New world order: Trump’s tariff attack sparks global recession fears

Washington: In February, when the Australian embassy in Washington hosted a superannuation summit that doubled as a last-minute plea to be exempted from tariffs on steel and aluminium, US Commerce Secretary Howard Lutnick was the guest of honour at an off-the-record dinner.

His remarks that night shocked many of the Australian guests; not least when he spoke of how he got to know Donald Trump decades ago on the New York social scene, where they would attend the same parties and go out afterwards to “chase the same girls”.

US President Donald Trump, left, and Howard Lutnick, US commerce secretary last month.Credit: Bloomberg

Lutnick, a billionaire finance tycoon, also raised eyebrows with his fawning portrayal of Trump as the smartest guy in the room, the grand chess master out to remake the world through tariffs and US energy production and, in doing so, weaken America’s adversaries China and Russia.

That night, the Australians left with no illusions about the new sheriffs in town. And this week, Trump’s vision for a new economic order was unleashed on the world, with sweeping tariffs imposed on nearly every US trading partner in what the president called a “declaration of economic independence”.

The occasion was full of pomp and ceremony. Trump entered the Rose Garden as the marine band played Hail to the Chief, and spoke in front of nine giant US flags hanging along the West Wing patio. The crowd was stacked with guests in hard hats and fluoro vests; steelworkers, auto workers and manufacturers whom Trump portrayed as the victims of foreign trade.

“For decades our country has been looted, pillaged, raped and plundered by nations near and far, both friend and foe alike,” he said. “They really suffered gravely. They watched in anguish as foreign leaders have stolen our jobs, foreign cheaters have ransacked our factories, and foreign scavengers have torn apart our once-beautiful American dream.”

Trump’s full-throated attack on globalisation, and the tariffs he duly imposed, mark the US’s departure from a global trading system it was instrumental in establishing. Free trade agreements, including a 20-year-old deal with Australia, were effectively ripped up on the spot. Prime Minister Anthony Albanese called it “unilateral action … against every nation in the world”.

Markets made their verdict clear, with the NASDAQ dropping 6 per cent – its biggest one-day fall since the pandemic. The index is down more than 14 per cent since January 1. Global stock markets also tumbled.

Meanwhile, the Chicago Board Options Exchange Volatility Index (VIX) - a popular measure of expected market volatility often called “the fear gauge” – soared 40 per cent in a day and was up 57 per cent over the past five days. The price of gold has risen 8 per cent in the past month.

Now the question is how the world will react. Will institutions like the World Trade Organisation (WTO) hold, or will they be rendered meaningless? How will Beijing retaliate to Trump’s “bullying”? Will it be fundamentally weakened? Will prices rise in the US and could it tip the world’s largest economy into recession, followed by others?

US President Donald Trump announces new tariffs in the Rose Garden alongside Commerce Secretary Howard Lutnick.Credit: AP

“This is a game changer, not only for the US economy but for the global economy,” said Olu Sonola, head of US economic research at Fitch Ratings. “Many countries will likely end up in a recession. You can throw most forecasts out the door, if this tariff rate stays on for an extended period of time.”

It was difficult to overstate how consequential the “Liberation Day” tariffs would be, said Kelly Ann Shaw, a senior trade and economics adviser to Trump in his first term. “This is the single biggest trade action of our lifetime,” she told a Brookings Institution event in Washington.

Shaw, now a partner at law firm Hogan Lovells, said it was likely the tariff rates were an “opening offer” from the Trump administration, not the final word. “I do think that these tariff rates will shift over time. But this is huge. And this is a pretty seismic and significant shift in the way that we trade with every country on earth.”

Trading favours

Trump, routinely described by fawning advisers and allies as “the world’s greatest dealmaker”, is famously transactional. Deals are always possible, exemptions are always on the table, as are further crackdowns.

Doing the rounds on US television on Friday AEDT, Lutnick indicated there was room to move on tariffs, but only after countries “changed their ways”. This did not mean negotiating, he said; the US wanted to see concrete action first. “Let’s see what they do,” he told CNN. “Talking is nonsense.”

In the Rose Garden, the president said he expected to field angry calls from world leaders. On board Air Force One the next day, he said negotiation was possible if the country offered something “phenomenal” in return. (China could get a degree of tariff relief for allowing the sale of TikTok, he suggested.)

Shaw said she thought the 10 per cent baseline tariff – the one applied to Australia – was more likely to stick than the various higher tariffs applied to countries such as Japan, India, South Korea, Israel and Vietnam, as well as the European Union.

Trump bills the tariffs as “reciprocal” – based on what other countries charge the US in tariffs and on non-tariff trade barriers. At the announcement, Trump and Lutnick displayed the rates on big laminated cardboard charts.

But as people realised afterwards, the rates were not reciprocal at all. In fact, the “tariffs charged to the USA” was a direct expression of the US’s trade imbalance with that country. They simply divided the US trade deficit with each country by that country’s exports to the US, arriving at a percentage.

A seemingly complex formula posted on the website of the US Trade Representative did not substantially alter the equation. The trade office justified its method by saying it “assumed” all persistent trade imbalances were due to tariffs or non-tariff trade barriers.

Mary Lovely, a senior fellow at the Peterson Institute for International Economics, said the calculations were deeply misleading. “I think the world ‘reciprocal’ can now be laid to rest. It’s a complete misnomer,” she told the Brookings event.

“As a technical economist, I can tell you there’s really no methodology there ... It’s like going to your doctor, finding out you have cancer and the basis for your medication is your weight divided by your age.”

