History is demarcated by events. There is little doubt that the tariff tantrums unleashed under Trump 2.0 has rendered the familiar unknown. This is verily the end of globalisation and ushering of uncertainty. To paraphrase the words of Matthew Arnold in Stanzas from the Grande Chartreuse, the global economy is wandering between two worlds, one dead and the other yet to be born.
US President Donald J Trump came to power riding the plank of Make America Great Again. His singular focus has been to leverage the size of the $29-trillion economy to engineer deals to reposition America. In his words, “America has been ripped off. Now it is our turn.”
So how is Trumponomics faring so far? A good reference point to assess progress or regress from—the arrival of policies and its impact—would be January 20. The strength of currency, value of sovereign bonds and performance of markets are credible indicators of performance.
Consider the data points for high-frequency indicators of the US economy’s health. On January 20, the Dollar Index was at 109.35, illuminating American exceptionalism. On April 12, it slid to 99.78. The US dollar is now weaker against the currencies of its major trading partners—the euro and the yen. Now, take stocks. On January 21, the benchmark S&P500 was at 6,049. Eleven weeks later, it is down more than 10 percent at 5,363. The Nasdaq100, an illustrator of US tech prowess, slid nearly 11 percent to 18,690 over the same period.
The precipitous fall in indices reflects the impact of perilous posturing, and the twists and turns of the tariff policy. Tariffs on China, for instance, moved from 54 to 104 to 145 percent in less than a week. Unsurprisingly, the Xi Jinping regime, which retaliated by raising tariffs on US goods to 125 percent, mocked Trump and called his strategy a joke.
Trump believes tariff is the most beautiful word in the dictionary and has made it the centrepiece of America’s engagement with the world. The bizarre notions and math underlying the policy have befuddled trade experts. Consider Lesotho, which Trump declared charges 99 percent on the US, now faces a tariff of 50 percent. The country exports to the US goods worth just over $235 million and imports goods worth barely $2.8 million. How is the tiny nation of 2.3 million people with a per capita income of $1,100 expected to correct the imbalance? By buying more or selling less?
The approach of the tariff policy—targeting friends and foes alike—and its impact rattled markets and market movers. In his annual letter to investors, J P Morgan CEO Jamie Dimon characterised the flaw: “America will be first—but not if it is alone.” Hedge fund Pershing Square’s CEO Bill Ackman likened the approach to an economic nuclear war. Elon Musk took to X to call Peter Navarro, who is credited as the architect of the tariff policy, a moron.
The fears triggering the reactions—which led to a 90-day pause on the new levies—stemmed from macro signals from the money markets. Traditionally, uncertainty triggers a flight to safety. The chosen destination till recently was US Treasury bills, resulting in a stronger dollar. The faith is seen unravelling as yields on 10-year US Treasuries, which inform global flows, yo-yoed from 3.9 percent and 4.5 percent.
The fall in bond prices resulting in higher yields signal a rise in interest rates and the possibility of a recession. The forex markets are abuzz about foreign investors exiting American T-bills and a conspiracy theory of an engineered fall. Meanwhile, the price of gold, usually an indicator of times good and bad, shot up from $2,708 per ounce (28.35 gm) to over $3,236, reflecting global concerns about disruption of growth.
Indicators symbolising the angst in the US are flashing red and amber. Earlier this week, the ISM Purchasing Managers’ Index for services, the sector that accounts for three-fourths of the US GDP, slid to a 9-month low. The Michigan Consumer Sentiments Index plunged from 71-plus to 50.8, propelled by fears of higher prices and unemployment. A University of Michigan survey shows the inflation expectations of American consumers have soared to 6.7 percent, nearly three times the US Federal Reserve target and the highest since 1981. Clearly, the US consumer is shaken by the policy pronouncements and their implications on the wallet.
The tariff policies are upending trust. Across the world, stock indices and currency markets are roiled, inflation expectations are up and growth projections are down. IMF Managing Director Kristalina Georgieva warned this week that US’s tariff measures “represent a significant risk to the global outlook at the time of sluggish growth”.
It is all well to rail against what Navarro calls the “globalist Ricardian orthodoxy”. The fact is, it was the US which erected this orthodoxy as its enterprises exported capital, technology, jobs and goods. Trump wants to rewind the clock, but the global economy is far more complex and interdependent today—for example, the iPhone components’ supply chain is spread over 40 countries. Lessons from history matter: William McKinley’s tariff law of 1890 led to the ‘Panic of 1893’ and a recession; the 1930 Smoot-Hawley law aggravated depression.
It’s true that these are early days—and that aggravates fears. The length of uncertainty will define the depth of global de-growth. The world is stranded between whims and worries, between a gutted system and one being grafted.
Shankkar Aiyar
Author of The Gated Republic, Aadhaar: A Biometric History of India’s 12 Digit Revolution, and Accidental India
(shankkar.aiyar@gmail.com)