Trump’s trade policy. A new economic model for the world? Country risk assessment and policy integration are critical to survive

Article’s purpose and background

The purpose of this article is to present a conceptual line of thoughts on the possibility of evolving a balanced trade-based economic management model in the world in response to the new trade policy being implemented by the US President Donald Trump (Read here the previous article on this subject).

The trade policy announced by the President Trump through reciprocal tariffs and universal tariff is not an isolated policy to ease the US trade deficit, but a key element in the country’s new macroeconomic and governance model being introduced for building a new domestic economy and society highly protected from foreign country risks. Four other major elements of the new economic policy are as follows.

• Protecting the borders to prevent illegal immigration, deportation of illegal and concerned immigrants and new immigration policy to protect jobs and livings standards for the US citizens.

• Cutting wasteful spending and corruption of the federal government to reduce the budget deficit and debt to prevent the bankruptcy of the country. The Trump Administration is implementing a radical programme through the Department of Government Efficiency (DOGE) headed by Elon Musk to cut wasteful spending, close down unproductive federal agencies and discontinue unproductive federal employee contracts. It is reported that a part of federal savings made through such cuts in waste and corruption is to be distributed among tax payers at a rate of US$ 5,000 per tax payer.

• Deregulation of markets to boost innovation and growth.

• Newly industrialization of the economy through the trade negotiations with countries for a balanced trade with each country.

The executive power of the President guaranteed by the Constitution, provisions of the Employment Act of 1946 and the Full Employment and Balanced Growth Act of 1978 and the global dependence on the US for both geopolitical and economic sides are instrumental in declaration and implementation of such national policies by the US President.

Therefore, country leaders should not take Trump’s reciprocal tariff policy lightly on geopolitical or other grounds because Trump’s new economic policy has already caused immense shocks and tensions on all corners of the world geopolitically and economically. Signs are there that many countries are heading for disasters and a new round of poverty due to the near-term collapse of the present economic model with its global support network.

Present waves of market volatility and movements of the dollar value are only a part of normal speculative behaviours caused by key market players and, therefore, have nothing to do with fundamentals that will respond to the Trump’s new economic policy. Therefore, country leaders and their economists should not be complacent and guided by eased market volatilities displayed from time to time. 

Instead, their task should be to invent a new economic model in respective countries with supporting economic fundamentals to stay relevant and resilient to the new global economic order that will emerge out of the Trump’s new economic policy.

How the present US-anchored economic model has evolved so far?

The present globalization-based economic model followed by countries is the direct outcome of the soft power and hard power of the US assisted by its Western/European allies.

• The soft power is the global institutional network sponsored by the US. This network helped the US Dollar to become the most popular global currency with a power to influence all corners of the globe.

• The hard power is the US military force that helped the US to become the world’s policeman.

As a result, economies of the rest of the world emerged on the US economy and dollar. This was the conduit used for the US economy to run excessive trade deficits that helped the US to maintain its consumption and living standards away above its national production. 

Therefore, the US has become the anchor economy for the rest of the world to achieve the present level of economic development and to reduce poverty through the open and export-led economic model mainly focused on industrialization supported by the governments on fiscal and monetary incentives and dollarized debt/capital inflow.

In this US anchored-global economic model, several segments of sub-economic models emerged in the rest of the world.

• First, the Euro zone which is the governance consortium of European countries led by its rich nations such as Germany and France. They invented its own bureaucratic model with a common currency i.e., Euro, to drive a rule-based single European market blessed by the US, given the European hand in the US global power center. The Euro zone with a new global reserve currency next to the US Dollar achieved a BOP surplus of 2%-3% of GDP in contrast to the US with a chronic deficits and most popular global reserve currency.

• Second, countries such as China, Japan and East Asia emerged as leading exporting countries earning a significant volume of dollar reserves through trade surpluses. These countries became newly industrialized countries of a wide range of export products at unbelievably cheap prices owing to low costs of production.

