With Donald Trump headed back to the White House, we’re about to stress-test the question: just how dependent is the world trading system on the US?
The distortive threat that the tariffs from his first term posed to the production networks that had been built up since the end of the cold war are obvious, but the impact of what he is contemplating now will go way beyond his previous actions.
High tariffs on Chinese imports (and duties on steel and aluminium from other trading partners) in Trump’s first term as president caused disruption to bilateral trade. But it’s now well-established that companies responded to the China tariffs by routing goods into the US via so-called “connector countries” such as Vietnam and Mexico. Governments including Mexico, Canada and Australia also managed to negotiate deals to ameliorate the impact of the steel and aluminium duties. The US’s trade deficit with China shrank: its overall deficit did not.
This time round, Trump has been threatening not just 60 per cent tariffs on China but blanket 10 or 20 per cent duties on all trading partners. His aim is to cut the US’s overall trade deficit, which he regards as intrinsically bad for the country in profit-and-loss terms. This is intuitively appealing but economically illiterate.