Bringing the Penguins to the Negotiating Table
Tariffs, Populism, and the Fracturing of the Global Economic Order
Karim Pakravan has been a regular contributor to econVue since 2016, focusing on global trade and international finance.
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I. The Populist War on the Rules-Based System
President Trump’s systematic dismantling of the global trade system entered a new phase on April 2, aka “Liberation Day”, when he unveiled his proposed reciprocal tariff on all U.S. trading partners. Among those targeted by these tariffs is an island close to the Antarctic populated only by penguins, for good measure! These tariffs were derived from a crude formula (country by country ratio of imports to bilateral trade deficit) that had little to do with reciprocity or economic reality.
The unveiling of the Liberation Day measures quickly translated to a market panic, leading to a global stock market slump reminiscent of the 1987 stock market crash and turmoil on the bond markets, reviving the fears of stagflation. Major investment banks have upped the probability of a recession to 60% (Goldman Sachs) and even 79% (by JP Morgan). Market uncertainty was heightened by the typical Trump chaos that accompanied the introduction of these tariffs, with members of the Trump administration and the President himself issuing slews of contradictory messages.
Are the tariffs here to stay? Were they designed as opening gambits to trade negotiations, or were they designed to revive America’s manufacturing base? Or perhaps they were designed to raise revenue to finance personal and corporate tax cuts.
The tariffs were supposed to be implemented on April 9. As of this writing, Trump has backed off, delaying the implementation of reciprocal tariffs by 90 days (with the exception of China, which now will enjoy a 125% levy). Considerable uncertainty remains, as we do not know what moves to expect after the end of the 90-day reprieve.
These trade policies represent the apotheosis of Trump’s forty-year crusade against the international trade system. Trump’s promotion of crude mercantilism sees global economic relations as a zero-sum game, reinforced by the perception that America has been victimized systematically by the rest of the world.
What is Mercantilism? ⧉
Mercantilism is an economic doctrine that flourished in early modern Europe. It holds that national prosperity comes from maximizing exports, minimizing imports, and accumulating gold or silver reserves.
-Mercantilist governments used tariffs, colonial monopolies, and state intervention to maintain trade surpluses. The core belief is zero-sum economics: one nation’s gain is another’s loss.
-Today, the term is often used to describe protectionist or nationalist trade policies that emphasize bilateral trade balances over multilateral cooperation or economic efficiency.Trump would not have been able to garner the political support for these actions without the populist revolt in the United States and other major western countries against globalization. This revolt is the result of several decades of deindustrialization in the U.S. and other major economies, and the offshoring of manufacturing from these economies to lower cost locations, in particular China. However, globalization and free trade are not the only culprit in the loss of manufacturing in the advanced economies: technology and the neglect of investment in infrastructure and human capital are equally to blame.
The question to ask is whether tariffs are the solution. In the mid-20th century, tariffs were justified by some economists to protect so-called infant industries to allow them to develop and become competitive. However, such theories were soon discredited. Furthermore, we do not have any infant industries in the United States that would need protection. Moreover, global trade has been carried on the basis of comparative advantage, with each country focusing on exporting goods and services where they have a comparative cost advantage.
For example, the U.S. exports agricultural products, high tech and entertainment, while Indonesia exports sneakers and mining products. There is no precedent for tariff protection across every single industry. Tariffs could also be used to address unfair trade practices; however, such issues are usually addressed through trade negotiations. We should also note that many countries, such as Germany, have remained industrial powerhouses without tariff protection, although German exports did benefit from the European currency union.
What Is Comparative Advantage? ⧉
First introduced by David Ricardo in 1817, comparative advantage is the idea that countries should specialize in producing goods where they have a lower opportunity cost, even if they are more efficient at producing everything.
This theory underpins modern free trade, arguing that all trading partners can benefit, even when one is more productive overall.
For example, the U.S. may excel in both agriculture and aerospace, but it might gain more by specializing in aerospace and importing food from a country like Brazil.Regardless of the short and medium term impact of the new tariffs on financial markets, they are the first steps in the Trump administration’s determination to destroy the global rules-based trade and financial architecture that has underpinned the global system for the past 80 years. However, contrary to the beliefs of President Trump and his isolationist advisors and followers, the collapse of the present system will end up weakening and isolating the United States.
II. Why the Current System Still Matters
First, let us address the victimhood thesis promoted by Trump. Contrary to his rhetoric, the system of global alliances and rules-based global trade and financial system has been an essential pillar of the prosperity and influence of the United States in the past decades.
The U.S. is the progenitor of the Post WWII Global Financial Architecture: As the largest shareholder in the Bretton-Woods multilateral financial institutions (the IMF and the World Bank), the United States has been able to have significant influence in the shaping of the global financial architecture.
