Sunday Times 2
The quick and easy way to put Trump in his place
View(s):By Paul De Grauwe, Project Syndicate, Exclusive to the Sunday Times in Sri Lanka
LONDON – Donald Trump’s tariff chaos has already offered some valuable lessons about both the US economy and Trump himself. By applying these lessons to their tariff responses, countries can sharply undercut Trump’s ability to bully and coerce them.
One lesson is that the US economy is more fragile than expected, owing to the strong link between the real economy and financial markets. Fears about future troubles in trade and production quickly spilled over into equity, bond, and currency markets. The US financial system’s central weakness is that large downturns in the stock market can force highly lever-aged, largely unregulated hedge funds to scramble for liquidity, leading to massive fire sales of assets, particularly government bonds. It is this potential for panic that makes the US economy more vulnerable than others.
A second lesson is that Trump’s bombast belies a fundamental weakness. When his tariffs threatened his billionaire friends’ business interests, he yielded.
The question now is how other countries can exploit these two weaknesses. Certainly, the answer is not to travel to Washington with one’s hat in hand—as representatives from around 75 countries reportedly have done. This is not only degrading, but also ineffective, because it boosts Trump’s own sense of power and allows him to play various countries off one another. Moreover, when Trump smells weakness, he tends to add more onerous conditions to any deal. Even worse, such deals are not even worth the paper they’re written on.
A far better strategy is to exert maximum pressure on the US economy, which will then reveal its fundamental weaknesses, scare Trump’s billionaire friends, and ultimately force him to blink (again). This can be achieved by rejecting any negotiation and pursuing proportional acts of retaliation. If enough countries adopt such an approach, America will find itself iso-lated. Since the US represents only 15% of world trade, those representing the remaining 85% have everything to gain by coordinating their response.
Some economists dispute the wisdom of retaliation. The standard free-trade argument holds that, since tariffs hurt the country that applies them, others should not follow the aggressor down the path of self-harm. But this argument fails to account for the political economy of retaliatory tariffs. By imposing reciprocal tariffs on US goods, countries can harm the US ex-port sector, thereby creating a domestic lobby for ending the aggression. In the absence of such a countervailing force, the lobby for import substitution (industries producing goods that the country currently imports) in the US will have Trump’s ear.
A version of this political-economy argument featured prominently in successive trade negotiations throughout the postwar period. In negotiating tariff reductions, countries used a reciprocity argument: We will reduce our own tariffs if others around the negotiating table do the same. In doing so, they created a domestic lobby of exporters favouring tariff reductions and helped to overcome opposition from the import-substitution sector. This approach was highly successful in reducing tariffs worldwide, and there is no reason why it shouldn’t be equally successful today.
A policy of joint retaliatory countermeasures would maximise the pressure on strategic exportreliant sectors such as high-tech and the digital services industries, thus increasing the probability of successful domestic opposition to Trump’s tariff policy. It also would maximise the harm done to the US production and trading system, thus rattling financial markets—the key factor that made Trump blink the first time.
Of course, it is one thing to formulate a principled argument for why countermeasures should be applied but quite another thing to organise such a response. There is a classic collectiveaction problem here because few countries are willing to stick their necks out and invite a harsh, punitive reaction. But once enough countries sign on to the effort, the Trump administration’s ability to mete out such punishments will vanish. After all, the cost that the US would have to absorb to punish the entire world would be prohibitive.
By contrast, if other countries fail to cooperate, they are effectively handing Trump a stick with which to beat them. Why should a country representing 15% of global trade be able to bully the other 85% into submission?
To solve this collective-action problem, we need political leadership. China has already shown the way with its reciprocal tariffs on US goods. If the European Union were to join it, there would be two leaders big enough to harm the US significantly, and others would have an incentive to join the coalition. In doing so, they would further isolate the Trump admin-istration, maximising the damage to the US economy and minimising the damage to the rest of the world. Then Trump would blink again.
(Paul De Grauwe is Chair of European Political Economy for the European Institute at the London School of Economics.)
Copyright:
Project Syndicate, 2025.
www.project-syndicate.org