Deglobalization 2.0

The path to an "all against all" regime in the global economy is open. Consequences of the New US Foreign Trade Policy for the Countries of the World and Ukraine

7 April, 2025

Trade & Investment

World

Yaroslav Romanchuk

Liberation Day was named by US President Donald Trump on April 2, 2025, when he pressed the "start" button for the globalization of the world economy. The Economist magazine, in its typical ironic manner, referred to it as Ruination Day.

The first de-globalization took place after the First World War. Trade barriers, bans, and restrictions grew like mushrooms after the rain. Economic nationalism: "produce everything at home", "buy only your own", "substitute imports", "trade deficit is the enemy of the working class". After 100 years, American President Trump declared a National Emergency in the country with the proclaimed goal of increasing the country’s competitive edge, protecting sovereignty, and strengthening national and economic security. Import tariffs were chosen as the main instrument for this purpose. A minimum rate of 10% was introduced for imports of goods from all countries worldwide. Increased import tariffs were introduced for more than 60 countries, including 20% on imports from the EU. The fiscal change in the foreign trade regime is the most significant increase in the tax and fiscal burden since the Vietnam War in 1968. According to the Aspen Economic Strategy Group.

L"… [Trump] misunderstands the ultimate cause of the trade deficit. The US trade deficit is not driven by foreign governments blocking US exports or subsidizing their own exports. Instead, the trade deficit is driven by the savings and investment decisions of American households and businesses and by the taxing and spending decisions of the US government."L

Source: Protectionism is Failing and Wrongheaded: An Evaluation of the Post-2017 Shift toward Trade Wars and Industrial Policy. Michael R. Strain. Aspen Economic Strategy Group. October 2024 https://www.economicstrategygroup.org/wp-content/uploads/2024/10/Strain-AESG-2024.pdf

Trade policy can affect bilateral trade flows, but it cannot counter these broad macroeconomic aggregates. These are the widely accepted truths of international economic policy from Aspen Economic Strategy Group:

L"…If your goal is to reduce the trade deficit, then your goal must also be reducing flows of foreign investment into the United States. When the US consumes and invests more than it produces, it must be running a current account deficit. To finance the deficit, the US sells assets to the rest of the world, and capital flows into the US from abroad. It is also helpful to consider an intertemporal context. Today, the US wants to invest more than it saves, so it must attract foreign capital. For that foreign capital to exist, the rest of the world must be saving some of its output and income. So, some of the output of foreign nations flows into US markets."L

Foreign direct investment and portfolio investment are indicators of other countries' confidence in the United States. America has accumulated inward FDI stock worth $12817 billion, or 26.1% of global FDI as of the beginning of 2024. At the same time, U.S. companies invested abroad $9433.9 billion (21.3% of the outward FDI stock). Trade deficit and FDI flows are interrelated. Declaring war on the trade deficit impedes the inflow of foreign investment, which is a confidence factor for the country.

Economic liberty, in particular trade freedom, should be the default position of economic policy. Experts from the Aspen Institute are convinced of this. “The economic police state required to eliminate the trade deficit would be so intrusive as to substantially reduce not just economic liberty but political liberty as well”.

According to Desmond Lachman, D. Trump's decision to impose comprehensive import tariffs is a huge tariff policy mistake.

L"One reason to think that Trump’s tariff action will end in tears for our economy is that our main trade partners will have little political alternative but to retaliate with tariff measures of their own. Prior to yesterday’s tariff increases, China, Europe, and Canada all had taken proportionate retaliatory measures to the earlier tariff round. They also threatened to respond with more retaliatory action in the event of further US tariff hikes."L

Source: Trump’s Big Economic Policy Blunder. Desmond Lachman. American Enterprise Institute. April 03, 2025 https://www.aei.org/economics/trumps-big-economic-policy-blunder/

The United States is connected to the rest of the world not only by trade ties, but also by money and resource flows. More than 30% of the revenues of S&P 500 companies (the largest US stock companies with the highest capitalization) come from commercial operations outside the US. D. Trump's foreign trade policy undermines confidence in the United States and its institutions in general.