• Third, the majority of developing countries emerged as import dependent countries with highly risky exports such as garments financed through dollarized market debt supported by the global investor network operating around the IMF and World Bank. In fact, the IMF assured the macroeconomic sustainability and resilience of these countries by emergency loan buffers provided to build up dollar reserves to deal with balance of payment deficit problems. This helped the global stability required for smooth functioning of the US economy. However, the IMF or the World Bank did not worry about economic instabilities of the US and Europe as their governments with globally accepted currencies were equipped with ample fiscal and monetary instruments to bailout any instability, for example, 2007/09 financial crisis and 2020/22 Corona economic and social crisis. Therefore, national leaders of these emerging market economies managed respective economies through international trade and foreign debt flows despite their conceptual differences on domestic politics between leftists and rightists.

The Washington Consensus designed by the US and European leaders led the global economic model to discipline monetary and fiscal policies within externally prescribed benchmarks while opening the countries for competitive trade and foreign debt flows. This separated the monetary policy from the fiscal policy with separate mandates and rules for domestic stability and opened national economic policies to depend of the trade and foreign debt as the major source of development and living standards.

Therefore, country leaders have got used to the present economic model and stayed in comfort zones to play their politics. However, various concentrations have exposed the countries to financial and economic crises from time to time. In that context, the Trump’s new economic policy geared for a protected domestic economy insulated from foreign trade and financial imbalances is a timely action to dissolve systemic risks and to reform economies before a new waive of crises hit in the world. 

In contrast, a massive opposition across the globe has erupted against the Trump Administration as usual from corners who have stayed in comfort zones. Therefore, the President Trump has induced all national leaders to assess macroeconomic risks of the present economic model and reform economies based on national fundamentals rather than politically managed trade and dollar flows. In that context, the US trade talks pending during the 90 days period of the pause of reciprocal tariffs is an unique opportunity to all nations to save their economies and living standards through a new economic model.

What is the nature of the US trade talks ongoing for balanced trade-based industrialization?

Many dollarized, debt-ridden countries have displayed a begging mindset seeking mercy from the President Trump on new tariff policy. Some tended to state that they were already on IMF bailout programmes with the US support. However, such begging requests are highly inappropriate in the Trump’s new economic policy agenda for strong domestic economy on real business fundamentals and opportunities. Therefore, such countries with begging mindset are likely to be highly humiliated at the US trade talks. Therefore, those delegates have be quite knowledgeable on the scope of trade talks prepared by the Trump Administration. It should also be noted that the US delegates participating in trade talks are 100% Trump followers with no room for any personal or independent views or external influence. 

Official interviews of the President Trump and high profile officials of the Trump Administration such as Treasury Secretary and Commerce Secretary have already revealed some key factors that would base the trade talks with countries. Accordingly, any review of reciprocal tariffs for respective countries will be based upon several ingredients as highlighted below.

• Time-based reduction of the US trade deficit.

• Reduction of country tariffs and non-tariff trade barriers on trade with the US. The Treasury Secretary recently indicated that non-tariff trade barriers such as monetary and fiscal incentives, exchange rate manipulations, exchange controls and bureaucratic controls will be the key on trade talks.

• Trades of services, incomes and investments that will help ease the trade imbalances.

• How the trade and investment profile with other countries will be redesigned to facilitate trade deals with the US.
• Time-bound plan for trade expansion with the US. For example, India plans to have trade talks targeting an increase of trade with the US to US$ 500 bn from the present level of US$ 190 bn.

• Setting up factories and investments in the US in place of exports to the US.

• Commodity composition of the trade with the US.

• How the country economies would be rebalanced in order to avoid excessive trade/BOP imbalances. For example, countries like China and Japan with high BOP surpluses and domestic savings rates need to expand domestic consumption in order to cut exports.

Accordingly, trade talks are not for a review of reciprocal tariffs but exclusively available for US trade expansion with a balanced trade with individual countries.

Therefore, country teams must have a data-based assessment of the macroeconomic and geopolitical risks involved in the present trade-based economic models as well as new balanced-trade-based economic models to respective countries if they are to be smart before the US delegations. They have already presented a strong case for talks in their favour alleging all countries for ripping off the US through trade and other transactions.

The risk assessment requires listing of all supply chains involved in the country economy, their concentrations and possible effects of trade deals on the economy and living standards through changes in supply chains or new supply chains.

Can a new global economic model be expected to evolve consequent to the new US economic policy?

When the US agenda for trade talks and reciprocal tariff policy is examined, the new US economic model will be the protected domestic production economy with a balanced trade with foreign countries individually. This is a new version of the closed economic model followed prior to 1980s in the world.

