The Trump Shock. How should governments respond?

The Trump shock: How should governments respond?

By Ann Pettifor

[This article posted on April 23, 2025 is translated from the German
on the Internet,
http://makroskop.eu/14-2025/der-trump-schock-wie-sollten-regierungen-antworten/.]


Trump's tariffs are shaking the international economic and financial
system. What paths are there to return to a stable system?

The President of the United States has set fire to the global trading
system and is now sitting back, seemingly calm in the face of the
conflagration that has engulfed the global economy.

Donald Trump's actions show that he has not really understood how
dangerous his attempt to change the world order is. He believes that
the crude methodology and calculations of “reciprocal” tariffs, which
he presented in a large table, are sufficient to achieve this. But, as
the Italian philosopher Niccolò Machiavelli once said, “There is
nothing more difficult, more dangerous, or more uncertain than the
introduction of a new order.”

How should governments around the world respond to the Trump
administration's irresponsibility? The most important thing is
realism. Above all, the widespread dogma that states should withdraw
and leave it to private markets to stabilize the economy must be
abandoned.

For largely ideological reasons, governments have apparently
surrendered their power over the national and international economy to
the “invisible hand” (Adam Smith) of private capital, currency, and
trade markets over the past 30 to 40 years. Trump has finally
destroyed this myth and shown that a large country like the US is
capable of disrupting the markets for goods and services as well as
for currencies, stocks, and bonds.

In order to respond appropriately to this catastrophe, governments
must first fully comprehend the scope of the current situation.
Whether all of them will do so is questionable. The British
government, for example, is sticking to a “deal” with Trump's
negotiators. This betrays a certain naivety regarding the motives of
the Trump administration and the possibilities for resolving the
crisis bilaterally.

The Trump administration will not negotiate with good intentions. It
is too deeply entrenched in the “America First” ideology and has
knowingly turned allies into enemies. Being isolationist, it will have
no interest in an international solution to the problem of global
trade imbalances.

Worse still, the Trump administration's nationalism – some even call
it proto-fascism – blinds it to the fact that this crisis cannot be
resolved through a series of bilateral agreements. Why? This is not a
crisis between the US and Mexico or China. It is much bigger than
that, because the United States is an open economy that trades with a
large number of countries around the world and runs a deficit with
most of them. In other words, this is an international crisis that has
engulfed all countries in the global trading system.

Globalization has led to the extensive integration of world trade. It
is the result of a politically motivated market liberalization over
the last thirty to forty years. If you pull one thread out of the
fabric—the thread that connects the country with the largest deficit
and the country with the largest surplus—the international and
multilateral trading system could unravel.

Donald Trump believes he can pull out individual threads through a
series of bilateral agreements and thus restore balance in US trade.
He is mistaken.

Two paths to a new global stability

There are two paths that can lead to new global stability. The first
is international, the second national.

The international response to this crisis requires both cooperation
and coordination between all countries to manage their trade relations
and capital flows.

As I said, bilateral solutions will not fix the system. They will
neither reduce surpluses nor correct deficits. To reduce surpluses and
deficits at the same time, a different approach is needed that focuses
on the domestic economies of surplus and deficit countries and allows
for change in those countries.

The United States cannot provide this international response under its
current regime. And cooperation is also difficult for the other heads
of state and government around the world, as they are committed to a
global economic system designed to resist international coordination
by states—a system that prefers to keep governments out of market
relations and grants capital almost unlimited power to move across
borders without friction.

It is crucial that this political and regulatory vacuum be filled
again by states.

The domestic policy path

For a government to take the domestic path, it must understand how
this situation came about.

The emerging ideology of “globalization” encouraged countries to focus
on exports. Poor countries, according to its narrative, could only
“grow” if they promoted and subsidized their export sector.
Commodity-exporting countries increasingly found themselves competing
with other poor countries that exported similar commodities.

As world market prices gradually fell, the currencies of poor
countries lost value against the currencies of OECD
countries—especially against the ever-strong US dollar. Since
low-income countries were denied the right to purchase energy or
medicines in currencies other than the US dollar, a strong dollar
caused persistent real economic problems and failures in those
countries.

In Anglo-American countries, public subsidies for exporters, cheap
credit, and tax breaks favored companies operating in the export
sector. These included the financial institutions that managed trade
financing—Wall Street and the City of London.

Public financial aid and resources enabled excessive saving and
overconsumption in the financial sector and among the super-rich, who,
in the words of economist J. A. Hobson, thus came to possess income
and wealth far beyond “their known needs.”

