‘An unplannable environment’

On April 2, global financial markets plummeted, following U.S. President Donald Trump’s announcement of enormous tariffs on goods coming into America. Then, on April 9, Trump paused most new tariffs for 90 days. But he left in place a universal tariff of 10 percent on all imports, maintained new tariffs on steel and aluminum, and continues to escalate a trade war with China: Import duties on Chinese goods are now 145 percent; China, in return, has raised its levies on U.S. goods to 125 percent. It’s all rattled even members of the president’s own party in Congress. The Republican senator Thom Tillis asked the administration’s trade chief, Jamieson Greer, “Whose throat do I get to choke if this proves to be wrong?” 

None of which is to say the tariffs were unexpected. Trump has been talking up tariffs since the 1980s. He imposed tariffs on China in his first term. And he’s not the only American politician who’s blamed the loss of U.S. manufacturing jobs on free trade: Many Democrats, including Trump’s predecessor, Joe Biden, agree on that point. Biden not only kept Trump’s tariffs in place; he even imposed new tariffs on some goods.   

So how radical a break is Trump’s trade policy? 

Martin Wolf is the chief economics commentator for the Financial Times and the author of the 2023 book The Crisis of Democratic Capitalism. Wolf says, very: The new U.S. tariff regime is the biggest reversal in global trade policy since the 1930s. While support for the idea of tariffs had been growing for years, Trump’s nevertheless completely changed the course of American trade policy—and keeps changing it. It’s accordingly almost impossible to predict the consequences—though that itself might be the biggest consequence of all: massively heightened uncertainty.

Trump might keep the China tariffs in place; he might strike a deal with Beijing; or he might negotiate new trade agreements with dozens of countries. Nobody knows. And in that environment, Wolf says, it’s impossible for anyone running a business to make long-term planning decisions—which will likely have major effects on investment. So now, even if Trump were to end the tariffs, he couldn’t stop the spread of radical uncertainty that’s consuming not just America but the whole global economy …

Gustav Jönsson: You’ve said that Trump’s tariffs from his first term were part of a new era of global trade. How do you see the origins of that new era?

Martin Wolf: Trump is the first major politician in the U.S. since the 1930s to be a committed protectionist. And I would say, as a head of government in a major country, he’s pretty well unique since the nineteenth century, his favorite period of history. He is a genuinely unique figure. It’s easy to imagine we wouldn’t be where we are if he wasn’t the individual he is—if he hadn’t caught the moment. He’s not like other Republicans: He treats tariffs with close to religious worship.

At the same time, a sizable proportion of the population has become deeply suspicious of markets. That’s because of a few factors: America has seen a general decline in manufacturing jobs, which some blame on trade; then there’s the rise of inequality alongside that decline; and then, on top of that, came the 2008 financial crisis, which largely demolished the authority of the expert class both in business and politics. And the Covid-19 pandemic was similarly destructive. 

Trump was a necessary condition for this new era, but so was this declining faith in markets, and the two together were sufficient to produce what we’re seeing now. 

Jönsson: What does this new era look like?

Wolf: We’re somewhere completely new. What we’re going through has never happened before in global trade policy. But it’s also clearly true that the U.S. is the only country where the repudiation of open trade has seized the political agenda. 

Trump isn’t like other Republicans on tariffs: He has an almost religious relationship with them.

Nobody except the U.S. really believes they can prosper without open trade—not even China. The general tendency of trade policy over the last 20 years has been in a broadly liberalizing direction, and that hasn’t reversed. What’s happening now is essentially unique to the U.S. 

There are a few main reasons for that. Trump is uniquely protectionist, but that fits in more generally with U.S. political culture. The U.S. has a vast, resource-rich economy on a scale that lets it imagine itself as being self-sufficient. And the U.S. has historically been highly self-sufficient. Trade accounts for a lower share of GDP in the U.S. than in any other significant economy, including China. Historically, the U.S. industrialized with the help of trade protection. The U.S. has historically seen free trade as a favor it grants others, not as a necessity that would benefit itself. 

That began to change a little after World War II. But when things started getting difficult, Americans—and particularly the middle classes—grabbed onto the idea, Well, why don’t we go back to self-sufficiency? And Trump symbolized that. 

