TheMarketForIdeas

As President of the United States and leader of the free world, Donald Trump has pursued a radical agenda of institutional reform, reevaluating and recalibrating America’s relationships with both the international community and its formal allies. Although he faces pressing global security concerns—such as the war in Ukraine, the conflict in Gaza, the looming prospect of a confrontation between Israel and Iran, and even rising tensions between India and Pakistan—Trump’s focus has remained firmly on his populist agenda: illegal (and legal) immigration, foreign trade, and the internal culture war.

Unlike his first term, his supporters cannot claim he failed to keep his promises, especially in trade, where his actions have caused severe disruptions in global markets. Trump initially imposed punitive tariffs not only on rivals but also on partners and allies. Frequent policy shifts, postponements, and tendencies toward escalation created deep uncertainty, reverberating across the real economy.

For the first time, Trump’s effect on stock markets has turned negative. No longer seen as pro-business, he has left small business owners—traditionally loyal to the Republican Party—reeling. Many of their enterprises rely heavily on imports from China and other tariff-hit nations. As a result, their profit margins are shrinking, and some are facing the specter of bankruptcy. The full consequences of retaliatory measures against the U.S. have yet to unfold, but they will inevitably impact American companies.

Trump’s supporters insist, as always, that he is playing “5D chess” to bring industry home and lower trade barriers. This references a meme used to praise (and also satirize) Trump – it presents his self-defeating moves, his prevarication and unexplainable actions as multidimensional chess (like the 3D chess of Star Trek) but in more than the four dimensions mere mortals know of. His detractors argue the opposite—that his policies are catastrophic and will further erode American industry, which is deeply enmeshed in global supply chains. Reindustrialization efforts may also suffer, as key production inputs like steel or industrial robots often need to be imported—ironically, from China. Thus, economic, technological, and strategic priorities may all be compromised.

Whichever side proves right, the consequences will unfold over a longer horizon than the short electoral cycles that shape American political life. If Trump has misjudged the effects of tariffs, overestimated U.S. bargaining power, or assumed too rapid a shift in import substitution, then—coupled with potential interest rate hikes—the economic fallout could lead to a stinging defeat in the congressional elections in under two years, as well as in gubernatorial and state contests. The viability of the post-Trump MAGA movement could also be called into question.

Even so, Trump’s critics should not rejoice too soon. The core assumptions of Trumpism are not entirely off base, even if its proposed solutions are flawed. A future Democratic Administration may likewise adopt protectionist measures and offer only selective support to global multilateral institutions—including the World Trade Organization, whose institutional decline began under the Obama administration when judicial appointments to its dispute court were blocked. The Biden Administration continued several of Trump’s policies: withdrawing from Afghanistan, escalating the economic and technological rivalry with China, sustaining offensive military aid to Ukraine, and even threatening allies like India and Germany with unilateral tariffs. Trump, then, may serve not as an aberration but as a Delphic oracle—revealing deeper shifts in the strategic thinking of American elites.

Trade Shocks

Globally, the shock to production and supply chains is significant, reducing forecasts for global economic growth and casting doubt on the sustainability of the current international division of labor. As of the writing of this article, the U.S. and China are locked in a tariff escalation, even as the White House announces tariff reductions for the EU and others to 10%. Meanwhile, the EU has delayed retaliatory measures until July to allow time for negotiation.

It seems Trump has ushered in a new systemic shift. For the first time, fears about the global economy have not sparked a rush into U.S. government bonds; instead, interest rates on U.S. debt have risen. Concerns over unsustainable growth and the need to refinance $6 trillion in debt this year have likely curtailed Trump’s more disruptive instincts. He has openly stated that “chaos” is the catalyst needed to alter the economic calculus of global actors. Yet, national debt service is nearing $1 trillion annually—surpassing the defense budget and amounting to one-fifth of total federal revenues. While interest rates have not yet returned to historical highs, they are no longer at historic lows either. There is still room for them to rise, especially if Trump undermines market confidence in the Federal Reserve or in U.S. creditworthiness.

Some damage is already done. Under these pressures, the global system is fracturing into trade blocs, regionalized production chains, and bilaterally negotiated agreements. After 70 years of largely uninterrupted globalization—35 in the non-Western world—we are entering uncharted waters. Reverting to past tariff levels does not recreate the historical context in which they existed. Global production chains complicate every shift.

We do not yet know what protectionism’s return will yield—or whether Trump’s goal of reindustrializing the U.S., particularly in sectors with dual civilian-military applications, will succeed. But we do know that America’s shift toward unilateralism began in the early 2010s and gained political momentum during the pandemic, driven by national security and resilience concerns. Trump may have been the first to ride the wave, but he will not be the last. When he’s gone, the flood may come.

