Global | The tariff shock shaking the world

Summary

The United States' trade strategy aims to reduce the nation’s bilateral trade deficits to zero. This target is difficult to achieve and the product of a misdiagnosis, which is currently eroding global growth and undermining stability.

Key points

• Key points:
• The idea that the US should have a carefully weighted trade balance in goods with each of its 100-plus trading partners only makes sense in a scenario with just two countries and no trade in services.
• In today’s world, with global production chains distributed across many countries, it is normal for there to be trade deficits in goods with some countries, which are partially or fully compensated by surpluses with others through trade in different goods or services.
• The US has recurrent external deficits not because it is being exploited by other countries but because its economy offers safe and profitable assets that attract savings from the rest of the world.
• This protectionist turn by the new administration presents multiple contradictions. First, weakening the dollar undermines its status as a global reserve currency, making US borrowing more expensive and pushing up the risk premium. Second, hiking tariffs and imposing capital controls is bad for competition and terms of trade, and also generates inflation.
• The new tariffs not only erode global growth and stability but also weaken the pillars on which America’s economic leadership has been built for decades: trade openness, trust and reliability for external investors, predictability, and capital inflows, which ultimately made the dollar a safe haven asset.

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