My most recent Substack is now a little old but as salient as when written. Labour backbenchers were doing their job but have exposed the government’s lack of strategy.
Three courageous things liberals should do
In my previous Substack I suggested that the demographic crunch was the dominant issue of our time (leaving aside world security…). I bewailed a lack of courage amongst our politicians. What if they did have courage. My next Substack explores.
Demography, not productivity, is the issue of our time
My latest Substack past, here, has seen more engagement than anything I have posted recently. It’s impossible to guess what will evince a reaction, and what a yawn!
These theme may be a familiar one to my regular readers, but I seem to have presented it in a more engaging way.
How to fix public services
My latest Substack post is here
I regard this topic as central to any successful progress in the political economy. But it requires a rethinking of what is required across departmental horizons – which reminds me of highly successful trends in business management in the 1990s.
Labour’s immigration policy
Here is my latest Substack published last week. The government pleases nobody as it confronts one of the central themes of British politics.
In Britain the anti-establishment tide rises
My latest piece published on Substack is here.
It covers the British political landscape following last week’s local and other elections.
Is Trump’s Ukraine Plan too easy on Russia?
Here is my latest thinking on this subject, posted on Substack.
My answer to that question in the title is no – which is why Russia is unlikely to accept it.
I will publicise future blogs here through a link to my Substack account, which I find easier to use.
Matthew
Liberation Day 3: could Trump’s term end early?
I don’t really like spending time on other countries’ politics. Domestic politics in Britain is interesting enough. Next week we have local elections and a by-election, and these will be highly significant – but I won’t comment until the results (all of them) are in, as I have no special knowledge or insight to impart beforehand. But current American politics is compelling and I had planned to do a third post following President Donald Trump’s Liberation Day tariff announcement, and so I am following that through, having returned from a lovely Easter break in Provence.
Immediately following Liberation Day, I sensed rout in the Trump administration, given the plan’s obvious insanity, and Mr Trump’s initial doubling-down. That made me think that he could be ousted before his term was up. The reversals he has made since have not shown the Trump regime in a good light, but they have defused the political danger that I sensed then. A policy rout may be occurring, but not a political one – Trump remains safe. Still it did get me thinking about what it would take to end his term early. There seem to be three ways: death in office; 25th Amendment; or impeachment. We can rule out resignation, except inasmuch as it might arise from the the drivers for 25th Amendment or impeachment. Being President is the ultimate self-affirmation for Mr Trump, and the status it confers goes to the core of his being. If seeing life beyond the presidency was beyond Joe Biden in 2024, it will be beyond Mr Trump ever. And he’s always been tenacious.
So death first. He is nearly 79 and so more susceptible to death from natural causes than most of the human race. But he doesn’t drink, smoke or over-work. Regular golf gives him moderate exercise. He’s not a healthy eater, and his obsession with media coverage isn’t especially healthy, but he doesn’t look unhealthy. He seems to be enjoying himself. So there’s a risk, but not an especially big one. Assassination is a possibility, but his security is very tight. And, Iran and some Arab nations excepted, most of the world’s unpleasant regimes probably want him in place for as long as possible. This looks even less of a risk. It is possible that the chaos of his style of government could compromise the security side of his administration – but my guess is that this is the one aspect that won’t be badly affected. So let’s put all that to one side.
What about the 25th Amendment, which provides for the Vice President to take over, temporarily or permanently, in the event of incapacity? On the assumption that Mr Trump would never admit incapacity himself, this would have to arise from a coup, by getting enough of the right people to certify him as incapable. That coup would in practice have to be led by the Vice President, currently JD Vance (and there is little risk of his premature departure). He is ruthless and ambitious enough, but he would need to mobilise the Trump base to ensure his re-election. For that to happen Mr Trump’s incapacity would have to be so obvious that even most of that base could be persuaded by it. That would require a significant change to his physical or mental health. See above.
