Trump’s tariff threats: New era of economic power plays

An article by Financial Times critically examines Donald Trump’s mercantilist mindset and its potential implications for global trade, especially for nations like Canada, Mexico, and others reliant on cross-border supply chains. It argues that markets and business leaders must adjust to Trump’s unpredictable trade policies and his underlying ideological approach to trade, which is fundamentally different from the widely accepted notions of free trade.

The article highlights Trump’s recent announcement of a desire to impose 25 per cent tariffs on all products from Canada and Mexico as a demonstration of his broader approach to trade policy. The piece underscores the shock and surprise this has caused, especially given the existing trade agreements like the USMCA (United States-Mexico-Canada Agreement), which were thought to stabilize trade relations in North America. By threatening to impose such tariffs, Trump is testing boundaries, leveraging shock tactics to destabilize other countries and extract concessions.

The core argument of the article is the ideological shift that Trump represents in trade policy. While economists and business leaders traditionally view trade in terms of mutual benefit, based on Adam Smith's idea of comparative advantage, Trump’s approach is more aligned with mercantilism. Mercantilism sees trade not as a mutually beneficial exchange but as a means for a country to assert dominance and extract wealth from its trading partners, ultimately strengthening its own power.

The article draws on Albert Hirschman’s analysis of mercantilism, pointing out that Trump’s policies are designed to enhance US power by weakening rivals economically, especially in industries like manufacturing and commodities. This contrasts sharply with the prevailing free trade framework, where countries are supposed to trade based on comparative advantages and mutual benefit.

Trump’s aggressive trade rhetoric is seen not just as posturing but as a strategic tool that works in his favor. The article notes how quickly figures like Canadian Prime Minister Justin Trudeau sought to appease Trump, signaling that such rhetoric often compels countries to make concessions. Similarly, European leaders, such as Christine Lagarde of the European Central Bank, have reacted by seeking to align with US demands.

The article points out that currency markets have already responded to Trump’s rhetoric, with the Mexican peso weakening and the Turkish lira strengthening, reflecting the unpredictable and often destabilizing effect of Trump’s trade threats. However, equity markets and corporate boards have not fully grasped the longer-term risks posed by such policies.

The article suggests that the real danger of Trump’s policies lies in the way they force countries to rethink their trade strategies, particularly those with deeply integrated supply chains with the U.S., such as Mexico and Canada. For example, industries like car manufacturing, which rely on cross-border supply chains, would face significant disruptions if Trump’s tariffs are enacted. The broader message is that Trump’s mercantilism could reshape global trade in unpredictable and damaging ways, especially for countries that depend on stable trade relations with the US.

Despite the economic shifts already occurring in currency markets, the article concludes that equity markets and corporate boards have not fully adjusted to the new reality of Trump’s economic policies. The writer suggests that those in business and finance should heed Hirschman’s warnings and prepare for a future where trade is no longer seen as rational economic cooperation but as a tool of geopolitical strategy.

The opinion piece makes the case that Trump's approach to trade is grounded in mercantilist thinking, which could have profound and disruptive consequences for global trade, particularly for countries closely tied to the U.S. economy. It warns that Trump’s provocative rhetoric is not merely bluster but part of a larger strategy to increase US economic power at the expense of others. Businesses and markets will need to adjust to this new reality, which emphasizes power over mutual benefit and could reshape the global trade landscape.

By Vafa Guliyeva