According to data from Yale think tank The Budget Lab at Yale, imposed tariffs are the equivalent of a rise in the effective US tariff rate of 11,5% up to 22,5%. This is the highest rate since 1909. Import duties could lead to a 0.5-0.9% decline in GDP, equivalent to a loss of $100-180 billion. According to preliminary estimates, an increase in import tariffs is equivalent to the introduction of annual additional taxes of approximately $100 billion. However, according to the government itself, the introduction of a basic tariff on goods from all countries of the world will lead to:

growth of the country's economy by $728 billion,
creation of 2.8 million jobs,
increase in real household income by 5.7 %.

The US leadership's arguments for imposing unprecedentedly high import tariffs are as follows.

Jobs. A significant portion of industrial production has relocated from the US to other countries or shut down entirely, causing a decline in the number of jobs in American industry, from 17 million in 1993 to 12 million in 2016. In 1979, the maximum employment in industry stood at 19.6 million people. In the summer of 2019, it was 12.8 million. In 2001, the US industry share of the world stood at 28.4%, but by 2023, it had sharply fallen to 17.4%. In 1996 - 2016, more than 100,000 industrial enterprises were closed. D. Trump's administration believes that the new tariff policy will contribute to the reindustrialization of America and the creation of highly productive jobs.
Defense and external dependence. The second argument is related to defense capability and the need to neutralize the strong dependence on foreign countries for weapons production that has arisen:
L"… Our production base has atrophied. Although the United States had produced fewer than 14,000 airplanes in the two decades before World War II, by 1944 it was producing 96,000 airplanes a year. For comparison, today the United States can produce only about a third of the 36,000 artillery rounds per month that the military says it needs to deter our adversaries...."L
Labor productivity. The Trump administration is convinced that the measures taken will accelerate the growth of the national economy. In 2001, the year China joined the WTO, real median household income in the United States (measured in 2023 dollars) was $70,020. In 2016, the comparable figure was $73,520—real median household incomes had grown only 5 percent in sixteen years. That’s an annual average growth rate of 0.3%. In the period 2016-2019 (President D. Trump's first term), this figure increased to $78,250, which was an increase of 10.5% over three years or 3.4% per year. D. Trump believes that it was the introduction of customs tariffs that allowed for such a rapid acceleration in labor productivity and income.

Source: The President’s 2025 Trade Policy Agenda. March 2025 https://ustr.gov/sites/default/files/files/reports/2025/President%20Trump's%202025%20Trade%20Policy%20Agenda.pdf

D. Trump's administration is convinced that for decades, the US government has provided free entry to the US market for goods from other countries, but in return, it has not had the same favorable treatment for American goods in these countries. Therefore, the US government switched to the reciprocity regime. However, a number of international trade experts see serious defects in the implementation of this principle.

L"Despite the president’s rhetoric about “reciprocity”, the White House’s numbers immediately didn’t add up. While the US and EU don’t have a free trade agreement, there is no way the average tariff rate the EU charges the US is 39 percent. And for South Korea, who we do have a free trade agreement with, Trump’s chart claimed they are charging us a 50 percent tariff rate. In fact, many of the countries that Trump singled out for “reciprocal” tariffs score above the United States on conventional measures of trade freedom."L

Source: Trump’s Tariffs Aren’t Reciprocal and Are a Massive Tax Increase on Americans. Jeremy Horpedahl, Phillip W. Magness April 3, 2025 https://www.cato.org/blog/trumps-tariffs-arent-reciprocal-are-massive-tax-increase-americans

To assess the overall global trade context, it is also important to understand the overall institutional environment. The fact is that tariffs are only one of dozens of tools to influence the content and volume of foreign trade. According to the Global Trade Alert, since 2010, all countries in the world economy have introduced 15,221 measures that impede international trade, compared to 5,602 measures that stimulated that trade.

Harmful measures that hinder global trade include:

subsidies - 6442,
export support measures - 2689,
tariffs (duties) - 1969,
other tools - 4121.

According to the Hinrich Foundation, from 2008 to the first quarter of 2023, the G20 countries applied more than 400,000 measures to inhibit or block free trade.

Measures to Slow Down or Block Free Trade by G20 Countries

Source: Corporate Subsidies: How Governments Impede Trade. Number of Subsidy Distortions by Implementing Country 2008 – Q1 2023. Hinrich Foundation. August 2023 https://www.hinrichfoundation.com/research/wp/trade-distortion-and-protectionism/how-states-use-subsidies-to-impede-trade/

95% of free trade distortions in China are the result of financial grants to commercial organizations. According to CSIS, China spends more on government support for business than on defense. 30% of trade distortions in Germany are the result of government loans. In the United States, 14% of distortions are subsidies, for example, for chip production.

