At the beginning of this helter-skelter week, Downing Street was declaring globalisation not only dead but a failure. Now, only five trading days later, the autopsy is still under way but the victim may instead be economic populism, strangled by Wall Street, the citadel of globalisation. Donald Trump’s so-called liberation day may in fact have been the anti-globalist’s entombment day.
In an effort to deny even a tactical retreat, Trump’s aides insist the White House goal all along was not to weaken globalism, or even to protect the US economy with tariffs, but instead to get into a negotiation to lower tariffs around the world and to punish China. As cover stories go, it is hardly credible, partly because the tariffs were repeatedly lauded by Trump as a macroeconomic revenue-raising measure, or a means to bolster US manufacturing.
The reality is that when faced by an attempt to remake the world trading system overnight, or what the former UK Treasury minister Jim O’Neill describes as “a full-on Kamikaze mission”, the markets revolted. But the retreat caused by the sell-off of US Treasury bonds has been only partial, with tariffs set at 10% universally, except for parts of trade with Mexico and Canada.
Washington’s all-out trade spat with China, meanwhile, still leaves the average effective tariff rate at 27%, the highest since 1903, according to the Yale Budget Lab.
Amid the chaos, significant long-term damage has been done not only to Trump’s political credibility but also to the resilience of globalisation as a system.
Trust, agreed rules and a degree of political stability are the underpinnings of globalisation. They are the prerequisite for specialised and highly extended trade supply lines across political borders to function. Globalisation, after all, is not just about the trade in goods or free markets, it is a set of interconnected ideas and institutions underpinning wealth creation that has dominated political thinking since the end of the second world war.
The UK prime minister, Keir Starmer, was not alone in arguing that Trump’s liberation day and its aftermath marked the end of an era. In a warning that holds true even after Trump’s retreat, Mark Carney, the Canadian prime minister and a former governor of the Bank of England, said: “The global economy is fundamentally different today than it was yesterday. The system of global trade anchored on the United States that Canada has relied on since the end of second world war, a system that while not perfect helped deliver prosperity for Canada for decades, is over.
“The 80-year period when the US embraced the mantle of global economic leadership, when it forged alliances rooted in trust and mutual respect and championed the free exchange of goods and services, is over. While this is a tragedy, it is also the new reality.”
In short, this is not a phase, however the trade war with China is resolved. The legacy of liberation day will linger for generations.
Paul Krugman, the Nobel prize-winning economist, largely agreed that the US was committing an act of abdication. “The rules governing tariffs and the negotiating process that brought those tariffs down over time grew out of the Reciprocal Trade Agreements Act, devised by Roosevelt in 1934 … It was, in fact, one of America’s greatest policy achievements. Donald Trump burned it all down,” he wrote.
When the man elected to lead the country that invented globalisation places the rejection of globalism at his ideological core, even if it means alienating the US’s closest allies, a fundamental reordering is under way.
A key difficulty is that Trump, 78, has shown no sign of wanting to learn from this debacle. As far back as September 1987 he spent $95,000 to publish an “open letter to the American people” in three newspapers. “For years, Japan and other wealthy nations have been taking advantage of the US,” he wrote. “It is time to end our vast deficits by making Japan, and others who can afford it, pay.”
While his target may have shifted from Japan to China, Trump’s sense of resentment and betrayal, coupled with an aversion to trade deficits, has never left him. His election in 2016, alongside Brexit, merely confirmed to him how his message resonated.
In fairness to Trump, analysis showed that US voting districts with industries vulnerable to Chinese imports tended to elect representatives with more polarised stances.
The vote gave him a mandate to end what he described as the US carnage of “rusted-out factories, scattered like tombstones across the landscape of our nation”. Many in the Davos establishment acknowledged that he had seen something they had not – globalism had left too many behind, not just in poor countries but among a previously middle-class group in western economies.
Trump’s first term would probably have seen a version of this week’s debacle if he had chosen different advisers, and if he had not later been knocked off course by Covid.
For the first two years of his first term, in 2017-18, his instincts were largely kept in check by his economic adviser Gary Cohn, a former chief operating officer at Goldman Sachs, who dampened Trump’s determination to use tariffs to end trade deficits.
Cohn engaged in a two-year running argument, compiling a mass of statistics designed to convince a sceptical Trump that the decline of US manufacturing and its replacement by a service economy was largely benign.
