Trade is a phenomenon that relies on the principle of mutual interest and a win-win proposition. The notion that my country or my interests take precedence does not work; rather, it is a perfect recipe for trade disaster. This is a universal truth supported by abundant historical evidence.
A recent example is globalisation and its dividend in enhancing global economic output and volume. We can debate its fairness, the losers, or the winners, but it is well-established it has increased the size of global economy.
Since the launch of a global movement for enhanced globalisation, improving connectivity and creating systems to promote globalisation, global GDP has undergone tremendous expansion. In 1970, global GDP was $3 trillion, which ballooned to $110 trillion by 2024. Therefore, the tariff war does not fit within the framework of economic logic. The question then arises: why is President Trump, or more specifically, American system, pursuing this policy, regardless of who is in power?
The economic data of select indicators of US economy can help us find the answer. Let’s start with GDP growth rate. Post-World War II data shows since 1969, annual average growth rate has declined, falling from 4.4 percent in 1969 to merely 2.1pc in 2024 (20-year moving average). There can be many reasons for this, but most experts believe low net fixed investment or gross capital formation is a key factor. The data indicates net gross capital formation in the US economy dropped from 8.1pc in 1970 to 5.1pc in 2021. The data on GDP and net fixed capital formation shows with the decline in capital formation, GDP growth rate continued to decline. The slower GDP growth rate also resulted in a lower growth rate in per capita GDP, which fell from 4.9pc in 1953 to 1.3pc in 2024.
The slowing GDP has impacted US economy and society in multiple ways. For example, inequality has started to increase, and in 2024, the value of Gini coefficient for the US was 0.47. This is due to multiple factors, but the most important ones are wealth distribution, income distribution, growth, and wages. The median income of upper class increased by 78 percent and middle class by 60pc between the year 1970 and 2022. Moreover, the share of upper class in aggregate income increased from 29pc to 48pc, while share of middle class decreased from 62pc to 43pc from 170 to 2022.
Simultaneously, the share of upper class in aggregate wealth increased from 60pc in 1983 to 79pc in 2016, whereas the share of middle class decreased from 32pc to 17pc in the same period. As a result, middle class is shrinking, while upper and lower classes are on the rise. Data reveals the share of middle class in American society decreased from 61pc in 1971 to 51pc in 2023.
Meanwhile, the proportions of upper and lower classes showed an upward trend. The upper-class share grew from 27pc in 1971 to 30pc in 2023, while the lower class increased from 11pc in 1971 to 19pc in 2023.
The trend is still going on. The data from President Biden’s era clearly shows wages were not increasing as much as compared to the stocks of rich companies and inflation. The S&P 500 share increased by 55.7pc and inflation increased by 21pc. The wages increased by around 20pc. It clearly indicates middle and lower classes had to bear the brunt of this growth trajectory.
The facts above indicate US is facing a dual-edged sword: growth is on the decline and inequality is on the rise. This has compelled policymakers to think about what to do and how to break the cycle, give a new impetus to economic growth and curtail increasing inequality.
There were two options: to reinvigorate growth by enhancing investment or to adopt coercive measures to break the existing cycle. Unfortunately, they chose the latter. President Trump recognised this situation perfectly and began to exploit the circumstances and policy choices to his advantage. This led to rise of President Trump’s political movement. He leveraged the situation by further manipulating facts, targeting deep state and blaming China for US economic woes. People were weary of deep state and struggling to survive.
President Trump offered them hope to reverse their economic fortunes and tackle deep state, and they embraced it eagerly. Against all odds, he won the election. Building on his success, he introduced numerous policies aimed at pleasing his loyalists, but they lacked strong economic justification.
In continuation of his anti-China rhetoric, he initiated tariff war with China during his first presidency. He proposed it would lower the trade deficit, impact Chinese growth and bring enormous benefits to US. On the contrary, they resulted in significant losses for US economy and society. According to government data, total exports and imports for the US were $1.5 trillion and $2.3 trillion, respectively. The overall trade deficit amounted to $792 billion.
In 2024, exports and imports were $2.1 trillion and $3.3 trillion, respectively, leading to an increased trade deficit of $1.2 trillion. On the other hand, China’s exports and imports were $2.3 trillion and $1.8 trillion, respectively, and it enjoyed a trade surplus of $419 billion in 2017. In 2024, China’s exports and imports were $3.54 trillion and $2.59 trillion, with a trade surplus of $949 billion.
Further data decoding reveals trade between US and China in 2017 amounted to $636.6 billion, resulting in a US trade deficit of $375.2 billion. In 2024, trade with China reached $582.4 billion, leading to a US trade deficit of $295 billion.
The data above shows, despite sanctions, China’s trade volume and surplus continue to rise. China alleviated potential negative impacts by expanding its trade connections, and in 2024, China partnered in trade with 150 countries. Meanwhile, the US trade deficit continues to grow, adversely affecting the industry, consumers and the economy.
Instead of learning from the outcome of past tariff wars, President Trump has launched a trade war with the whole world. It will not help US; rather, it will add to problems. For example, during the first two days of tariffs, $5 trillion was wiped out of the stock market.
The discussion above indicates a trade war lacks economic rationale. President Trump initiated it to appease his political base, which is suffering due to weaknesses of liberal economic system, such as unfair distribution of GDP growth dividend, flawed redistribution model, etc. Therefore, he should focus on addressing the real challenges to restore growth and prosperity and prioritise enhancing investment, establishing mechanisms for fair distribution of GDP growth dividends, reducing the inequality gap, etc.
The US can learn from the Chinese economy and society, which thrive due to prudent policies in these areas. For instance, net fixed capital formation in China is approximately 15.5pc, which is three times that of US. Otherwise, it is feared the trade war will create more challenges for President Trump’s base, potentially making him unpopular.