Trump wants to close off America. If he succeeds, the global consequences will be catastrophic

The great closing of America is under way. It’s closing in multiple dimensions, but Donald Trump’s tariff decision is a concrete and quantifiable expression of America First.

The country that created the global free market from 1948 is bringing it to an end. Not soberly but vengefully: “For decades, our country has been looted, pillaged, raped and plundered by nations near and far, both friend and foe alike,” as Trump framed his announcement. “Foreign scavengers have torn apart our once-beautiful American dream.”

Donald Trump holds up his chart of “reciprocal tariffs” at the announcement event in Washington.Credit: Getty Images

And not reluctantly but exuberantly: “The operation is over! The patient lived, and is healing,” Trump declared online. The average effective tariff applied to worldwide US imports last year was 2.3 per cent. Under Trump’s plan, it leaps more than tenfold to about 25 per cent, according to the US credit rating agency Fitch.

That’s the highest average in 115 years. Even higher than the infamous 20 per cent Smoot-Hawley tariff of 1930 that aggravated the Great Depression.

All agree that this will wreak dramatic change: “The global economy is fundamentally different today than it was yesterday,” observed Canada’s Prime Minister, Mark Carney, former governor of the Bank of England.

But for better or worse? “The prognosis is that the patient will be far stronger, bigger, better, and more resilient than ever before,” according to Dr Trump, surgeon extraordinaire. Carney, an actual doctor of economics, differed. Trump’s tariffs would “rupture the global economy”, he foreshadowed.

Professor Ross Garnaut: “There will be a very damaging shock to global growth.”Credit: Wayne Taylor

The entire episode would be comically clownish if it weren’t so serious, Trump preening himself on his looks mid-announcement: “Look at my old speeches when I was young, very handsome.” And congratulating himself on his clever vocabulary: “A beautiful term, groceries. It sort of says a bag with different things in it.”

And then, with the big reveal, he exposes the amateurishness of his whole operation by proudly putting tariffs on the penguin populations of uninhabited Antarctic islands, the Australian territories of Heard Island and McDonald Islands.

But investors worldwide aren’t laughing. Although already braced for big Trump tariffs, sharemarkets worldwide sank in dismay at what Macquarie Bank economists called “the biggest trade shock in US history”.

The eminent Australian economist Ross Garnaut has a one-word summary: “Catastrophic”. The system of global trade, which was liberalised in a near-continuous process from 1948 until the COVID pandemic, proved to be a vital part of a wealth creation machine.

Trump and Professor Ross Garnaut don’t agree on tariff policy.Credit: Joe Benke

It didn’t guarantee any outcome for anyone. But, for countries that pursued good policy, the opening of the world economy allowed many poor countries to trade their way to prosperity; the share of world population living below the poverty line fell from 40 per cent in 1990 to 8.7 per cent in 2022.

Japan took full advantage of the world market to catapult itself from postwar poverty into the ranks of the world’s richest by the 1980s; Japan’s success was the origin of Trump’s trade tirades.

He took out full-page ads in major US newspapers in 1987 to argue that “America should stop paying for countries that can afford to defend themselves”. This grievance has festered ever since and now finds expression in his so-called “Liberation Day”.

And the open market also allowed rich nations to get richer. Australia is an outstanding example of an open economy that has prospered under the system.

When the US under Bill Clinton allowed China to enter the World Trade Organisation in 2001, its growth was turbocharged by improved access to the world market. China’s economy today is an astonishing 14 times as big as it was at that threshold moment.

But it was China’s growing dominance – and, by contrast, the stagnation of American middle- and working-class incomes – that pushed the US to the brink.

Trump’s big rhetorical flourish in announcing the tariffs this week was to promise he would “Make America Wealthy Again”. But America hasn’t lacked wealth. Just this week, Forbes magazine published its annual rich list. The number of US billionaires grew from 813 last year to 902 this year, with combined holdings of $6.8 trillion, equivalent to 22 per cent of the entire US economy’s annual output.