As all countries seek a favourable review of the US reciprocal tariffs that have already been announced, they need to have a full-pledged trade agreement with the US covering areas listed in the above section. Therefore, it is highly likely that many countries that are willing to trade with the US will have similar economic models to survive in the new global economic order.

If this kind of economic model is to emerge, all countries will have to be reprofiled to live within domestic talents and resources without undue concentration to the globalization of trade, debt and immigration.

Therefore, it is up to the country authorities to assess macroeconomic and geopolitical risks involved in the new model envisaged if they are to be resilient. 

What are the key challenges confronted in managing the new economic model?

As the new economic model painted above will be for the protected domestic economy with a balanced trade with individual countries, the present economic and global monetary/reserve currency model will no doubt breakdown over the time. As a result, some key challenges can be visualized for early preparation for risk choices and management. Some of them could be as follows.

• The balanced trade/BOP policy of the US will cut the dollar supply to the world. As a result, the dollar will loose the reserve currency position in the world. Therefore, countries will have to search for bilateral trade settlements in own currencies with opportunities for investing the surplus in deficit countries. The present deadlock confronted by trade blocks (such as BRICS) and clearing unions (such as Asian Clearing Union) is the net settlement in the US Dollar. Therefore, the world’s dollar shortage will force the countries to search for alternative payments and settlement mechanisms. In addition, the value of the dollar may stay higher due to the world’s dollar shortage if the reserve currency position is to continue. That could happen only if the US invents a mechanism for the US banking system to lend money to credit-worthy trade partner countries as a part of agreed trade deals. This could be a new mechanism of country bailouts in place of the IMF mechanism.

• New trade regime will defunct the IMF and international institutions system. Even the IMF’s currency or the SDR used in its transactions with member countries will collapse as member countries may not be willing to use dollars out of their reserves to buy the SDRs issued in bailout packages. Therefore, countries that will confront economic crises will have to work out bailout programmes from large trade partner-countries.

• Country fiscal and monetary policies that have been separated for independence under the Washington Consensus have to be reverted back to the former integrated or coordinated policy model to enable the governments to protect and rebuild economies under the new model. As global reserve currencies will disappear due to the global scarcity of such currencies, country governments will have to depend on own sovereign currencies to drive monetary systems for domestic objectives as the balanced trade will reduce the excessive volatility of exchange rates. Therefore, reforming the economies requires substantial fiscal spending funded through monetary easing while interest rates are kept low to stimulate private sector activities. Therefore, countries like Sri Lanka who implemented fiscal and monetary rules through new laws as required by the IMF in line with the Washington Consensus will confront severe policy governance problems unless such laws are amended to facilitate the integrated policy framework. The danger of the current system is the ability of few state individuals to run the economy disregarding majority interests by falling behind the fictitious policy independence.

• The US, EU and several countries have already started moving in this direction. 