In a World Bank study, an important conclusion is drawn about the impact of industrial policy on foreign trade:

L"First, we confirm a conventional concern that subsidies limit access to markets. When these markets are large, the repercussions are likely to be global, and the negative effects cannot be avoided by exporters. Two decades ago, agricultural subsidies in large developed markets provoked the most concern. Now we also need to consider the implications of industrial subsidies for industrial development and economic diversification in trade partners, especially developing countries.

Second, we identify a new concern arising from the combination of industrial policy and PTAs. Non-members of PTAs already faced the cost of exclusion, as PTAs preferentially reduced explicit trade barriers like tariffs through reciprocal liberalization and implicit barriers like technical regulations through mutual recognition and harmonization. Now, exporters from non-member states are further disadvantaged relative to producers within the PTAs that are shielded from the adverse impact of industrial policies."L

According to OECD:

L"...the subsidies are pervasive. Only less than 3% of all firms did not receive any type of subsidies in any year. No subsidies were reported for only 8% of firm-year observations. Around half of the firms received at least one type of government support every year during the period for which data are available, and around 90% of firms benefited from at least one subsidy for half of the period for which data are available. The receipt of government support is pervasive, although the precise form of this support can vary over time; The pervasiveness and sustainability of subsidies may be due to their nature as part of the tax code or to long-term industrial policy strategies that require ongoing government support."L

Government subsidies are as damaging to international trade as import duties, if not more so. On average, they are small when applied to all firms - about 0.6% of revenue - but governments concentrate resources on supporting the favorites of the nomenclature, which receive subsidies of more than 15% of revenue.

D. Trump's government has fallen victim to an elementary misconception in economic science and political economy that trade deficits are evil for the economy. The trade balance is influenced by many factors, including the level of savings and investment.
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It makes no sense to consider trade balances with individual countries, especially in the context of a complex interweaving of global value chains, multinational corporations that have been operating around the world for decades. According to experts of the Cato Institute:

L"... the White House’s tariff rate calculation is barely more sophisticated than dividing the bilateral trade deficit between the United States and each trading partner by the quantity of goods imported into the United States, and then (completely at random) further dividing it by 2. Presto, there’s your “reciprocal” tariff rate."L

For example, Brazil, which has relatively high trade barriers, received the same import tariff as Singapore, with which the United States has a free trade agreement, because the United States has a trade surplus with Brazil. Goods from the islands of Saint Pierre and Miquelon received an import tariff of 50%, because they imported only $3.4 million worth of goods from America and exported $100 thousand worth of goods to the United States. But Mauritius, with a weighted average import tariff of 1.3%, received a "reciprocal" duty of 40%.

The difference in import tariff rates according to the Trump Administration and the real tariff rates of countries confirmed by the WTO

Country	USA Claimed Tariff Rate, %	WTO Import Tariff Rate, %	Difference, %
Vietnam	90	5,1	84,9
Sri Lanka	88	7,5	80,5
Serbia	74	6,4	67,6
China	67	3	64
Thailand	72	6,3	65,7
Switzerland	61	1,7	62,3
Taiwan	64	1,7	62,3
Indonesia	64	5,3	58,7
Angola	63	7,3	55,7
South Africa	60	5,8	54,2
Pakistan	58	7,6	50,4
Kazakhstan	54	5,9	48,1
Japan	46	1,9	44,1
Malaysia	47	3,3	43,7
EU	39	2,7	36,3
Israel	33	3,6	29,4
New Zealand	20	2,3	17,7
Georgia	10	1,9	8,1
Australia	10	2,5	7,5
Albania	10	3,3	6,7
United Kingdom	10	3,3	6,7
Ukraine	10	3,4	6,6
Chile	10	6	4
Turkey	10	6,1	3,9
Brazil	10	6,7	3,3
Argentina	10	10,3	-0,3

Source: "Reciprocal Tariffs," The White House, April 2, 2025; "MFN—Trade-weighted average duty (percent)," WTO Stats; and "Regulating Imports with a Reciprocal Tariff to Rectify Trade Practices that Contribute to Large and Persistent Annual United States Goods Trade Deficits," The White House, April 2, 2025.

