US President Donald Trump kicked off the month of February with the announcement of tariffs on the northern and southern neighbours of the US which, together with the US itself, established the North American Free Trade Agreement (NAFTA) in 1992.
The agreement eliminated tariffs on goods traded between its signatories and gradually lifted restrictions on trade and investment. In his first term as president, Trump decided to amend the agreement, which he described as “the worst trade deal in the history of this country.” The renegotiated result, called the United States-Mexico-Canada Agreement (USMCA), followed the same approach, with modifications to enhance prospects for the US automotive industry, improve trade origin verification, develop and improve labour standards, liberalise the dairy market, strengthen the tech and digital transformation sectors, and support environmental protection and sustainability practices.
The USMCA came into effect in 2020.
The balance of trade between the US and its neighbours has since favoured the latter, with Mexico achieving a $157 billion surplus and Canada a $55 billion surplus with the US. This has put the two countries in Trump’s crosshairs, and he has repeatedly intimated that he will jack up tariffs on them. On issues from illegal immigration and the rise in US overdose deaths due to Fentanyl smuggling to thoughts by BRICS group member states about a currency of their own that could replace the dollar, Trump’s answer has been to threaten tariff hikes.
Increasing tariffs would force other countries to meet their responsibilities, Trump has said on numerous occasions. In addition, he has claimed that it would stimulate US domestic industry, compel manufacturers to bring their operations back to US soil, and generate revenues that would make up for his promised tax cuts.
However, solid economic evidence challenges such claims and suggests that the harms done by higher tariffs would outweigh the advantages. Even granting the argument that the harms accompanying the benefits would be even worse for other countries, increased tariffs would still have devastating impacts on the US economy in its current state.
It is still struggling to recover from high inflation rates, and US consumers are dependent on Chinese goods whose prices would soar as a result of the 10 per cent hike Trump has said he will impose on them alongside the 25 per cent tariffs he has slapped on Canadian and Mexican imports.
Trump’s announcement of these measures effectively proclaimed the start of a global economic war, with its inevitable detrimental impacts in terms of higher inflation and interest rates and lower growth rates. The developing countries will be faced with sharp exchange-rate fluctuations, increased financing costs, and a likely flooding of their markets with imported goods.
These will be the short-term risks for the countries of the Global South. Over the medium and longer terms, protectionist policies will jeopardise the significant progress some of them have achieved since the 1990s in development, job creation, and fighting poverty.
They could not have made such progress without the expansion in the export trade, in the import of production components, and in the improved quality and competitiveness of the goods and services they offer at home and for export. These developments, moreover, have attracted investments and financing for more enterprises and technological advancement.
If the benefits of international trade are vital for larger economies, they are indispensable for countries that lack the market size and domestic resources to create sufficient job opportunities and increase revenues. These countries have no choice but to expand their exports and spur investment to stimulate growth. Import-substitution measures can only help offset trade and balance of payments deficits in sectors where countries have a relative competitive advantage.
Some developing nations have managed to achieve high growth rates by adopting industrial policies in the framework of comprehensive development strategies underpinned by sound financing. They have thus succeeded in lifting themselves out of severe poverty and advancing to higher rungs in the global economy.
Unfortunately, the climate conducive to such progress has now changed. Amid the pervasive and mounting geopolitical tensions, international cooperation has deteriorated and funding for it has slowed. This has hampered the development and weakened the governance of international financial and development institutions, undermining their ability to perform their roles in fighting poverty and assisting the developing countries in times of crisis.
A recent report produced by the Washington-based Centre for Global Development, titled “The Future of Official Development Assistance”, is a useful resource for understanding the dynamics affecting development aid. These dynamics had already begun to reshape development assistance well before the recent, and still unclear, steps being taken regarding the US aid agency USAID by the Trump administration.
Economists and political scientists are searching for historical analogies and precedents to better understand Trump’s unusual approach. Some compare it to Washington’s unilateral decision to abandon the Bretton Woods Agreement in 1971, ending the gold standard that had defined the value of the dollar. This event was known as the “Nixon shock” after then US president Richard Nixon.
Other analysts see parallels between Trump’s actions and past trade wars, the worst of which occurred in the 1920s and 1930s. One of the most notorious broadsides at the time was the US Smoot-Hawley Tariff Act of 1930. Protectionist measures such as these have been blamed for exacerbating the Great Depression, which saw people reeling economically until the gunfire of World War II.
This article also appears in Arabic in Wednesday’s edition of Asharq Al-Awsat.
* A version of this article appears in print in the 6 February, 2025 edition of Al-Ahram Weekly
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