It’s the distribution of wealth that’s caused the political eruption known as the MAGA movement. The left-behinds in “flyover” and “rust-belt” America despaired that a broken system could be repaired. They voted for Trump to smash it.

And so he is. Trump is turning the wealth machine off. As the European Commission chief, Ursula von der Leyen, said: “The consequences will be dire for millions of people around the globe.” The poorest will, as usual when things go wrong, suffer the most. But the rich world will suffer too.

“The world is going to go through a difficult time,” Garnaut forecasts. “The consequences will be felt most in the US, but it will be felt all over the world. There will be a very damaging shock to global growth and global productivity growth.

“It’s probably enough to tip the US into recession, and there will be quite strong recessionary impulses from this going out from the US. We will need fiscal policy and monetary policy responses around the world, including in Australia.”

Garnaut’s broad expertise includes trade economics. He was the Bob Hawke economic adviser who wrote Australia’s blueprint for opening its economy to fully participate in China’s boom.

His advice to Canberra and to Martin Place, home of the Reserve Bank? “Our Reserve Bank is behind the game anyway. It already needed to do a fair bit of cutting of interest rates, and now it needs to do more. I think the right response is not to have excessively loose fiscal policy and to have the main expansion in monetary policy.”

Trump is having a “very damaging” effect on Australia and its global interests through five different avenues, Garnaut says. One, by abandoning the climate cause; two, by withdrawing its expertise and its cash from global health initiatives; three, by cancelling its international aid; four, by undermining global security in cutting support to Ukraine, for example; and, finally, by imposing new tariffs.

“Each of these,” says Garnaut, “is very important in itself, but the biggest single blow is on the world trade system.”

Just how bad will it get, and could it produce a global financial crisis? It depends on how other governments respond: “The chances for the rest of the world are best if countries stay open to each other.”

But the EU and Canada threaten to impose retaliatory tariffs on the US, and China is speaking of unspecified “countermeasures”. Trump promises to strike again at any country that retaliates. Escalation of the trade “war” would amplify the pain for all. Garnaut says that Australia’s restrained response, more in sorrow than in anger, is the right approach.

Anthony Albanese is not threatening to retaliate but has announced a five-part plan in response. Four of the five are modest no-regrets programs to help Australian businesses adjust. The fifth is a promised “strategic reserve” of critical minerals. Australia’s rich underground reserves are essential to Trump’s plans to break China’s stranglehold on global supplies.

An Australian government can use such a “reserve” as a potential bargaining chip to persuade Trump to scrap the 10 per cent tariff he has just applied to Australia. But is Trump in a negotiating mood? Or are these punishing tariffs a fait accompli?

President Donald Trump holds a signed executive order during an event to announce new tariffs. Credit: nna\KCampbell

Trump said on Friday (Australian time) that he’s open to foreign governments that can make him a “spectacular” offer. He’s open to deals, in other words. But his top trade official, Peter Navarro, has said the new tariffs would raise about $US600 billion ($960 billion) to $US700 billion a year in US government revenues.

And this goes to the heart of the Trump program. He’s counting on revenues from the tariffs to pay for tax cuts he plans to hand out. Going by his record in his first term, those tax cuts will be concentrated on the wealthiest taxpayers and corporations.

The typical red-hatted MAGA supporter is unlikely to get much benefit from these tax cuts based on the evidence so far. But will suffer from the big tariffs on imports, and from the economic downturn to follow. So the tariff plan responds to the MAGA grievances but without providing a solution.

And the $US600 billion to $US700 billion a year? It’s “not even in the realm of possibility”, says Moody’s chief economist Mark Zandi. “If you get to $US100 billion to $US200 billion, you’ll be pretty lucky.”

Meaning that Trump won’t have much leeway for making deals, even “spectacular” ones. Most of the tariffs, on most countries, will remain.

The Devil’s Dictionary, a classic 1911 lexicon of wit by Ambrose Bierce, gives this definition of friendship: “A ship big enough to carry two in fair weather, but only one in foul.” Trump has declared the global winds to be foul. He’s throwing all America’s friends overboard. As US import prices go up and the economy down, Americans will come to miss us.

Peter Hartcher is political editor.