Not only the supporters of free trade and capitalism criticized D. Trump's proposed foreign trade policy. Even mainstream economists from research and think tanks almost unanimously agreed on the quality and effectiveness of the decisions made. Adam Posen, president of the Peterson Institute for International Economics (PIIE), said:

L"This will not generate a fraction of the rise in employment in US manufacturing that the administration claims. In fact, it will reduce US companies' share of global auto sales. The uncertainty hanging over corporate investment will remain, given the nature of the open-ended tariff threats and the manner in which they are decided. So, US recession risk is going up, but expect inflation either way growth goes, up or down."L

He also points out the risks of retaliatory tariffs.

Oliver Blanchard, one of the leading mainstream economists, former chief economist of the IMF, states:

L"Running bilateral trade surpluses /deficits with different countries is the way it should be. Trying to eliminate each one is simply stupid. I have a trade deficit with my grocer, a trade surplus with my employer. I am not sure it would be a great idea for me to work for my grocer. Even if the loss for the economics profession was minimal, I am not very good at packing groceries. Same thing with countries. There are reasons why we sell more to one, buy more from another. Different tariff rates across countries imply reshuffling of deficits and surpluses across countries, but no obvious change in the overall trade deficit. To go back to the economist’s mantra (and the power of identities): If you want to reduce the overall trade deficit, increase saving (you might consider decreasing the budget deficit?) or decrease investment..."L

Source: PIIE experts react to Trump’s tariffs announced April 2. Peterson Institute for International Economics April 3, 2025 https://www.piie.com/blogs/realtime-economics/2025/piie-experts-react-trumps-tariffs-announced-april-2

Thus, the international trade regime before D. Trump's introduction of comprehensive import tariffs on April 2, 2025, cannot be called a free trade regime conducive to globalization. The number, intensity, and scope of government measures of trade, industrial, innovation, and environmental policy have long turned international trade into unequal, unfair, and unfree competition. The main sources of trade distortions and protectionist policies are the G20 countries. They produce 85% of the world's GDP and account for 75% of world trade. There is an active tug-of-war between them, which has been intensified by two events: the global financial crisis of 2008-2009 and the COVID-19 epidemic, which have sharply increased state interventionism and accelerated the destruction of the global trading system.
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Conclusions and assessment of the future

The new trade policy of the Trump Administration has effectively put an end to the international trade system, which is failing and no longer functional.

Countries and blocs of countries (e.g., the EU) have long since begun a trade war among themselves. The US government has unilaterally proposed a new format of relations, an American-centered model. It is unlikely to be accepted by countries that form a significant part of international trade. China has already announced retaliatory measures. The European Union is also considering the mode and scope of their introduction. Now it's every man for himself. Even the transatlantic partnership and relations between the EU and the US need a complete reset.

Changes in the volume of foreign trade between the EU and the US will put pressure on the USD/EUR exchange rate, will provide changes in cash flows in general, and foreign direct investment in particular. Some European experts are already suggesting that the EU mitigate the pressure of US tariffs by devaluing the euro. In light of the United States' having practically imposed a trade embargo on Chinese goods, one of the risks for the EU could be a sharp influx of Chinese goods into Europe. None of the G20 countries, including the United States, China, and the EU, can continue their current industrial and innovation policies without serious fiscal consequences.

In light of new acute security challenges, countries will need to undertake a thorough audit of fiscal policy while maintaining a monetary policy that aims to ensure macroeconomic stability and low inflation. On the other hand, there is a risk of contagion of financial markets and service markets due to protectionism. This will bring even more confusion to the global economy. The new global trade regime of "every man for himself" increases the risks of disruption of global value chains, including established stable logistics routes and transport corridors. The forces of opposition to foreign investments will be activated, as they will be perceived as resources of trade opponents or even enemies.

Some companies and sectors that will benefit from new trade protectionist measures will temporarily become beneficiaries of this policy; however, for the vast majority of businesses, the regime of trade self-isolation is likely to increase regulatory and transaction costs, worsen access to capital and raw materials, which will definitely affect consumer prices…

We may witness a profound multilevel, multidirectional deformation of international relations and institutions, which could lead to depression and a sharp escalation of confrontations between countries, potentially resulting in "hot" wars.

Topics

Trade & Investment

World

Yaroslav Romanchuk

A well-known Ukrainian and Belarusian economist, popularizer of the Austrian economic school in the post-Soviet space. He specializes in reforms in transitional economies in the post-socialist space.

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