Bizarre inclusions – such as a 10 per cent tariff on the uninhabited Heard and McDonald Islands, and a 29 per cent tariff on Norfolk Island – only added to the sense these tariffs were lifted from a spreadsheet and not really thought through.

The fact the tariffs are not actually reciprocal makes it harder for countries to identify what they might offer in return for a reprieve. But Australia is counting on the administration’s desire for rare earth minerals to swing a potential deal down the track.

“We’ve got the whole periodic table, just about, in this country. That’s a good thing,” Albanese said, confirming the government would establish a strategic reserve of critical minerals if re-elected. Opposition Leader Peter Dutton also says minerals must play a central role in striking a deal, and argues only he can do it.

The world reacts

From afar, Trump has dominated the start of the election campaign. Both parties criticised him, with Albanese calling the tariffs “totally unwarranted” and not the act of a friend. Dutton accused the president of disrespecting Australia’s “special relationship” with the US, which included fighting together in every major war for a century.

French President Emmanuel Macron, centre, his Prime Minister Francois Bayrou, left, and Presidency General Secretary Alexis Kohler meet with representatives of the sectors affected by the new Trump tariffs at the Elysee Palace in Paris. Credit: AP

Their reaction was shared. French President Emmanuel Macron called for “collective solidarity” and for European businesses to pause new investments in the US. European Commission President Ursula von der Leyen denounced the tariffs as a major blow to the world economy, but held fire on retaliation.

US Treasury Secretary Scott Bessent warned in a CNN interview: “If you retaliate, that’s how you get escalation.” So far, most countries have followed that path, not wanting to push the button on a trade war.

Morever, leaders who were already grappling with a US that has thumbed its nose at the United Nations and the World Health Organisation are now reassessing their own relationships with Washington and their role in a liberal world order that Trump has partially vacated.

“We believe in international co-operation,” said Canadian Prime Minister Mark Carney, a transplant from the world of central banking who is also in an election campaign. “We believe in the free and open exchange of goods, services and ideas. If the United States no longer wants to lead, Canada will.”

Trade economists are divided about where the rules-based order now stands. At the Brookings Institution on Thursday, Shaw said the WTO had been on life support for 25 years and was effectively a non-entity already.

Lovely said the WTO had serious problems but wasn’t yet dead. “The problem is it’s rudderless,” she said. “The US was the architect and essential partner. Now the US is removing itself, not officially but defacto.”

Lovely argued that despite the US’s enormous market power, it was unlikely that countries would drastically restructure their economies to please it when there would be a new president in 3½ years.

More likely, they would band together and bolster co-operative agreements that excluded the US, such as the Trans-Pacific Partnership of which Australia is a member. Trump withdrew from that agreement upon taking office in his first term, although the US had never formally ratified it in the first place.

Steven Hamilton, a former Australian treasury official, now assistant economics professor in Washington, said Trump’s tariffs on friendly nations such as Vietnam, Cambodia, South Korea and Japan were especially counter-productive.

“Trump has driven his friends into the arms of his enemies at a time when you’re trying to peel them away from China,” he said. “Trump had taken US tariff rates back to the levels of the 19th century, and he’ll take the US economy back to the 19th century with him.”

The war at home

There is also no guarantee Trump’s new world order will be dismantled by his successor, whether they are a Democrat or Republican. Joe Biden kept many of the tariffs Trump introduced in his first term, especially on China. And Democrats, slowly rebuilding from their defeat in November, are under increasing pressure to find answers for Americans’ economic dissatisfaction, even though the US economy has been performing well.

Trump’s contention that the world trade system screwed over the US found plenty of support on the campaign trail. As he reminded the crowd in the Rose Garden, he won all seven swing states, including the rust belt states of Michigan, Wisconsin and Pennsylvania, where car making and manufacturing has dwindled in the era of globalised commerce.

“Never forget, every prediction our opponents made about trade for the last 30 years has been proven totally wrong,” Trump said.

But now that he is in power, Trump must deliver results, including keeping a lid on inflation, another grievance on which he campaigned vigorously, and avoiding recession. Lutnick has said a recession would be “worth it” to restructure the US economy, while Trump plays it down but admits there could be bumps. The White House stresses the tariffs must be seen in context of the administration’s broader economic policies.

Economists are generally much more pessimistic. “This has to be one of the biggest unforced economic policy errors in US history,” said David Beckworth, a senior research fellow at George Mason University’s Mercatus Centre and a former US Treasury economist, in a post on X.

Scott Lincicome from the Cato Institute, a libertarian think tank in Washington, said Trump’s tariffs would increase US import taxes to levels not seen since the Smoot-Hawley Tariff Act of 1930, “which incited a global trade war and deepened the Great Depression”.

“Trump’s risible rhetoric about the economic power of tariffs is, like his trade strategy, detached from reality,” Lincicome said. “The only thing these tariffs will ‘liberate’ is money from Americans’ wallets.”

There is also a cloud hanging over the legal mechanism Trump is using to impose these tariffs, which would typically be a matter for Congress. Instead, Trump invoked a national emergency on trade deficits – just as he called an emergency on fentanyl to justify earlier tariffs on Canada and Mexico.

This week, four Senate Republicans voted with Democrats to back a measure that would rescind Trump’s emergency declaration for Canada – though it is unlikely to pass the House of Representatives. One of the Democrats, Senator Tim Kaine of Virginia, said it was likely they would pursue a similar bill to block the emergency declaration underpinning this week’s tariffs.

The Democrats’ Senate leader Chuck Schumer said the tariffs were far worse than he predicted. “It was the largest tax hike on families since World War II,” he said. “Yesterday was not liberation day, it was tax day.”

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