In contrast, workers received only a small share of what they
produced. This reduced their ability to import and consume what was
produced by the global trading system. The incomes of some workers
were deliberately suppressed.

On the one hand, this led to underconsumption of all goods and
services produced by the global economy and, on the other hand, to
overcapacity, which threw the industrial ecosystem out of balance: the
rich cannot spend – consume – everything they earn. In contrast, the
so-called “99 percent” spend most of what they earn on food, rent,
health, and education. But with their declining real incomes, they
could hardly afford to do so.

So it was by no means the case that society's purchasing power was
chasing too few goods and services, as many mainstream economists
argued. Rather, too many goods and services were chasing shrinking
purchasing power.

For geopolitical and ideological reasons, the United States and
countries such as the United Kingdom lifted most restrictions on
capital transactions in the 1970s and early 1980s. This gave foreign
investors unrestricted access to their financial markets.

Companies in surplus countries did not spend their export earnings on
US products. Instead, they used their capital to buy US financial
assets – government bonds, stocks, derivatives, investment funds, and
so on. Wall Street and the City of London created the necessary
supply.

The powerful US dollar

In the US, the influx of money into the financial markets strengthened
the US dollar, which on the one hand increased the value of financial
assets and made the rich even richer, but on the other hand meant that
US industrial goods were no longer competitive. As a result, factories
closed and jobs were lost – the wage share in the US economy fell.

What can be done to restore balance in the international trade and
financial system? First, the control of trade and capital flows must
be improved. Above all, however, national economies must be realigned:
away from the global system and toward a domestic economy that
increases income in the domestic economy. In Europe in particular,
this requires a departure from austerity policies and increasingly
abstruse “budget rules.”

Second, there must be a move away from hegemonic reserve currencies. A
start could be made with the establishment of a regional clearing
union, as once envisaged by John Maynard Keynes. This regulatory
authority for foreign exchange trading would enable global
coordination and cooperation. In other words, today's global crisis
requires the leadership and foresight of Keynes.

The original version of this translation appeared on Ann Pettifor's blog.

Ann Pettifor is a British-South African economist. A self-described
Keynesian, she is the director of the Policy Research in
Macroeconomics think tank and a fellow of the New Economic Foundation.
________________________________________________________

Globalization without America?

By the editorial team

[This article posted on April 24, 2025 is translated from the German
on the Internet,
http://makroskop.eu/14-2025/globalisierung-ohne-amerika/.]


Dear readers

No, it was not a belated April Fool's joke when Donald Trump announced
the “most extreme trade measures in modern history” (quote from Thomas
Fazi) with his sweeping tariff measures on April 2. In February and
March, the US government had already imposed tariffs of 25 percent on
steel and aluminum imports as well as on car imports.

In addition, according to Trump, tariffs of at least 10 percent were
to apply to all goods from countries outside North America, and as
much as 20 percent for the EU. A week later, on April 9, came the
preliminary U-turn: The US president suspended the previously
announced country-specific “reciprocal” tariffs for 90 days to allow
for bilateral deals with trading partners. Meanwhile, tariffs on
Chinese goods have risen to 145 percent. As things stand now. All
subject to change, of course.

Given the erratic behavior of the US president, it is difficult to
predict whether this will remain the case this time around. This is
not what planning security looks like for companies. The global
economy is in danger of losing momentum. The IMF has assessed the
impact of Trump's tariff policy and lowered its economic forecasts for
most countries. “The global economy is at a critical juncture,” it
says in its latest World Economic Outlook. The outlook is also bleak
for the eurozone and especially for the German economy, which remains
mired in stagnation.

But even the US is unlikely to benefit from the tariff chaos it has
created. The stated goal of bringing production back to the United
States and “restoring American prosperity” is evaporating into the
question posed by US entrepreneur Molson Hart in this issue: whether
this tariff policy means the “end of globalization” or just the end of
America's participation in globalization.

Nevertheless, as much as the free trade so beloved in Brussels is not
the be-all and end-all, tariffs are not inherently evil – provided
they are well thought out, legally sound, and well communicated.
Companies looking to invest can hardly benefit from economic policy
that zigzags back and forth. Nevertheless, the desire to protect one's
own industry and bring sectors back to domestic soil is a legitimate
government goal, especially in light of the upheavals caused by
globalization. This is the view of both Hart and MAKROSKOP authors Ann
Pettifor and Thomas Fazi.
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