If you go to Germany or Japan, nobody believes they can survive without trade. Even China—which is now more industrially more self-sufficient than America—needs commodities from the rest of the world, because it’s relatively resource-poor. Still, China is the next country that could imagine itself moving toward self-sufficiency, which is why I think Beijing will be quite happy to retaliate against the Americans.

Jönsson: It looks like the global trade model that’s held sway since about 1980—an era of deregulation, privatization, and increasing global trade—is receding in much of the world, not just in the U.S. How do you see this new model that’s emerging? 

Wolf: One of the most difficult things to decide in real time is whether what we’re seeing is a continuation of a previous trend or a fundamental break. But I think what’s been happening these last few weeks constitutes a very dramatic break. 

Already during the global financial crisis of 2008, I thought the Reagan-Thatcher view of the world was over. People began to embrace regulation of financial markets; but more broadly, people—particularly in a lot of developing countries—had the sense that the market alone wasn’t enough.  

But Trump’s protectionism is genuinely unique. We’re not seeing that model elsewhere. It seems to be motivated mostly by the view that the U.S. has to stop China. The Europeans have followed the U.S. somewhat in protecting their markets from Chinese imports, but not to the same extent. So that concern with China got layered on top of broader worries about financial markets. 

I think Beijing will be quite happy to retaliate against the Americans.

Yes, the world was moving gently away from that era, which many people call neoliberalism, but we had not abandoned it. In different ways, U.S. presidents Barack Obama and Joe Biden were broadly trying to recreate a modified version of that world—but a more cautious, prudent, protectionist one. Under Biden, the U.S. pursued industrial policy, but it was a quite targeted, limited, and careful industrial policy. You could say it’s neoliberalism with lots of bells and whistles added, but there was still a fair amount of faith in the market. True, Biden’s people didn’t roll back Trump’s tariffs, but they didn’t go vastly further; they mostly talked about reducing supply-chain vulnerabilities and moving production to friendly countries.

Trump is taking the U.S. out of the world economy—at least in the trade of goods. These tariffs will have truly dramatic effects on American and world trade—if they stick, of course, which is always a question. Still, Trump has changed the course of trade completely—we’re in a new world. We’re going through a break similar to the break that occurred in the very early 1930s. That will have global repercussions way beyond anything I would have envisaged a year ago; this is really very radical. 

Jönsson: The 1930s may not be the most auspicious comparison. 

Wolf: But it’s where the U.S. now is, just in terms of trade. And since the world is much more open to trade now than it was in the 1930s, the disruption will be bigger. And other countries will have to move in the same direction. They’ll feel they have to retaliate. The world economy will look radically different. I believe the world is going to change radically, but it’s hard to forecast how it’ll change.

Jönsson: How do you see these new trade policies affecting the relations between China, the U.S., and Europe? 

Wolf: That gets to the core of what’s now unfolding. One really big question is whether China and Europe can form some sort of cooperative relationship with reasonably open trade. Other parts of the world will be very important here, too, particularly Asian regions—they’re huge entities in the trading world. About half of world trade is now among developing countries. 

Rising powers like India and Indonesia are going to be active players in this new world. How countries in Southeast Asia will respond is unclear. Vietnam, for example, has closely tied its exports to America, much of which is a diversion of manufacturing from China. What are they going to do now? 

I would guess that the Europeans will try to stay open, because they are quite trade-dependent, but they could lose much of the U.S. market. That would be a fairly big deal for them, but not catastrophic. And European relations with the U.S. are just not going to recover in the near future. 

There will probably be a huge diversion of Chinese exports from the U.S. to Europe. China has a huge export surplus, so now that the U.S. market is pretty much closed to them, where is this stuff going to go? The obvious destination is Europe. Then the Europeans would likely increase their protections against China substantially. Europeans won’t allow China to shift its vast amounts of excess production into Europe. 

Rising powers like India and Indonesia are going to be active players in this new world. 

My suspicion is that U.S. actions are so radical that they could fragment large parts of the world into trading blocs. That would be very bad for small, open, developing countries that are dependent on trade. The EU, China, and India will likely become more self-sufficient, but an awful lot of countries really won’t know how to manage this fragmented new world. 