• Mark Carney, a former Governor of the Bank of Canada and the Bank of England who was dead against fiscal expansion alleged to endanger the independence of the monetary policy and price stability, is now the Prime Minister of Canada and has recently promised to deeper fiscal deficits to cut income taxes and increase spending on infrastructure to reduce the country’s dependence on the US. He knows that such fiscal deficits will be eventually funded by the creation of new money. The Bank of Canada cut the interest rates once close on the heels of the Trump’s trade tensions with Canada at the beginning and now awaits further clarity for the next round of the monetary policy. Canada is the worst affected by the Trump’s new economic policy, given the country’s historical dependence on the US.
• The European Central Bank cut its interest rates twice in March and last week to address possible concerns over economic downturns to be caused by the Trump’s trade war, despite concerns over inflationary pressures anticipated from tariff hikes and disruption in global supply chains.
• The President Trump has raised serious concerns over the lethargy and delay of the US Central Bank, Fed, in facilitating his new economic policy and is prepared to even sack the Fed Chairman. In the last week, the Fed Chairman expressed at an interview that the new tariff policy would affect on both mandates of the Fed, i.e., maximum employment and price stability, and, therefore, awaits further clarity on the impact to decide the next phase of the US monetary policy. This is because of the divine independence treated for the Fed despite the new policy requirements of the economy. The clarity is the evading term for this 110 years old central bank practicing the monetary policy. However, the Fed is quite used to open its money printing tap unlimited at zero interest rate if a liquidity crunch were to surface. Therefore,  the conflict is on the delay in a sizable interest rate cut because what is required at this stage of the economy is the lower cost of funds. The President Trump has repeatedly requested the Fed to cut interest rates in support of the new economic policy. Therefore, it is highly speculated that the President will intervene in the Fed even through legal amendments sooner to drive his new economic policy with the support of the monetary sector.
•  Macroeconomic risk assessment of the present economic model and the new economic model based on real world data is urgently required. However, views expressed in this article as well as by others in the media are only conceptual thoughts not supported by data. Therefore, country authorities need facts on inter-linkages of economic activities of all local and foreign markets and their impact on living standards. In this assessment, the quantification of systemic risks affecting the banking and financial system should be the priority as new economic policy envisaged may have the potential of destabilizing the banking system in the event of the de-dollarization induced by the US policies. As the present economic models and monetary and fiscal instruments of all emerging market economies are highly dollar-dependent, the transition period of the new US trade and economic policy will be highly risky to the rest of the world. It is certain that all such risks will be passed to living standards of the general public as the country leaders will play games on such controversial events. Therefore, some countries may sink in another waive of a currency crisis unless the US government bailouts them.

Few remarks

• There is no doubt that the Trump’s new economic policy for the world’s anchor economy will have radical changes to the world economic order that has evolved during the past 8-9 decades after the world war II.

• The world and economies have evolved through such geopolitically motivated policies that have guided market developments. Therefore, the Trump’s new economic policy is another policy landmark for the world.

• It is quite usual that certain segments always oppose system changes and improvements as they now live in own comfort zones created within the prevailing system. Therefore, they do not evaluate the pros and cons of the proposed changes. Instead, they immediately oppose changes or new systems.

• However, the Trump’s new economic policy appears to be focusing on resolution of a major global instability of the present world economic order that operates on highly imbalanced trades and resulting hot capital flows. Further, it appears that the global institutional framework such as IMF, World Bank, World Trade Organization, US AID and United Nations that are behind the present world economic order is highly outdated due to its global bureaucracy. Therefore, this framework has failed to resolve fundamental issues surrounding the current economic order in fairness to the majority developing world. Frequent economic crises and cyclical fluctuations are the real world evidence for its failures.

• In that context, the Trump’s new economic policy for a balanced trade of the world’s anchor economy will help the rest of the world to follow suit because all like the US willingly or unwillingly due to its world power house. This will laydown a new world economic order for a fairer utilization and distribution of world resources and quite stable living standards within the country means.

• Therefore, it is reported that leaders of more and more countries have taken the Trump’s a new economic policy as a new opportunity for their countries and eagerly participate in the US trade talks with a positive mindset rather than the trade war mindset quite labeled by the political media.

• Therefore, the US trade talks now going on would be a new turning point of the global economy and living standards. The general public of all countries has to wait for its outcomes and resulting market and supply chain adjustments despite rumored and created uncertainties because the President Donald Trump has the political power, executive power, business knowledge and the loyal team to implement the new policy. Therefore, any assessment of the new policy based on the present failing economic order and its market volatilities is highly irrelevant and misleading.

(This article is released in the interest of participating in the professional dialogue to find out solutions to economic issues affecting living standards. All are personal views of the author based on his research and knowledge on the subject and, therefore, the author has no intension to personally or maliciously discredit views and characters of any individuals.)

P Samarasiri

(BA (Hons) in Economics and MA in Economics)
(Former Deputy Governor, Central Bank of Sri Lanka)

(Former  Deputy Governor, Assistant Governor, Secretary to the Monetary Board, Compliance Officer and Director of Bank Supervision of the Central Bank, Former Chairman of the Sri Lanka Accounting and Auditing Standards Board and Credit Information Bureau, Former Chairman and Vice Chairman of the Institute of Bankers of Sri Lanka, Former Member of the Securities and Exchange Commission and Insurance Regulatory Commission and the Author of 13 Economics and Banking Books and a large number of articles published.)

Source: Economy Forward

*The content in this article is of personal views of the author and does not reflect the opinion of LNW in any way.