Which leaves impeachment. For this you need a cause – “treason, bribery or other high crimes or misdemeanours”. That’s the easy bit; Mr Trump’s disregard of legal niceties and eye for personal enrichment will offer lots of opportunities. Presidential immunity, extended by the Supreme Court last year, doesn’t apply; the presence of the impeachment process was one reason that immunity exists. The bar isn’t high: remember that Bill Clinton’s affair with an intern was enough. The Supreme Court has regarded impeachment as primarily a political process, so it wouldn’t get too involved in this. If it’s good enough for Congress, it’s good enough for them. A simple majority in House of Representatives is enough to set things off (which happened twice in Mr Trump’s first term), but it requires two-thirds of the Senate to remove him, following a trial. That has never happened.
The Republican majority in the lower house is thin, and could disappear even before the mid-term elections in 2026, after which a Democrat majority is expected. But the upper house threshold looks unattainable in pure party political terms, although I have read a couple of comments suggesting that a Republican rout in 2026 could get that far. But the Senate elects by thirds, so that is surely out of reach. And surely if it looked like a possibility, the Republicans would be breaking ranks. In practice successful impeachment would require a substantial Republican rebellion, and we wouldn’t have to wait for the mid-terms. What could cause that?
Any idea that such a rebellion could occur on matters of ethics or principle can be discarded; if it couldn’t happen after the Insurrection of January 2021, it never will. A sense of impending political doom amongst Republican lawmakers would be needed to overcome their fear of being ousted by Mr Trump’s base. Mr Trump’s election was based, to over-simplify, on a fanatical core vote (“the base”), and a substantial number of floating voters who were persuaded that since the economy went relatively well in Mr Trump’s first term, it would do so again in his second. Many others were persuaded by frustration with the Biden presidency and false reassurances from the Trump campaign. There were even significant numbers of Arabs campaigning for Trump because of Biden’s support for Israel. I wonder how they are feeling now. These floating voters are being systematically driven off; doubtless this includes many donors to the Trump cause too. The question is how much this haemorrhage will scare Republican congressmen.
I have no special insight on that I’m afraid. My sense is that things have to get really bad before the ice starts to break. The closest thing I can think of is the early years of Margaret Thatcher in 1979 to 1982. She imposed a new, harsh economic regime, and unemployment shot up, while inflation took its time to reduce; liberal elite types were up in arms as she bulldozed polite norms. Her popularity sank drastically, but the party remained loyal; she won a landslide in 1983, though largely because the opposition was divided. America’s political system is very different from the British one then – but in ways that made Mrs Thatcher less secure. She had a loyal base and that was enough. That’s my guess for this time too. It will take more than a recession for any serious breaking of Republican ranks.
But what about the base? If cracks form there things could start to move very quickly. At present it looks as solid as ever. They seem to care more about inflicting pain on the hated liberal elites than about bringing success to America – and on that score Mr Trump is doing well, exceeding expectations even. What will it take to shake them? I don’t know – though we should remember that this base is not as monolithic as our mental picture usually makes them. Elements of it could start to flake off before the hard core does. Still, I think it will take a fair bit more time before any doubt might creep in – another year at least.
One reason for thinking that Mr Trump can head off serious danger, even as the economy does badly, and other bits of the state start to fail, is that his own political instincts are so strong. He has an especially strong bond with his base. He knows what to say so that they are angry at anybody else but him. He is also able to convey the idea that any criticism of him is also a criticism of them. And he makes policy adjustments when things get too hot. These instincts were on display in the weeks after Liberation Day. He is no ideologue – unlike Mrs Thatcher.
So when assessing whether Mr Trump may be at risk, don’t look at economic performance, or popularity ratings – look for signs that core loyalists are dropping out or breaking ranks. By this I don’t mean people inside or close to the administration itself – as Mr Trump’s management method is bound to cause a steady turnover of personnel here. I mean people who aren’t directly trying to influence policy or personnel – as close as you can get to the actual core voters. Evidence of this might show up in disaffection in the House of Representatives – these are likely to the first victims of a Trump backlash.