Despite claims to the contrary, globalization has been good for the United States. Between 1980 and 2024, total exports of goods and services have increased by a factor of 11, goods exports by a factor of 9.29 and services exports by a factor of 23. This has translated in an annual average growth of 6.5% for total exports, considerably higher than output growth. Also, major U.S. corporations and banks have been major beneficiaries of globalization
U.S. military power is an instrument of U.S. power: President Trump has repeatedly accused the NATO allies of freeloading on the U.S by putting an excessive burden on America in terms of military expenditures. Successive U.S. presidents, staring in the 1980s, have pushed its NATO allies to increase their military budgets to 2% of GDP or more, and there has been progress in this regard. There is considerable justification for the U.S. position. Over the past decades, the European allies have historically focused on the butter, while the U.S. has focused on the guns in the guns-vs butter equation.
America’s military might has also been a key pillar of its global strategic and economic power. While U.S. military power has kept the sea lanes open for all, it has also projected U.S. political and strategic power (very much in the way the Royal Navy did in the heyday of British imperialism) indirectly buttressing America’s economic might in the global markets. Moreover, weapon system purchases by NATO allies also strengthened America’s massive weapons industry, with significant technological and scale advantages.
The Dollar King: The main source of American exceptionalism has been the U.S. dollar’s central role. Ever since the Bretton Woods international system was set up in 1944, the dollar has been the main global reserve currency and has remained at the center of the global financial system. Most of the trade and investment flows worldwide are denominated in dollars, as are major commodities. U.S. sovereign bonds are considered the world’s safest assets, and for decades have represented a haven for international investors.
American banks dominate global financial markets. In addition, the U.S. controls the physical infrastructure of the global payments and settlement systems—all fiber optic cables transit through the United States and the U.S. government essentially calls the shots on SWIFT, the global financial settlement system.
Finally, the “exorbitant privilege” of having the main international currency has allowed the U.S. to run chronic balance of payments and fiscal deficits, financed by foreign financial flows to the U.S. capital market—essentially a no-limit credit card for the country. By one estimate, the flow of foreign capital to the U.S. government bond markets has saved the U.S. government $100 billion a year in interest costs.
III. The Shift Toward a Multipolar World
At the same time, the global financial and trade architecture has evolved over the past two decades. We live in a multipolar world, with China becoming the world’s second largest economy and a dominant technology, manufacturing, trade and finance platform.
Major middle powers such as Mexico, India, Brazil and South Africa are creating their own space. New Global South-centered institutions and alliances are challenging the Global North-centered global financial architecture. Furthermore, The neo-liberal/globalization economic paradigm that dominated economic thinking and policymaking after the financial crisis of 2008 is increasingly under attack from both the left and the right.
In this context, the Trump administration’s economic isolationism and focus on tariffs is inherently incoherent. On one hand, the U.S. is bent on destroying a global system that has been a pillar of its prosperity and global influence. On the other, it is seeking to bully its trading partners into submission. Given the changes outlined above, the result of these policies is likely to undermine the U.S. position and leave it increasingly isolated:
Undoing the rules-based system and weaponizing trade and finance will strengthen rival organizations such as the BRICS, moving a larger share of trade and financial flows out of the dollar sphere to alternative arrangements
The main beneficiary of the new paradigm is likely to be China, which can offer both the promise of a new rules-based system and the financial infrastructure to circumvent the United States
America’s traditional allies--the European Union, other European countries, Canada, Australia, Japan and South Korea—are likely to expand trade relations with each other, as well as with China through free trade agreements and other mechanisms
Middle powers will seek closer bilateral and multilateral ties to each other, as well as to the EU and China
While the dollar is likely to remain the major international currency, the shift away from the U.S. currency will accelerate. Furthermore, Trump’s policies are likely to undermine the haven status of the United States.
Recent proposals by Treasury Secretary Bessent to force holders of U.S. sovereign bonds to exchange them for 100-year issuances, as well as musings by Trump about defaulting on government debt have not helped.
There are indications that the next targets of the Trump administration will be multilateral financial institutions such as the IMF and the World Bank. Efforts to defund or marginalize these institutions will only weaken the global financial system and make it more vulnerable to shocks.
An important consideration is the impact of Trump’s policies on U.S. soft power. Over past decades, America had created a web of alliances and partnerships. Allies have generally followed the U.S. lead and provided economic, military and diplomatic support over the years. The wanton destruction of these alliances and the callous treatment of allies has already irremediably undermined U.S. soft power, and is likely to continue to do so, given current trends.
A History of Trade Wars
Conclusion
The chaotic actions of the first twelve weeks of the Trump administration, and what appear to be the first shots in a trade war, reflect an approach to trade policy that has been widely criticized as economically inconsistent or uninformed by mainstream economists such as former Treasury Secretary Larry Summers.
The Hobbesian global order envisaged by Trump and his populist base is likely to lead to further global fragmentation, shifting the global balance of power to China, resulting in a poorer and more isolated United States.
Historically, trade wars do not end well. Will the U.S. recalibrate its role in the global order—or continue down a path of fragmentation?
Karim Pakravan
Karim Pakravan is an academic, global finance specialist, and consultant in the fields of emerging markets, international finance, monetary policy, and banking regulation.
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