In the wider world, Trump’s trade policies sow havoc. Businesses delay investment due to uncertainty. As the world’s largest importer, the U.S. exerts immense pressure on export-reliant economies like Germany, Vietnam, and China. Even Romania, despite its chronic trade deficit, enjoys a rare surplus with the U.S.— one of only three developed trade partners with which it has a surplus, alongside France and the UK. The complexity of production chains means intermediate goods can cross borders multiple times, accumulating tariffs with each trip—especially when such transfers occur between firms rather than within multinational corporations, which may enjoy exemptions.

Retaliatory measures only add to the chaos, often driven more by political calculus than economic rationality. Free-trade purists argue that Trump harms U.S. consumers; yet, counter-tariffs by the EU and others will likewise harm their own citizens. These actions may only be justifiable as bargaining chips for restoring open trade. In any case, the U.S., like many others, no longer makes decisions solely on the basis of GDP maximization or consumer welfare. Strategic and ideological considerations now hold equal sway. In such a world, anything is possible.

Why Protectionism?

Trump’s second term is unfolding very differently from his first. In 2016, he faced resistance from within the Republican Party and struggled to staff his administration. This time, he arrived prepared—with executive orders pre-drafted, personnel lists in hand, and pressure groups ready to advance key agendas, including protectionism and immigration control. The Administration is now far more functional. The recent scandal involving leaked information via chat groups is notable only by contrast to the daily leaks of his first term.

While Trump’s anti-immigration stance may have been opportunistic and reactionary, his protectionism is deeply held, going back to the 1980s, when he railed against Japan. China now plays the role of antagonist, but the argument remains: America accepted unilateral free trade for strategic reasons, offering others access to its markets while tolerating barriers in return. While tariff barriers declined under GATT and WTO agreements, non-tariff barriers surged—often in illegitimate ways that are difficult to prove or measure.

Ambitious nations exploited this to lure U.S. (and Western) companies into their domestic markets, extracting technology and consolidating control over key supply chains. This gave rise to formidable competitors—especially China—in sectors like electronics and digital technology. Meanwhile, the U.S. dollar-based financial system, anchored in petrodollars and “risk-free” Treasury bonds (the “exorbitant privilege” decried by Mitterrand), necessitated persistent trade deficits, accelerating offshoring.

Trump campaigned not only on the economic costs of deindustrialization but also on its social consequences: hollowed-out regions, drug addiction, and the precarity of the working and middle classes. Yet many elite Trump supporters are even more concerned with America’s military readiness. They argue, for example, that a toaster factory can be repurposed to build drones—but not a social media studio. The decline of firms like Boeing is blamed on the outsourcing of core skills and functions, which weakens innovation and undermines strategic independence.

Many of Trump’s protectionists still consider themselves free-traders—but of the “reciprocal” kind. They argue that David Ricardo’s theory of comparative advantage never anticipated a scenario where a nation would voluntarily abandon strategic capacities in exchange for short-term economic gain.

There is, however, a painful gap between Trump’s populist rhetoric and the likely reality. Even if import substitution and reindustrialization succeed in closing strategic vulnerabilities—such as the U.S. lag in naval shipbuilding—they will not revive employment in any meaningful way. The new factories will be automated, whether they produce tanks, smartphones, or teddy bears. The resulting dissonance between expectations and outcomes may produce unpredictable political consequences.

What Is Europe Doing?

Europe’s foundational ethos is protectionist, and Trump’s complaints about this contain some truth—though often exaggerated. Trade negotiations run aground on European non-tariff barriers, which are not merely protectionist tools but reflect public preferences enshrined through democratic processes. Phytosanitary standards, bans on genetically modified organisms, and restrictions on certain substances are all targets of U.S. ire. Likewise, safety standards that keep vehicles like the Cybertruck off European roads are viewed as trade impediments, though the monster cars often arise from internal U.S. regulatory distortions.

Worryingly, some U.S. officials—including Trump—regard VAT (value-added tax) as a de facto tariff, despite it applying equally to domestic and imported goods. VAT is a cornerstone of public finance in Europe, akin to state sales taxes in the U.S. While earlier such accusations may have been mere bargaining tactics, they now appear to reflect genuine ideological hostility—especially given Trump’s deeply rooted aversion to trade deficits.

This ideological divide may preclude any real harmonization between the U.S. and EU during Trump’s tenure. In fact, transatlantic tensions could escalate. A new flashpoint may emerge over European efforts to tax and regulate American tech giants while fostering homegrown alternatives—where they exist. A conciliatory gesture from Europe might involve expanding U.S. access to EU defense procurement under the ReArm Europe Initiative.

Still, Europe faces a precarious situation. Anti-American rhetoric often belies the underlying reality of dependency—particularly as the U.S. replaces Russia as Europe’s primary gas supplier and serves as a linchpin in Ukraine’s defense. A medium-term rupture would harm not only the EU—especially Eastern Europe—but also the U.S., which needs the EU as a junior partner and multiplier of innovation, industrial might, and diplomatic clout in the emerging bipolar world shaped by rivalry with China. Trump may succeed in renegotiating key aspects of this relationship—but he also risks overplaying his hand.

Photo source: PxHere.com.