A couple of other things are worth thinking about. If Mr Trump is removed then he is replaced by the Vice President. Mr Vance is more coherent and rational than Mr Trump – but he has some extreme views. He is very much an isolationist in terms of world politics, and he has even less respect for the rule of law. Replacing Mr Trump with him is not an inviting prospect, and that could cause opponents to hesitate. It is possible that he could be impeached as well, but that is much harder to do in coordination.
A further point is that the Trump administration might start to corrupt the electoral system to secure his Republican acolytes. One reason that I thought that Liberation Day might put him in danger is that he seemed to be moving too early – before any institutional consolidation of his power had taken place. Perhaps I’m wrong, but I am less worried about this now. Mr Trump has too much going on, and he’s not motivated to make life easier for his supporters – he’s the only person that matters to him. And the American system may be easy to corrupt at the edges (with strategic political appointees) but not so much at scale. The anti-Republican backlash is liable to be too big to stall with such tactics. Also he won’t be facing the electors again. His talk of a third term is more of a ploy to stop talk of succession, which would take the attention away from him and turn him into a lame duck, than it is a serious bid.
For now, Mr Trump has little to fear. But if there is danger it would be as Ernest Hemingway described bankruptcy: “gradually and then suddenly.”
First published on 24 April 2025 on Substack
Liberation Day 2: American turmoil
Trying to write a considered commentary on events in America is a hazardous business. Things will change even as you write. In the middle of preparing this article President Donald Trump executed a screeching handbrake turn on his tariff policy, having paused the higher tariffs for 90 days. This leaves it as a universal 10% tariff, with massive mutual tariffs remaining with China. Stock and bond prices bounced back sharply with a huge sigh of relief. The political pressure on Mr Trump evaporated. But the dust hasn’t settled, and on any other day the remaining tariffs would have constituted a major escalation; bond market troubles may well be more deeply sourced; questions remain over the direction of tariffs in future. Disaster still beckons.
The economist Paul Krugman, whose Substack I recommend, warns against the “sanewashing” of Mr Trump’s policies – the projection of a rational strategy when none is there. This will lead to disappointment. There is not a coherent strategy behind his tariff policy – it has conflicting goals, for a start – but it flows from strongly-held beliefs, and some of his advisers have a more coherent take on it. The most important of these is Peter Navarro, who wrote an article for the Financial Times recently; I would recommend reading it if you want an insight into the administration’s outlook.
Mr Navarro presents a long list of grievances: of unfair trading practices from America’s trading partners, which are leading to a hollowing out of the United States, and a system that is tilted against it. That has led to a substantial overall deficit, and huge individual deficits with many countries. Europe bans America’s chlorinated chicken; China manipulates its currency; Vietnam acts as a conduit for Chines goods; and so on. The “reciprocal tariffs” – now in suspended animation – are a quantification of these trade barriers; he does not explain that they are simply half the ratio of trade deficits to imports, subject to a minimum of 10%. This picks up on two ideas explained in my previous post. First is the “victim narrative” of trade deficits: domestic production has been suppressed by unfair competition, meaning that it cannot fulfil domestic demand, which is in turn sustained by capital transfers from abroad. These transfers are being used to buy up American assets, ceding control to overseas interests. The second idea he picks up on is that fair trade implies that there should be no deficit at at all between countries; any imbalance is therefore evidence of trade distortion – and so as the proposed tariff is proportional to the deficit – the fewer the distortions the lower the tariff. Lost in that is the fact that 10% is still a high tariff by current international standards, and that it applies even to countries with whom America is in surplus. Mr Navarro shows that there is enough evidence for his narrative out there if you really want to believe it. I don’t know enough about the man to understand why this is – just that he has held these views for a long time. Other narratives and supporting evidence is available. After all, if America is being ripped off, why does it have the most successful economy in the world?
