Trump's tariffs upend 80-year-old world economic order, and it will cost us all

By business editor Michael Janda, ABC

It is impossible to overstate how significant this week's events have been for the global economy.

Donald Trump's rambling press conference in the White House Rose Garden on 2 April may soon come to be seen as the most significant financial event since the Lehman Brothers bankruptcy on 15 September, 2008.

It's possible history will ultimately judge it as even more significant.

Most analysts and traders have assumed that Trump is using tariffs as a bargaining chip to force concessions from other nations.

As an example, the financial press jumped upon comments the president made on Air Force One suggesting he may wind back tariffs for countries that are willing to offer a "phenomenal" deal to the US.

"The tariffs give us great power to negotiate," he said.

That's what traders want to hear.

They're desperate to believe that Donald Trump doesn't really want to tear up the global trading system first established nearly 80 years ago in the wake of World War II, then modified to US ends in the 1970s and '80s, all in a matter of months.

But while Donald Trump loves a deal, he also genuinely loves tariffs and has done for decades.

He implemented more modest targeted tariffs, particularly against China, in his first term. While some were wound back, many remained in place.

This time around, if the Trump administration was merely using tariffs as a bargaining chip, why would they hit virtually every nation? You can't practically negotiate with nearly 200 countries all at once.

And, if you were only using tariffs as a threat to make a deal, you probably wouldn't set the implementation date for them mere days after their announcement. You'd leave yourself time for negotiation, as the administration did initially with Canada and Mexico.

Moreover, Trump's rhetoric and that of those around him suggests this latest sweeping, universal round of tariffs is not merely a bargaining chip. It's part of a plan.

What's Trump's plan?

When it comes to the intersection of geopolitics, economics and financial markets, I have come across few more astute analysts than Rabobank's Michael Every.

In his note analysing Trump's "Liberation Day" announcement, Every pointed out that the US would have its highest trade barriers in more than a century, with a weighted average tariff rate of 29 percent.

That's higher than the Smoot-Hawley tariffs of the 1930s that are widely blamed by economists for intensifying and lengthening the Great Depression.

"That's staggering, not just for the US, or inflation or GDP, but for the global system built on the US as consumer of last resort for everyone else's overproduction and the US dollar as the lubricant for that trade and the US financial assets everyone accumulates as a result," Every surmised.

He then quoted former Greek Finance Minister (and former University of Sydney economics lecturer) Yanis Varoufakis, another student of economic history, who believes the Trump administration is consciously trying to blow up the remnants of the globalised neoliberal financial and trading system that has reigned supreme since the early 1980s.

In doing so, it would be repeating, but in reverse, the seismic shift of Richard Nixon's Republican administration, when it blew up the post-war Bretton Woods financial system designed by John Maynard Keynes and based on the fixed convertibility of the US dollar to gold.

"The Nixon Shock was more devastating than the one delivered today, especially for Europeans," Varoufakis wrote on 2 April.

"The success of the Nixon Shock in no way guarantees the success of Trump's version, but it does remind us that what is good for America's rulers is not necessarily good for most Americans or, indeed, for the world."

Why would Trump blow up globalisation?

In short, because the Chinese became too good at playing the game.

For a time, there was a mutually beneficial symbiosis between a developing China that wanted to manufacture cheap consumer goods and sell them to the developed world, especially the US, in return for buying the Treasury bonds issued to fund the deficits for Americans to buy those cheap consumer goods.

But now that China is dominating the world in building electric cars, solar panels, ships and much else - and is increasingly competitive at artificial intelligence, robotics, aerospace and other high-tech sectors - the US has decided that this system is no longer working to its advantage.

Instead, on 2 April, Donald Trump openly expressed the need to onshore manufacturing, especially production critical for national security.

"We import virtually all of our computers, phones, televisions and electronics. We used to dominate the field and now we import it all from different countries.

"A single shipyard in China now produces more ships every year than all of the American shipyards combined."

In other words, to maintain its hegemony as the world's most dominant economic, financial and military power, Trump believes he must tear down the current global trading system and replace it with another.

What's going to happen?

In short, no-one knows. As Varoufakis argues, Nixon's success in reshaping the global order to suit America for around four decades doesn't guarantee that Trump's administration will achieve a similar outcome.

China is a lot more powerful than the nations the US was up against in the 1970s.

It has also dramatically reduced its reliance on exports to the US since it was whacked with tariffs in Trump's first term.

Nonetheless, the US is still a massive consumer market and the nearly 70 percent effective rate of tariffs on most Chinese goods will cause a big hit.

One of my Political Economy lecturers, the enigmatic Joseph Halevi, once advised our class, "Once China builds an Airbus, buy gold".

What he meant was, once China achieves broad technological parity with the West, it will come into an inescapable conflict with the United States for global dominance.

That day appears to have come, or at least Donald Trump has decided it's so close that immediate action is necessary to hold China back by any means he can.

The longest-standing safe haven in times of conflict, economic or military, is gold.

And, as Dr Halevi predicted, the precious metal has indeed soared to record highs.

There are a few key uncertainties about how this plays out.

Is China strong enough to survive America's trade attack? Or will it fatally expose the gaping domestic economic problems that exports have, until now, been able to paper over?

Is the US economy strong enough to survive the stagflation that will almost inevitably result from this new round of tariffs?

After all, a weighted average tariff rate of 29 percent is like nearly three GSTs on all imported goods, for both consumers and businesses, with much of it imposed almost literally overnight.

As Michael Every's Rabobank offsider Benjamin Picton wrote on Friday: "Making America great again entails a shift from a consumption-driven economy to a production-driven economy.

Unlike China, the US is (at least for now) a democracy, so one has to wonder whether Trump's support and the Republican majority in Congress can survive this further hit to American living standards through renewed inflation and possible recession.

Finally, will the aggressive US tariff strategy drive its erstwhile allies into the arms of its adversaries?

Former Australian treasury secretary Martin Parkinson believes Trump's policies are akin to the US shooting itself in the foot.

"One of the consequences of this is that US primacy or US hegemony, however you want to describe it, will not be able to survive," he told The Business on Thursday night.

"We talked about in the past how the global trading system was fragmenting. Well, it's fragmented. We talked about how the liberal international order was under pressure. Well, it's collapsed.

"And all of these things, weirdly, are actually being driven by the United States, which is the architect of this entire system.

"And the idea that, let's say, four years'' time, Donald Trump's replaced by, for example, a Democrat, that's not going to change the outcome."

As for where that leaves Australia?

"It's going to be a very lonely and very illiberal world in which we're going to have to chart a course," Parkinson warned.

"And that's going to take some really hard decisions on the part of the Australian public and the Australian political class."

On the evidence of the current election campaign, how confident can we be that these are decisions any of our political leaders will be willing to make?

* This story was first published by the ABC.