 2008–09, so must mechanisms such as the RCEP agreement be rapidly mobilised as platforms for coordinating a regional response, lest a spiral into harmful protectionism gains pace in the absence of high-level — meaning leader-level — dialogue and policy coordination.
Could political conditions in the United States put a check on Trump’s madness?
Liam Gammon addresses that question in this week’s lead article, highlighting that ‘framing the relationship with Washington in terms of interests sets a better framework for an overdue conversation about the extent to which those interests are still aligned, on critical questions of international order and economics, as the post-“Liberation Day” world comes into focus’.
The upshot is that if the United States’ democratic accountability mechanisms become more and more dysfunctional, interrupting the feedback loop between voters and policymakers, then that leaves the path clear for Trump to take what might be called the Hugo Chavez option: wrecking a national economy for ideological reasons, while holding on to power through a combination of repression and targeted patronage for loyalists.
This scenario may seem dramatic, and Gammon emphasises that it is not by any means guaranteed. Trump’s mounting unpopularity and the decentralised nature of political power in the United States’ federal system make any effort to strategically undermine democratic processes a big ask, which Trump may lack the motivation or wherewithal to do.
But it is nevertheless a possibility that has to be prepared for given that the pressures on the rule of law and democratic norms in the United States, after only three months of Trump, have exceeded the worst fears of the pessimists at home and around the world.
The EAF Editorial Board is located in the Crawford School of Public Policy, College of Law, Policy and Governance, The Australian National University.