Mr Trump’s thinking is broadly consistent with this, though without its intellectual gymnastics. His view is more akin the idea of Mercantilism. This idea was developed by the 17th-Century French statesman Jean-Baptiste Colbert, who was first minister to Louis XIV. Colbert was a brilliant administrator, and his ideas set the tone for European statecraft for a century. He suggested that trade was about maximising exports and minimising imports so that the country would accumulate wealth, which at the time could be equated to “treasure”, the banking system being pretty crude. This was the set of ideas that were unpicked by Adam Smith and David Riccardo more than a century later. The French economy at the time consisted of a state dominated by a substantial war machine (there was barely a year when Louis was not at war) financed by excise duties and taxes on the poor. An export surplus would have implied suppressed consumption by the aristocracy (the poor had nothing left to give), which I suppose was not really a hardship. So far as Mr Trump is concerned, exports imply money coming in; imports represent money going out – so surpluses are power, while deficits mean you are being ripped off. His business philosophy is very much that if you not ripping somebody else off, you are being ripped off yourself; the idea of mutual benefit does not compute.
But Mr Trump’s love of tariffs goes further than countering perceived trade distortions. He also wants an extra source of tax revenue that he can tell his supporters that foreigners are paying rather than them. In his wilder moments he dreams of this replacing income tax. After all, income tax was brought in at first, both in America and in Britain, to compensate for the loss of tariff revenue from free trade. Of course to generate substantial revenue then the US must continue to import lots of goods. His supporters suggest this might come about through the strengthening of the US dollar, as happened to some extent in his first term, to offset the cost of the tariff. The tension between this and reducing deficits and protecting US industry is obvious.
Another aspect of tariffs for Mr Trump is that he hopes it will turn the clock back to a time when America had a lot of manufacturing jobs. Many Americans have fond memories of when many working class people had reasonably well-paid and stable (and unionised…) jobs in manufacturing. According to the MAGA mythology these were the jobs destroyed by unfair foreign competition, so rebalancing means that they jobs can come back.
And yet another reason to like tariffs is that it allows Mr Trump to throw his weight around on the global stage and make deals. He gets high on what he sees as grovelling by foreign governments to reduce tariffs by dismantling trade barriers; he makes sure that his fellow Americans see their humiliation. Many of Mr Trump’s cheerleaders from the business world thought that this was the main point of his tariff talk, and that they were just a negotiating tactic. Just like Russia’s military buildup on the Ukrainian border in early 2022 was supposed to be something called “power diplomacy”. But the Liberation Day system is so comprehensive that it appears negotiation will be just around the edges. Anyway you can’t do 70 highly personalised bilateral deals at once. It is now unclear what future negotiations will be about. Will some countries be allowed to escape the 10% lower limit? Is it about modifying the suspended “reciprocal” scheme? Or will the focus be on the special regimes for cars and steel – as the British government appears to believe. Nobody, including Mr Trump, knows.
But problems are coming in multitudes. The first is that, whatever Mr Trumps says, tariffs are a tax on American consumers. Americans cannot avoid buying imported goods (often as components of more complicated things like cars), and prices will rise across a wide range of goods. America is less dependant on trade than many economies, but even so they will have a significant impact. There will be a temporary bump to inflation. The Federal Reserve might be induced to raise interest rates. I think that risk is overdone; it is a temporary adjustment, and unless a wage-price spiral is threatened, there is no longer term threat. Weakness in the wider economy reduces that risk. The main problem is political: Mr Trump suggested that he would cut prices rather than raise them. The MAGA faithful will accept that this is a short-term adjustment and that better times are around the corner; many other Trump voters will feel let down, or even betrayed.