Jönsson: You’ve said that the idea behind the new U.S. trade approach is to bring back manufacturing, but you’ve also said they’re unlikely to succeed in that. So how do you see Trump’s new tariffs affecting manufacturing globally?

Wolf: This is a huge question. Nothing like this has happened before. Transport, manufacturing, and communications are vastly more integrated compared to 100 years ago. The modern corporation is now built to facilitate global trade. The multinational corporation hardly existed in the 1930s, apart from sectors like the oil industry. Over the last 40 to 50 years we’ve developed—for the first time in history—an economy in which the entire supply chain is made up of international trade. 

Roughly speaking, back in the 1920s and 1930s, trade among manufacturing economies was relatively limited because they more or less all made the same sort of stuff. In today’s world, the whole supply chain is traded, even if the final product is made in your home market. But Trump’s now trying to bring the entire supply chain back home—from basic components to final goods. 

One obvious consequence is that the price level for manufacturers’ goods will rise. If the U.S. remains the most protectionist country in the world, prices in America will be far higher than in the rest of the world. U.S. components will face heavy tariffs from global suppliers, so its final products won’t be competitive globally. U.S. exports of manufactured goods will collapse—and that’s part of Trump’s aim to make the U.S. more self-sufficient. 

The U.S. will become more self-sufficient, but U.S. producers will not be internationally competitive. The scale at which U.S. manufacturers operate is going to be smaller than their international competitors because they’ll be limited to the U.S. market.

The U.S. will continue to export agricultural commodities and services, which are not really affected by tariffs; that’s very important, because services are a big part of the economy. Still, the rest of the world is going to regard U.S. services much more skeptically now. The U.S. will be seen as a hostile power—that feels inevitable. The U.S. is trying to destroy industries in other countries—and those countries know it.  

American multinationals might have to break themselves up. For example, Apple could avoid the tariffs on imports from China by making iPhones in America. That would make the American iPhone much more expensive compared to iPhones in the rest of the world—but it would still probably be cheaper than importing them into the U.S. with tariffs above 100 percent. That means Apple would make iPhones specifically for the U.S. in U.S. plants, and iPhones for the rest of the world outside the U.S.  

It’s a giant systemic shock—maybe not as big as the 2008 financial crisis, but possibly as big as the pandemic.

Jönsson: If these tariffs stay in place for years, that could create the kind of certainty that allows businesses to make long-term investment decisions. But at the same time, Trump is talking about the tariffs as negotiating tools. The White House says some 70 countries want to negotiate trade deals. That seems like a lot of uncertainty. How much does that uncertainty matter to business?  

Wolf: We’ve moved into a new world, whether or not these tariffs remain—a world of total uncertainty. The old world is gone. You now have to get used to the idea that things can change overnight. Trump is changing America’s trade policy on a daily basis; it’s never been handled like this before. 

This is an unplannable environment. A lot of decision-makers will be paralyzed until they’re confident there won’t be more sudden changes. Nobody in their right mind will build a factory based on today’s tariffs unless they’re reasonably confident the tariffs will last at least 10 years. Unless Trump says, This is it, we’re not changing anymore—which he might—the short- to medium-term effect will be paralysis. 

If there’s no confidence, important things—most importantly, investment—won’t happen. And if investment falls as much as I expect, we’ll have a recession, possibly a big, global recession. There will be losses in the financial system, as we’ve seen in markets. 

It’s a giant systemic shock—maybe not as big as the 2008 financial crisis, but possibly as big as the pandemic. The consequences of shocks are very difficult to predict, but I’m sure they’ll be substantial. 

There is the possibility, though, that American businesses will protest so loudly that Trump will have to back down, or perhaps he’ll get offers from foreign countries that allow him to back down. Then the question would be: Will his backing down make people feel like they can make long-term decisions? And I’m afraid the answer is: Probably not—because even if he backs down, as far as everyone else is concerned, he might just try it again later. 

That’s why we really have moved into a new world—and why the defining characteristic of this world, given the personalities involved and the forces unleashed, is uncertainty. The trading system that Trump has blown up was designed to make people feel that they could plan ahead. But that’s gone. And what it will take to get it back is now part of the uncertainty of this new world, too.