He set out how blanket tariffs rebound on American consumers. He explained the link between consumer uncertainty and the stock market. He challenged Trump to explain why he thought tariffs would not be counterproductive. Trump replied that he did not know, but he just did and it was what he had thought for 30 years. At one point, exasperated, Cohn accused Trump of a dangerous nostalgia, saying: “You have a Norman Rockwell view of America” – the artist remembered for his idealised portrait of American workers.
In the end, Cohn found Trump – who once scrawled “trade is bad” as the summation of his thinking for a keynote speech – so immune to evidence, and so determined to impose steel and aluminium tariffs, that he quit, leaving Peter Navarro, a man Cohn regarded as a tariff flat earther, to take the reins.
Vestiges of opposition to Trump’s tactics remained inside the Republican party. Ben Sasse, a Nebraska senator, tweeted a now familiar criticism in 2018: “About those new tariffs: Europe, Canada & Mexico aren’t China. You don’t treat allies the same way you treat opponents. Blanket protectionism is a big part of why we had a Great Depression. ‘Make America Great Again’ shouldn’t mean ‘Make America 1929 Again’.”
But Trump largely ignored the critics inside his own party. Re-elected in 2024, with Navarro and other tariff supporters reappointed to lead his trade team, Trump was convinced that his key mistake in the first term had been taking any notice of those advising him that globalisation had brought the US unparalleled wealth.
The path was clear for Trump’s headlong assault on tariffs, in part because in the four years out of office the anti-globalist tide had appeared to be heading in his direction. Many on the centre left bought the argument that hyperglobalisation did not suit an era of geopolitical conflict.
The Biden administration, for instance, in the name of reindustrialisation and national security, retained many Trump-era tariffs, especially on China, a decision seen as a mistake by a study published this week by Harvard Kennedy School. In the study, Joe Biden’s economic advisers Adam Posen and Jonas Nahm argued that the protectionism was excessive.
Since the 2007-08 financial crisis, there has been a steady increase in trade-restricting measures – such as tariffs, non-tariff measures, export controls and investment restrictions – contributing to growing trade fragmentation. In 2024 alone, more than 3,000 trade restrictions were implemented globally.
Some arose from legitimate concern about unfair competition, but much was being driven by deepening geopolitical competition. Countries of all politics have resorted to ever-expanding definitions of national security to screen foreign investment and trade. New language has entered the vocabulary such as “friend or near-shoring”, a term to encourage companies to align their supply chains with the geopolitical interests of their countries.
The call for resilient supply chains was given a spur by the vulnerabilities exposed by Covid, including the west’s dependence on a small number of vaccine suppliers.
After the invasion of Ukraine, Russia further exposed the west’s supply chain vulnerability by exploiting Europe’s dependence on its gas pipelines. Interconnectors designed to bring countries closer, such as undersea data cables, have become targets – from the Baltic Sea to the Taiwan Strait. The war also blew apart the myth that trade brought peace.
As a result, investment screening measures were introduced by governments all over the west empowering them to block takeovers and investments by foreign firms, mainly Chinese in strategic industries.
Rachel Reeves endorsed the trend in a speech in Washington as the UK’s shadow chancellor in May 2023. “Globalisation as we know it is dead. Supply chains that prioritise only what is cheapest and fastest struggle when a crisis strikes, be that PPE during Covid or energy following the war in Ukraine.”
In a diagnosis similar to Trump’s, Reeves claimed that a globalised system “can be gamed by countries like China who have undercut and ignored the international trading rules and made it impossible for our own to compete”.
Rajan Raghuram, the former chief economist of the International Monetary Fund and ex-governor of India’s central bank, has argued that friend-shoring is “resurgent protectionism, cloaked and augmented by new geopolitical rivalries”. He also criticised the initiative as “concentrating production within the gated community of advanced communities”.
Even so, trade as a proportion of GDP – the best measure of economic openness – has not as yet collapsed. In its 2023 report titled Re-globalisation, the World Trade Organization (WTO) said there had been a slowdown in world trade after the financial crash and Covid, but the change may as much be to do with the growth of services, as opposed to goods, in the world economy. Countervailing trends such as digital trade have kept globalisation alive.
The issue now is what can be preserved from the wreckage of the past week, and whether a new coalition of the willing – this time of free traders – can be assembled, if necessary. There is talk of a G6 – the G7 minus the US – going to China to see if an agreement can be found to reduce its trade imbalances, and distorting subsidies, a subject of complaint to the WTO not just by the west but by emerging markets.
But this will require the UK’s Labour party to stop briefing that globalisation has failed. In the current context there is no room for nuance, and it risks sounding as if Labour shares Trump’s utterly chaotic prescription. This is the time to declare economic populism, and not free trade, dead.