Next the economy will weaken, perhaps to the point of recession. The problem here is less the extremity of this particular policy (which has been softened after all), but the perception of instability across the whole of American public policy, which has become dependent on one mercurial individual with little grasp on reality. Mr Trump talks of vast amounts of inward investment, as firms promise factories in America to avoid the tariffs. But long term investments require a stable economic outlook; companies will delay doing much until things settle down – which could take some time. Exports are likely to suffer too, from retaliatory action by foreign governments (and especially China) and from a loss of confidence in America generally. Foreign visitors, especially students, are alarmed by the arbitrary application of policy that can see visas revoked on a whim, and detention at the border. This might help reduce the current account deficit – but through making Americans poorer.
The questions really start to arise when trying to picture the American economy the Trump administration is trying to create. He wants to shield US businesses from competition. That means that inefficient businesses are given a lifeline, and more efficient businesses don’t need to try as hard. That is not a recipe for economic dynamism – and thus has been the experience of most highly protected economies in history. A partial exception has been Asian economies that have used protectionism as part of an industrial strategy to allow the build-up of new industries. There is no such strategy in America. To be fair, America is a naturally competitive economy, and large enough not to need foreign trade as much as others to keep it so. But still, high tariffs will make America less efficient and wealthy, not more.
And it is hard to see those old industrial jobs returning. Technology, more than foreign trade, was responsible for their demise, and there has been a Baumol shift towards services, as Americans see to bank productivity gains in manufacturing by consuming more services. A more rational expectation is that America becomes a powerhouse of modern manufacturing business, in highly automated businesses, which export much of their output. But that entails a level of investment that will not happen in the current chaotic policy environment – and tariff barriers are not a particularly good way to achieve it. President Joe Biden’s use of subsidies was a more realistic idea.
But am I overdoing it? Will it be a matter of disappointment rather than disaster? Well, maybe. But that will entail the Trump regime rowing back on its revolutionary mission. Anything is possible in Trump World.
First published on Substack 12 April 2025
Liberation Day 1: the economics of trade
It is hard to overstate the significance of President Donald Trump’s Liberation Day US tariff plan, announced last week. It is a rewriting of the world order – and America’s place in it. It’s going to take more than one article from me to explore its significance. This time I want to look at the general context – as this is essential to understanding how things might develop from here – and it is very widely misunderstood by even expert commentators. The president’s action looks like one of the most colossal acts of self-harm in history – but the impact on the rest of the world may not be as bad as many suggest.
Any discussion of the economics of trade must start with the idea of comparative advantage – first articulated by David Riccardo 200 years ago. It is one of the most powerful economic ideas out there, and it is also one of the most neglected. I don’t want to go back to Economics 101 here. Suffice to say that the theory shows that trade is driven by opportunity costs and not productivity. There is a limit to how much each country can produce – and if each one specialises where it is relatively the most efficient (but not necessarily in absolute terms) then production across the world is maximised and everybody should benefit. Differences in actual productivity are taken care of by exchange rate differentials. It is why equilibrium exchange rates do not conform to purchasing power parity. “Comparative Advantage” may sound rather like “Competitive Advantage”, and we may often make an analogy between a country and a firm (“UK plc”) – but they are very different things. In economics firms compete but countries do not – they optimise. Tariffs, meanwhile, distort pricing signals and lead countries to sub-optimise.
This theory does a wonderful job of explaining the world we see today – why there is so much trade, and why and how exchange rates differ from purchasing power parity (i.e. currencies buy different amounts of goods and services in different countries). What it doesn’t do is help with the sort of fine-grained predictions needed for economic models. That requires a very detailed understanding of economies and what the opportunity costs are – way beyond the capabilities of current economic data and analysis. Attempts to model it at an intermediate level, by looking at broad factors of production (land, human capital, etc.), have failed. In modern economics, if you can’t put it into a model, it’s no use at all. So while most economists have a general idea about comparative advantage, it’s a distant memory from their undergraduate days. They haven’t thought about it very much. Politicians and political commentators pick up on the general idea but garble it – falling into a fallacy of composition (assuming that the production side of an economy is analogous to a firm) and muddling competitive and comparative advantage.
