The announcements of Liberation Day have struck at the heart of globalization, potentially turning a world which Friedman once described as flat, into a world with many protective walls, higher inflation and lower growth.
What could be the reasons behind such a move, which is generally thought to hit everyone, but the poor and poor nations more?
The first is probably an ideological belief that the US has been a victim of the world trade system, with many countries running a trade surplus with the US. We know though that the US has been one of the biggest beneficiaries of globalization which has helped it grow to be the economy it is, with global supply chains that have kept its costs under control. We also know that economic theory believes that there is a win-win when a country imports goods from another country which has a comparative advantage in production compared to the importing country, allowing the importing country to use its resources to produce goods where it has an advantage. So, the notion that there should be no trade deficits with any country seems misplaced in economic theory. The measures announced also seemingly impact some of the long-term allies of the US. When you levy such tariffs against everyone, there is a certainty of a change in the world order as every country tries to figure what’s best for them. And that’s not a good outcome for the world’s biggest economy for sure. The winners might be unclear right now, but it certainly could end the notion of US exceptionalism.
The second reason could be the US fiscal deficit which has been rising and is almost $ 2 trillion. The DOGE and raising tariffs are possibly the chosen policy tools to curb the deficit and provide some room for lowering taxes. However, the issue is that tariffs aren’t a sure shot source of revenue as there are several factors at play. If tariffs don’t yield the desired results, there is a chance that with a slowing economy the deficit doesn’t improve but even worsens. What happens then to the dollar based financial system? And what tools will the US have to stimulate its economy in such a situation where monetary policy itself will be hamstrung by the prospect of inflationary expectations?
