April Fool’s Day fell on April 1, but the next day US President Donald Trump unleashed “Liberation Day”, imposing sweeping tariffs on nearly all US trade partners. The US stock market fell 4 per cent on April 3, wiping out more than US$9 trillion in market value in just two days.
According to JPMorgan, the new US tariff rates are higher than the infamous Smoot-Hawley tariffs of 1930 which exacerbated the Great Recession. The increase is equivalent to a tax rise of about US$700 billion, or 2.4 per cent of US gross domestic product. That would be the largest tax increase since 1968, lifting the chances of recession this year from 40 per cent to 60 per cent.
While Trump has now suspended his “reciprocal tariff” tariffs on most nations, it is worth looking at their possible impact on the global economy, the US dollar and global markets. JPMorgan suggests that the rise in US tariffs, combined with retaliation by China and the European Union, could reduce US GDP by 2 percentage points and global GDP by 1 percentage point through 2026. This would put the US into recession territory and Europe at zero or negative growth, while fast-growing emerging economies such as Bangladesh and Vietnam would be badly affected with tariff increases of 37 and 46 per cent, respectively.
Stephen Miran, the chairman of the US Council of Economic Advisers, laid out in a report last November three key tariff objectives related to the future of global trade and the US dollar: to serve as a negotiating tool, tax revenue source and a wall to protect onshoring of US manufacturing.
Miran understood that US influence depends not just on military might but also the power of the US dollar. As the world’s reserve currency – accounting for about 60 per cent of international payments and 58 per cent of official reserves – the real carrot in using the dollar lies in its higher rate of return, superior liquidity and safe-haven status.
While the United States has a large external debt, most of it is denominated in US dollars, meaning it can repay its debt by printing more of its own currency. Given that US dollar liquidity is superior to euro or yen interbank market liquidity, having the largest military power reinforces US dollar hegemony over rivals such as the euro, yen or yuan.
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