Two insights get lost in all this. The first is that the theory has nothing to say about trade deficits and surpluses. In the standard exposition, exchange rates should adjust so there are no deficits or surpluses – though whether this applies country to country, or to countries across all their trading relationships is an interesting question that I’m unable to answer. I will come back to that. The second is that the benefits of trade are driven by difference – and that the more similar economies become the fewer gains from trade there will be. Let’s take a closer look at that in the context of the US and China.
In 1990, when trade between the two countries started to open up, the US was one of the world’s most advanced economies and China one of the least developed, after the failure of Maoist Communism. Most of China’s workforce was tied up in massively unproductive agriculture. Only a tiny proportion of America’s was in its hyperproductive productive agriculture. America had a massive comparative advantage in agriculture; China therefore had a comparative advantage in pretty much everything else that was tradable, apart from technologically advanced goods that were beyond its capability. To put this another way, China’s hideously unproductive agriculture sector meant that Chinese wages were tiny compared to America’s, which meant that even very inefficient manufacturing businesses were highly competitive. And so they had the basis of massively beneficial gains from trade. America exported agricultural products and advanced goods, while importing cheap manufactured goods. Both countries benefited from cheaper inputs.
So far, so good. But the situation was dynamic. Rural workers in China responded to the demand for extra manufacturing jobs; rural productivity improved. Chinese manufacturing invested; infrastructure was improved; productivity and wages rose. America and China converged. It follows that the gains from trade diminished. This has mostly been at America’s expense. Chinese goods became more expensive relative to domestically produced ones. Meanwhile, because productivity was advancing rapidly, in China the lost gains from trade were compensated for by gains from productivity. This has been replicated on a global scale as the dynamic between developed and less-developed countries. There were massive gains from trade in the early days, and a convergence between the two sides that has seen the biggest ever eradication of extreme poverty. But the gains from trade are now much less. This is one of the reasons that living standards in the developed world have struggled since the mid-2000s; access to ultra-cheap goods from the less developed world has drastically diminished. This development is almost unacknowledged by economists; the late great Paul Samuelson has been to the only one that I have seen to point this dynamic out – largely before it happened. Instead people are bewailing the loss of a system of global trade that delivered so much benefit in the past.
The world has progressed in another way. Manufacturing productivity has advanced steadily, mainly through automation, but also through better process management. This has tilted the balance of developed economies towards services that are largely untradable. This means that the impact of trade on developed economies is steadily diminishing.
This doesn’t mean that gains from trade have disappeared. Surely it still makes sense for Apple to make its iPhones in intermediate economies? But it does mean that strategic considerations are weighing more heavily than commercial ones. In particular both America and China are worrying about what would happen if war broke out between them – an increasing risk given China’s ambitions to absorb Taiwan. It also doesn’t mean that the reordering of manufacturing supply lines that the Trump administration seeks won’t be painful and disruptive for both America and its trading partners – especially those in East Asia. But it does mean that ultimately it will almost certainly be worse for America than anywhere else. I want to talk about the impact on America in more detail in my next post.
But what about trade deficits and surpluses? A current account deficit represents an excess of demand (consumption plus investment) over supply; a trade deficit has a slightly narrower definition – it applies to goods – but it is much the same thing. If demand can’t be met by local supply, you need to imports to make up. This, however, tells you nothing about what caused it. The victim narrative suggests that the surplus of demand arises because domestic supply is being driven out of business by competition from abroad. The economy then runs up debt (or sells its assets to foreigners) in order to maintain demand, which has to be supported by imports, and it all ends in ruin. An alternative, boomtime narrative is that consumers are on a demand binge which domestic supply cannot meet. Foreigners are happy to finance this because this booming economy provides opportunities to make returns. Trump supporters are scarred by the sight of business closures with the excuse of foreign completion being given, or outsourcing to cheaper suppliers abroad, and point to victim narrative. Trump critics point to low US unemployment and a healthy economy, and say that there is no obvious case that the supply side is being suppressed – and so lean to the boomtime narrative.
