World economy: Trump’s tariff policy puts unity to test / Don’t let rules that underpinned prosperity collapse

Editorial

14:37 JST, January 8, 2025

The return to power of U.S. President-elect Donald Trump, who advocates an “America First” policy, is likely to pose a serious challenge to international economic rules that supported prosperity after the end of World War II.

Major countries must unite to deal with the tariff policies that Trump will wield.

The question is whether these countries will be able to overcome the high inflation that can be described as an aftereffect of the COVID-19 pandemic and shift their economies to stable growth. Their ability to respond to risks will be tested.

Victory in battle against high prices

The year 2025 opened with the approaching footsteps of protectionism. U.S. President Joe Biden, on his way out of office, issued an order banning Nippon Steel Corp.’s planned acquisition of U.S. Steel Corp., a disturbing move that threatens the stable growth of the global economy.

This is because Biden’s decision can be seen as proof of not only Trump, but also the U.S. public, strengthening their inward-looking mindset.

The outlook for the global economy this year itself has given businesses a positive attitude. A path to victory in the battle against historically high prices is beginning to come into sight.

Last year, central banks of major developed countries and regions managed to shift their policies to cutting interest rates while avoiding a serious economic downturn.

The Organization for Economic Cooperation and Development predicts that the global economic growth rate in real terms will rise by 0.1 percentage points to 3.3% this year from the previous year, with the United States and the eurozone expected to see strong economic growth, bringing them to 2.4% and 1.3% — the latter representing a rise of 0.5 points — respectively.

Shrinking trade major blow

The biggest risk to stable growth is the economic policies of the incoming Trump administration. Its stance of openly challenging the global economic order inevitably causes concern.

The post-war global economy has developed under a free trade system, based on the principles of freedom, non-discrimination and mutual benefit, with the free flow of people, goods and money.

To a large extent, the rules of this system have been upheld by the leadership of the United States, the world’s largest economic power.

However, Trump does not believe that countries can develop through mutually beneficial relationships.

He has expressed his intention to impose a blanket tariff of 60% on imports from China and 10% to 20% tariffs on goods imported from the rest of the world, with the aim of protecting the domestic manufacturing sector. If this policy leads to a significant reduction in trade, the impact on the global economy will be enormous.

Will Trump actually move forward with the additional tariffs? Or is this just a bargaining tactic to generate results from individual countries? Other countries likely will need to discern his moves and respond accordingly.

To begin with, it has been said that a high tariff policy encourages inflation through rising import prices, so this will have a serious negative impact on the United States.

Major countries must work together to prevent historical turmoil and persistently urge Trump to exercise restraint.

Japan could also become a target of Trump’s policies as it has a large trade surplus with the United States. It is crucial for the Japanese public and private sectors to communicate well with each other and work out measures to deal with Trump’s policies.

With the free trade system in flux, Japan has a major role to play. This is because Japan has a track record of promoting the Trans-Pacific Partnership free trade framework after the United States withdrew from it.

In December last year, Britain joined the TPP, bringing the total number of member countries to 12. The economic bloc now covers a population of 580 million and accounts for 15% of the global gross domestic product. Japan is urged to play a leading role in advocating the importance of free trade.

Following the pandemic, the strong economic growth of the United States has become notable and the country has been called the world’s lone superpower. However, a sense of overheating can be felt in the U.S. stock market as it has been boosted by tech giants. Vigilance is surely needed against the possibility of unforeseen events in international financial markets as the dollar remains stronger.

Meanwhile, the slump in China, the world’s second-largest economy, is expected to continue, as the country has postponed the implementation of drastic measures to deal with the problems in its real estate sector, which is said to account for a quarter of China’s GDP with related industries included. Social unrest has not been resolved and a deflationary trend is also intensifying.

Be alert to China risks

The administration of Chinese President Xi Jinping is trying to find a way out overseas. Its strategy is to become a manufacturing powerhouse through decarbonized products, such as wind power generation systems and electric vehicles.

However, if China seeks sales channels overseas for excessive production of EVs and such other goods, and promotes “the export of deflation” at lower prices, it will inevitably cause severe trade friction. China should aim to shift to an economy led by domestic demand and consumption.

Countries implemented massive fiscal spending for economic stimulus measures amid the pandemic, causing their debts to grow significantly. Fiscal consolidation is an important policy issue, but there is strong opposition to spending cuts and other measures from low-income earners as they have been plagued by high prices.

In countries such as Germany and France, the political situation has fallen into disarray over fiscal policy. Political stability is also essential for sustainable growth.

(From The Yomiuri Shimbun, Jan. 8, 2025)