This article first appeared in Forum, The Edge Malaysia Weekly on December 2, 2024 - December 8, 2024

Now that Trump 2.0 is in place, and with the kind of people being proposed for his cabinet, all the campaign threats of action against China and Asian exporters may be turning from rhetoric to reality. When surrounded by people who believe China poses an existential threat to the US, and have said as much, the groupthink is dangerous and unhelpful to a world already fraught with so many geopolitical flashpoints. Trump’s idea of making America great again appears to be based, among others, on the following: (i) imposing 60% tariff on all imports from China, (ii) 10% to 20% tariff on all imports from other countries, (iii) large tax cuts for American corporations and the wealthy, (iv) depreciation of the US dollar to counter perceived undervaluation by others, (v) curtailment of the US Federal Reserve’s independence and a push for rate cuts, (vi) mass deportation of undocumented immigrants and restrictions on legal immigration and (vii) restriction on imports from Mexico with a 100% levy on cars.

The underlying thinking and Trumpian philosophy appears to be that America’s woes are due to everyone else, meaning the rest of the world is to be blamed. Never mind that no Chinese, Japanese or Korean producers ever forced American consumers to choose their products over others. Never mind that cheap Asian imports had for years improved affordability and the quality of life for American consumers. The fact is, American consumers preferred Asian products either because they were cheaper, were of better quality, or both, relative to domestic ones. To argue that these cost and quality advantages are due to subsidies and unfair practices of Asian governments is nothing but grasping at straws. Global trade rules provide avenues for complaints against unfair practices, and restitution where violations are proven. It should be noted that US President Joe Biden’s Inflation Reduction Act and the CHIPS Act commit hundreds of billions of dollars as government subsidies to US businesses.

The US’ competitiveness problem has structural underpinnings. To begin with, American labour is among the most expensive in the world. But when corporate culture requires CEOs and top management to be paid several hundredfold more than what labour earns, there is just no way American industry can be competitive, certainly not with the manufacturing of high-volume mass-produced goods. And it is such high volume manufactured goods, cars, appliances, integrated chips, iron and steel, phones and the like that account for much of the trade deficit. The wage and cost differentials are so high that no amount of technology-driven productivity can level the playing field. So, if US manufacturing has hollowed out and employment lost, there are domestic structural issues that need addressing. Politicians, having presided over the erosion, are of course loath to address the real issues which can be both tough and unpopular to resolve. Blaming others is a lot easier. A characteristic shared, it seems, by politicians everywhere in the world.

With a supermajority win and control of both houses, Trump, the world now fears, is free to do as he wishes. Or does he? Since Trump1.0 in 2017, the world has changed. With hindsight, it is now clear that none of the disruptions Trump brought on worked to America’s advantage nor improved its competitiveness. For example, the tariffs imposed on China then had done nothing to stop or even slow China’s growing share of global trade and commercial footprint. In fact, over the five years from 2017, its exports to the US had increased from US$463 billion to US$551 billion in 2022, an average annual growth of 3.54%. This points to two things — first, American addiction to and reliance on cheap imports and second, the tariff burden appears to have fallen on American consumers, not China. But it did awaken China of the need to diversify and indeed today, it depends less on the US than it did in 2017. China’s trade with the developing world has increased substantially. In 2023, for example, while the US took in 14.8% of Chinese exports, Asia accounted for double that.

If tariffs hadn’t worked in 2017, why would they in 2025? Yes, at 60% this time, it is much larger, more punitive and at 20% for other countries, much more comprehensive. For Asia’s developing countries it certainly seems scary, but executing them would be painful to the US too. Consider this: back in 2017, US inflation was a non-issue and the interest rate (federal funds rate) was a mere 0.5%. Today, inflation, having hit 9% in mid-2022, is now close to 3% and interest rates between 4.75% and 5%. The higher inflation and interest rate environment constrict policy space. If the previous experience with tariffs being passed on to consumers recurs, even partially, inflation could skyrocket.

More than the resulting pain inflicted on American consumers, the government, being the world’s largest debtor, will be pushed into an ever larger debt servicing burden as interest rates rise with inflation. According to the Congressional Budget Office (CBO), interest on government debt is projected at US$892 billion in 2024, a rise of 33% over the previous year. The sharp increase is a reflection of higher interest rates and increased borrowing. At 13% of the government budget, debt servicing is already larger than spending on defence, Medicare and income/social security programmes. Interestingly, in 2017 debt servicing was just 7%, so between Trump 1.0 and 2.0, interest expense has already doubled. Taken together with the fact that the maturity structure of the debt is mostly short, with about half the outstanding debt maturing by 2026, one can see how tight the government’s position already is.

Add to these the promised tax cuts to corporations and the wealthy and the absence of any commitment to cut government expenditure, and one sees the current budget deficit that is already US$1.8 trillion (6.3% of GDP) widening even further. It is hard to imagine revenue from the proposed tariffs coming anywhere near filling the gaps. Trump’s promised mass deportations too can add to inflation. An estimated 50% of farmworkers are undocumented. Removing that many will obviously disrupt farm production and stoke food inflation.

The possibility of an ever-widening budget deficit, increased inflationary pressures, potentially sharp interest rate increases and debt servicing costs could all act as millstones on the necks of Trump’s policymakers. He may have received a political blank cheque from American voters, but putting the rhetoric to work is not going to be easy. There will be costs for the US, one set of costs arising from the internal vulnerabilities described above and second, from the backlash as other countries push back with their own retaliatory measures.

So, where does all this leave emerging Asia? Not in a comfortable position. Thus far, the developing countries of Asia, the likes of Malaysia, Thailand, Indonesia, Vietnam and so on have been flying under the radar and have benefited from the China + 1 strategy of multinationals. Vietnam in particular has had the most relocations from China. Every one of these countries has experienced increasing trade surpluses against the US. But all these could change with Trump 2.0. There are three ways they could be hurt. First, the tariffs of up to 20% could kick in, reducing American demand for their exports. Second, they may not be able to play the third country conduit for Chinese exports. The China + 1 strategy that has benefited them thus far may not stand up to scrutiny by hawkish Trump officials. Third, perhaps most importantly, a China curtailed from exporting to the US would need less of the raw materials and inputs sourced from them. To minimise the hurt, these countries will be well advised to hasten the redirection of their trade towards the BRICS grouping and West Asia, both of which are moving away from the US and Europe.

Global economic evolution has resulted in a highly interdependent world. Unilateral action may win political cookie points at home, but given the interdependence, will boomerang on the initiator. It is noteworthy that the Fed’s own modelling has shown that Asia’s and especially China’s purchases of US Treasuries have lowered yields by an estimated 150 basis points. With debt in the trillions, that is substantial savings to the American taxpayer. Being paid with IOUs for your export goods is acceptable when the trading is unhindered, but may not be when there is open hostility. Curtailing Asian imports translates directly into reduced demand for US Treasuries and higher implied yields. Worse, if all the hostility and ill will leads to an unloading of even portions of US T-bills held, the potential spike in US interest rates could be excruciating, particularly to a government that is in no position to deleverage.

Blanket tariffs have been debunked by numerous studies to be ineffective. The mutual pain they will inevitably cause calls for restraint and rational thinking. Not the zero-sum thinking driven by ego, hubris and bluster.

Dr Obiyathulla Ismath Bacha is professor of finance at INCEIF University

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