Trump’s stupid obsession will unleash pain on America

Perhaps the most striking conclusion of the Organisation for Economic Cooperation and Development’s revisions to its global growth forecasts is that the United States, largely responsible for the downgrades, will be hit harder than most of the rest of the world.

According to the OECD, global growth will slow from the 3.1 per cent generated last year to 2.9 per cent this year and a similar number in 2026.

It is likely that the OECD is underestimating the damage Trump’s trade wars will do to the American economy.Credit: Bloomberg

With a few exceptions (Australia is one), most of the advanced economies will see reduced growth this year and next, with some recoveries in growth rates in 2026.

The US posted growth of 2.8 per cent last year and was expected to grow 2.2 per cent this year when the OECD last updated its forecasts in March. Now that forecast has been downgraded to growth of 1.6 per cent this year and 1.5 per cent next year.

The OECD’s forecasts are likely to prove conservative. Economic forecasts from bodies like the OECD or International Monetary Fund tend to understate outcomes, in both directions, but generally get the trend lines of economies broadly right.

In this instance, with the OECD pointing to US President Donald Trump’s trade policies as the major factor in the weakening of global economic prospects, it is almost certain to have underestimated their impact because it is basing them on where Trump’s tariffs are set today – the 10 per cent universal baseline tariff on all imports to the US and the 30 per cent tariff on imports from China.

With Trump making up tariffs on the run – the doubling of the tariffs on aluminium and steel to 50 per cent last week came out of the blue – and the nature and scale of the so-called “reciprocal” tariffs unknown until next month (assuming they survive the court challenges or are based on different legislative instruments), there’s only downside in the outlook for global trade and growth.

What the OECD numbers do suggest, however, is that America’s trade war on everyone will rebound most significantly on the US, with Canada and Mexico the other major casualties.

Canada, which achieved GDP growth of 1.5 per cent last year, is expected to post growth of only 1 per cent this year and something similar in 2026. Mexico, after also growing its economy 1.5 per ent last year, is expected to slow to 0.4 per cent growth this year before recovering somewhat to a growth rate of 1.1 per cent in 2026.

Australia, which had GDP growth of 1.1 per cent last year, has forecast growth of 1.8 per cent this year and 2.2 per cent in 2026.

Xi Jinping has led a sophisticated response from China to Trump’s tariffs. Credit: AP

The prime target of the US assault on global trade, China, is expected to be affected negatively, but to a significantly lesser extent than the US. Its economy grew 5 per cent last year, is expected to slow to 4.7 per cent growth this year and 4.3 per cent in 2026.

In other words, China is expected to lose about 70 basis points of growth over two years, but the US 130 basis points.

There is uncertainty surrounding what the eventual outcome on tariffs might be, but it is near-certain that the current settings are only a baseline case and that, with Trump determined to implement his tariffs one way or another, the likely outcome will be more damaging to global trade and growth - and to the US and other economies - than the OECD numbers suggest.

There’s also uncertainty relating to retaliatory measures by those countries hit by Trump’s tariffs.

The European Union, which responded to the steel and aluminium tariffs (where the 50 per cent rate cuts in today) with retaliatory tariffs of its own, has a long and lengthening list of prospective US targets for more tariffs if Trump imposes reciprocal tariffs on top of the baseline 10 per cent duties.

China and the US agreed to a pause in their trade confrontation that left the US reducing its tariffs on imports from China from 145 per cent to 30 per cent and China its retaliatory tariffs from 125 per cent to 10 per cent.

More threatening than China’s tariffs, however, are its controls over exports of rare earths and rare earth magnets, where it dominates the global supply chains.

It has effectively shut down almost all exports of the strategic metals, which are essential for the manufacturing of automobiles, aeroplanes, semiconductors, robots, wind turbines and a host of other advanced manufactures, including military hardware.

That, if it continues, will be highly disruptive to global supply chains and highly damaging to advanced economies, most particularly the US economy.

Last month a Ford plant in the US had to cease operations because of a shortage of rare earth magnets. That’s a small preview of what might be to come for US manufacturers if their administration continues its ill-conceived crusade against global trade.

China’s asymmetric response to the Trump tariffs reflects the sophistication of its response. Employing its near-monopoly over rare earths does minimal damage to China’s economy but could bring US advanced manufacturing to a standstill.

It would take years, probably decades, for the US to develop sufficient alternative sources of supply to eliminate its dependence on China for those specialised metals.

The OECD’s forecasts are likely to prove conservative.

Other economies being threatened with punitive reciprocal tariffs unless they reduce trade barriers, remake their tax systems and succumb to Trump’s directives on their social policies will no doubt be looking for asymmetrical responses of their own. The EU, for instance, is eyeing off the big US tech and social media companies.

In normal circumstances, the abrupt slowdown in US growth depicted by the OECD would produce a response from the Federal Reserve Board.

Confronted by such a rapid and significant loss of economic momentum, the Fed would cut interest rates and, if the outlook were deemed significantly dire, restart its quantitative easing program, buying bonds and other securities to suppress market interest rates and pump liquidity and credit into the financial system.

The OECD, however, is forecasting a US inflation rate that will rise from its current level of around 2.3 per cent to 3.9 per cent by the end of this year, before falling back next year as the economy slows. If that were to transpire, the Fed won’t be cutting US rates this year and might well be raising them.

Having been burned by the surge in post-pandemic inflation, which it thought was transient, it won’t risk making the same mistake again, which may well exacerbate the extent of the US slowdown.

The OECD’s forecasts underscore that this remarkably stupid trade war, initiated by a president who doesn’t understand trade and whose policymaking appears uninformed by any serious analysis of the consequences, will do significant damage to the global economy for no near-term economic gain but plenty of economic pain for the economy that has initiated it.

Maybe Trump’s vision of a 20th-century economy with a renaissance in US manufacturing might be effected, although it would take decades to construct the plants that would entail and America would emerge as the world’s high-cost manufacturing base for the low-value goods it now imports, which hardly seems like a compelling economic strategy nor one that is worth the self-inflicted economic pain, uncertainty and risk it will deliver in the meantime.

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