DONALD TRUMP was hoping to take a wrecking ball to the world trade system and other countries’ exports to the US. He swung it hard when he announced tariffs on US imports from the rest of the world on “Liberation Day” on April 2, but within weeks it had slapped him hard in the face.

Unfortunately, this humiliation does not mean that will not be the end of the matter — far from it. These are the actions of a reckless president, and a reckless administration. Once his motivation is properly understood, it seems inevitable that he will return with similar policies. 

To put the current turmoil in perspective, there are two key trends in the world economy. The first trend is the relative decline of the US economy. The second is the extraordinary rise of China.

Clearly, the two trends are linked, but the US’s decline is not simply a function of China’s rise. The US relative decline has been taking place for decades. In the early 1950s the US economy accounted for 28 per cent of world GDP. By 2023 that proportion had almost halved, with the US accounting for just 15 per cent of world output.

There has been talk in recent years of the US “boom.” In reality GDP growth has been moderate, while the boom lies solely in the creation of low-paid jobs because of US firms’ refusal to invest. This factual position underlies the broad-based decline in real incomes in the Biden years, and why the Democrats were trounced in the presidential election, even though they were running against one of the least credible candidates ever, a convict, a president who had previously failed to get re-elected and who had tried to overturn the popular choice by violent means.

But this weakness of the US economy is taking place simultaneously while the Chinese economy continues to forge well ahead of the US. This explains the urgency of the Trump policy and its recklessness. To offer one illustration, in terms of real output the Chinese economy was $31.2 trillion in 2023, well ahead of the $25trn of the US economy. This is not from some leftie think tank or pro-China blog, but from the CIA World Factbook 2024.

From the US administration’s perspective, the situation is even worse once prevailing trends are taken into account. In effect, and over a prolonged period, the Chinese economy has been growing at at least twice the rate of the US economy. From the current relative starting point the Chinese economy will be more than double the size of the US economy in less than a decade. In another 10 years or so, the Chinese economy will be four times the size of the US economy. China is not simply surpassing the US, it is moving well past it and out of sight.

This explains both the reckless urgency of the Trump policy and how it’s structured; with 145 per cent tariffs on China seemingly aimed at ending US-China trade altogether, while other countries’ starting-point for tariffs is 10 per cent. Those other countries have also been threatened by further US tariffs if they continue to trade with China.

The Trump policy amounts to an all-out trade war on China. Simultaneously, the aim is to dragoon the rest of the world into Trump’s trade war onto the US side, with the use of more modest tariffs, the dubious promise of trade deals and threats of more tariffs to come unless those countries do Trump’s bidding.

Clearly the policy has backfired badly in the first round of the battle. The immediate cause of that is the turmoil in all the main US financial markets, the stock market, government bonds and the US dollar on the currency markets. All have experienced sharp falls and persistent volatility.

This matters in the US above all other countries, because so much personal wealth is tied up in stocks, including the wealth of the billionaire oligarchs whom Trump represents. The US government bond market is important not only in determining the interest rates paid on government debt, but also in setting the interest rate on all other types of borrowing, for business investment, mortgages and personal debt. Finally, volatility undermines the supposed “safe haven” status of the US dollar, crucial for its role as the world’s reserve currency, which confers enormous political as well as financial benefits on the US.

Trump’s policies damaged all these markets, which is not the purpose of any US administration, and certainly not one so closely tied to the tech oligarchs. As a result, Trump will have to tread much more carefully to avoid a repeat of the financial market turmoil.

But it seems certain that Trump will return to these policies, or variations of them. This follows directly from the US being relegated to the No 2 economic power in the world, and the urgency of the situation in relation to China’s growth relative to the US economy.

Even then, further key obstacles remain. In the first place is the complete unwillingness of the Chinese authorities to concede to the threats and bullying, instead responding with counter-measures of their own. This is decisive, because had a very different course been taken, the financial market turmoil would not have been as severe. A foolhardy and unworkable policy could have become its opposite.

This in turn has emboldened some other countries, which, acting out of self-interest, are completely unwilling to discard their main trading partner under Trump’s coercion. China is Japan’s largest trading partner with innumerable supply chains across many sectors. Components and semi-finished goods switch backwards and forwards between the two. Japan has publicly and strongly resisted US pressures. It remains to be seen what others like the EU and India will do.

There is a further unknown factor, which is the response of US workers and the poor. They will be badly hit by the rise in tariffs. It is widely understood that tariffs will raise prices, while the impact on “reshoring” manufacturing jobs will be minimal. That would require major investment in infrastructure, transport and education.

Yet Trump plans the opposite, with his announced intention to slash $2trn from social programmes, beginning with a cut of $880 billion to MedicAid. In a blatantly class-war approach, he also intends to implement a $1trn package of tax cuts for the mega-wealthy, which will further stoke inflation.

Trump has always regarded workers with disdain and organised workers as the enemy within. The outcome of that struggle too will also affect all our interests.

Michael Burke’s economics column appears monthly.