Donald Trump’s return to the White House seems to have sent jitters across major European capitals, as his second presidency is feared to spark a “global trade war” and deal a “hammer blow” to the decades-old project of globalisation.

Most European Union (EU) officials and economists warn that in addition to disrupting global trade — and especially Chinese exports — through his tariffs, Trump’s return could also deal a death blow to the rules-based global trading order and the World Trade Organisation (WTO).

The reason for their concerns is obvious: Mr Trump’s protectionist policies during his first presidency (2017-2021) mostly singled out Beijing — barring a 25 per cent tariff on Europe’s steel and 10pc on its aluminium imposed by the US in 2018 on “national security concerns” — and when Washington slapped punitive tariffs on imports from China accompanied by unprecedented actions against its tech companies, it didn’t hurt the business interests of Europe and other trading partners of the US even though it brought the rule-based multilateral trade regime under the WTO under heavy strain.

The EU, in fact, actively supported these actions when President Joe Biden continued to pursue this policy and increased some of the Trump tariffs: up to 100pc on electric vehicles, 50pc on solar cells and 25pc on batteries. Even companies using China-made components in their products were covered under the Biden tariffs.

Trump’s policies may have far-reaching negative effects across the globe, especially on emerging markets and countries like Pakistan

This time around, the situation appears to be different. In the past, Mr Trump’s tariffs targeted individual countries and certain industries. While much of Trump’s rhetoric is still aimed at China, it does not end there. Europe’s export-oriented countries, such as Germany and France, are also heavily exposed to his plans to tighten trade restrictions with the US allies.

EU officials are already hinting at the prospect of tit-for-tat trade measures if the president-elect carries through his plans for his proposed tariffs: 10pc to 20pc for all imports to the US from outside China, where a 60pc levy could be imposed. The proposal would raise duties to levels not seen since the Great Depression, according to the Western media.

Global growth

That said, the global economy will face potentially harmful shocks to growth and inflation if Mr Trump implements the kind of import tariffs he threatened during his campaign.

“If a jurisdiction as important as the US imposes tariffs of 60pc to any other important jurisdictions — let’s speak about China — I can assure you that the direct effects and the indirect effects and the deviations of commerce will be huge,” an EU official was quoted by British media.

Swiss bank UBS has estimated that a 60pc tariff on Chinese goods and a 10pc universal tariff would reduce global economic growth by one percentage point in 2026. A study by analysts at the London School of Economics and Political Science has predicted a 0.68pc reduction in China’s GDP and a 0.11pc reduction in the EU’s GDP.

In a note released prior to the election day, the Kiel Institute for the World Economy expresses, “In the most severe scenario, a breakdown of the WTO or fragmentation into competing geopolitical blocs would lead to profound economic losses. EU GDP could fall by up to 0.5pc, with Germany’s output declining by 3.2pc, while China would bear the greatest losses. Given the high stakes, the EU’s priority must be to uphold the global trade system, as the costs of fragmentation far exceed those of a bilateral dispute with the US.”

Emerging markets

The US presidential race has been one of the most chaotic ones in recent times, with election day voting beginning amid fears of violence and unrest, reports focusing on boarded-up businesses, increased police patrols and metal fences erected around the White House and Capitol Hill. This chaos is going to be reflected in Mr Trump’s protectionist policies as well.

Apart from making their exports to the US more expensive and forcing American consumers to spend less on imported goods, President Trump’s economic plans to slash taxes and boost spending threaten to harm emerging markets and developing economies like Pakistan.

The US dollar is likely to strengthen as higher inflation is expected to be triggered by the proposed universal tariffs on imports, tax cuts, and expansionary fiscal policy, which may prompt the Federal Reserve to raise interest rates. When the dollar rises, other countries see their currencies depreciate, raising the cost of imports as almost all currencies are valued against the US dollar. So, too, are commodities.

A stronger dollar also makes it more burdensome for governments to repay their dollar-denominated debt. For countries relying on dollar funding, such a policy mix will make borrowing more expensive, dealing a double blow on top of the lost exports. A more expensive dollar will make US goods more costly for others in general. It will also make global commodities that are priced in dollars, like oil, more expensive for buyers paying in other currencies.

The second Trump presidency may make things more difficult for the rest of the world, especially for economies like Pakistan with balance of payment issues; it will only accentuate the past US policies that have little room for a multilateral rule-based trade regime when faced with competition from partners and rivals alike.

Published in Dawn, The Business and Finance Weekly, November 11th, 2024