But there is a further dynamic. Some countries, including Germany and China, enjoy trade and current account surpluses as a matter of policy. They achieve this by, one way or another, suppressing demand so that the supply side can generate a surplus to export. This might be by underpaying their workers and letting businesses accumulate profits; it can be through governments over-taxing and leaving an unspent government surplus; or it can be through a conservative public forever saving for a rainy day. Why do governments let this happen? A surplus means that the country does not require foreign finance, and that generally makes the national finances easier to manage; for dictatorships, like China, that can be especially important. If some countries run a surplus, then others must run a counterpart deficit. This pattern can help fuel the victim narrative of deficits. The alternative view is that surplus countries are selling themselves short – they could charge more for their exports and/or allow their citizens to consume more – and that deficit countries are beneficiaries of this generosity – and should be sending the surplus countries thank you notes. Which narrative (and others are available) better fits the facts depends on the circumstances. One the one hand you might have a colony being exploited by its ruling power; on the other you could have an industrial powerhouse using foreign capital to build up its infrastructure and industrial base. You need to get beyond the raw statistics to work out what is going on.
There is an argument that all trade should be in balance, and persistent surpluses and deficits show distortions from “fair” trade. This comes up quite a bit for people trying to “sanewash” Mr Trump’s actions. He himself seems to have a much cruder understanding: a surplus means you are getting one over on the other side and building up wealth; a deficit means you are being ripped off and seeing your wealth disappear into foreign pockets. The idea that surpluses and deficits may simply be a reflection of supply and demand being out of kilter runs counter to this.
What role do exchange rates play in all this? Exchange rates should adjust to an equilibrium that allows trade and capital flows between countries to balance – letting the market decide. Countries can try to lean on the market by buying or selling reserves – but this only really works to manage short-term blips where governments think the markets are temporarily distorted. Monetary policy, fiscal policy and capital controls all affect the exchange rate, and can be used to fix exchange rates – but ultimately because these policies work because they affect supply and demand, and the capital flows required to finance them. You can get too hung up on asking what a “fair” exchange rate is.
What is the impact of the Trump tariffs on the world economy? In the short term there will be a lot of disruption, and we have only seen the start of it. There are two pressure points that will need close attention. The first is less developed economies that have been slammed with high tariffs: notably Vietnam, Thailand and Bangladesh. These do not have the resilience (or negotiating power) of bigger economies, such as China, Japan or South Korea. They may be able to divert to other markets, but long term damage looks likely. The second is in the financial system; this has been delivered a series of shocks by the Trump administration, of which Liberation Day is merely the biggest. A lot of bets made by intermediaries have gone sour and these could have ripple effects that start to endanger bigger institutions – this is what happened to Liz Truss’s government in the UK in 2023, causing its demise. A danger sign is that the price of safe haven assets, such as US Treasuries, has been sinking alongside riskier ones. An added risk is if China starts to dump its some of its substantial holdings of US Treasuries – which it might need to do to counter the disruption of trade. A new financial crisis might develop.
But this crisis is not the end of globalisation: it simply marks exit, or intended exit, of the US as a global trading power. The rest of the world can carry on trading more or less freely with itself – and that seems to be what they want to do. And in some respects America will continue as a global commercial power: Google, Meta, Apple, Microsoft and even Amazon will be disrupted but there is no fundamental threat to their business models. The globalisation of information will go on. The big question is who, if anybody, will take up America’s leadership role? China could curb its own tendency to bully; the European Union could have its moment.
In due course, however, I expect the Trump tariff regime will collapse, and America will come back into the world system as a diminished player. But that’s another story.
First published on Substack on 9 April 2025