Wishing for White Flags
On Thursday the world marks the 80th anniversary of the unconditional surrender of Nazi Germany and the end of World War II in Europe. Planning for the post-war world had started years before the fall of Berlin.
This included arrangements for economic cooperation. It was understood that the Great Depression of the 1930s contributed to the rise of fascism, and that the sharp turn towards protectionism, notably the passing of the 1930 Smoot Hawley Tariff Act by the US Congress greatly worsened to the Depression. Mechanisms needed to be put in place to avoid a repeat. The post-war economic architecture (at least in the West) was agreed on at a conference in Bretton Woods, New Hampshire in 1944. This included the creation of the International Monetary Fund to help countries manage balance of payments difficulties, and the World Bank to fund reconstruction and economic development. A free trade agreement proved elusive, but by 1947 the General Agreement on Trade and Tariffs (GATT) came into existence and would oversee the gradual removal of trade barriers around the world. GATT was eventually replaced by the World Trade Organisation.
In all of this, the US played a key role. It was the undisputed economic and military superpower at the end of the war. Although it could have thrown its weight around, the US worked towards a world where even the vanquished Germany and Japan could flourish. It would continue to be a leader of this global system over the next eight decades, greatly benefiting from it, and allowing others to also benefit. For all the world’s many problems, it is more peaceful and prosperous than at any time in history, with people living longer and having access to more technology than ever before. Even a cheap smartphone today has significantly more computing power than the whole of Bletchley Park, the famed wartime British code-breaking centre. While the US itself had to cede ground to other countries in terms of its share of global economic activity, it was also richer and more productive at the start of 2025 than at any other time, and notably outperformed other advanced countries in recent years. Again, there are many problems and many unhappy Americans, but this is not a country that needed to be “Made Great Again” as was the case with devasted Germany and Japan in 1945, for instance.
In question
Needless to say, all of this is in question today. Under President Donald Trump’s America First banner, the US is seemingly turning its back on a free and open global economy (the original “America First” movement of the 1930s campaigned to keep the US out of global conflicts).
Although Trump suspended the “reciprocal” tariffs he imposed on 60 countries, he increased tariffs on Chinese imports to 145%. China is such an important supplier of manufactured goods to the US that, even with exceptions for smartphones and other electronics, as things stand, the effective tariff rate is around the level 20% set by the Smoot-Hawley Tariff Act. It was around 2.5% at the start of the year. This is a huge tax hike for American consumers. Meanwhile, China’s 125% tariffs on imports from the US mean profitable trade between the world’s largest economies looks impossible.
Many American businesses have warned that some products will become much more expensive or simply unavailable in the months ahead, while others fear much worse: bankruptcy and job losses. Small businesses with tight cashflow and constrained balance sheets are clearly more at risk. The good news is that the US economy came into this tempest in good shape, with healthy levels of consumer spending and business investment. This will give it some resilience, but not necessarily enough. It is also possible that the economy looks stronger than it is, since many businesses and consumers would have brought forward purchases in anticipation of tariffs.
Given all this, it might be surprising that the initial market shock from Trump’s April 2 “Liberation Day” tariff announcements has faded so quickly. Many equity benchmarks have already retraced their losses. This suggests that markets have sniffed out that Trump does not have the stomach for an extended trade war. After all, he has already made concessions. Investors believe that he will keep backing down and ultimately do deals with other countries, including China. There is a big debate whether the US or China has the upper hand in this conflict, but the bottom line is that both stand to lose from a protracted trade war.
In a democratic society, pressure for change can build quickly. Republican politicians have shown little appetite to rein in Trump, but they will face voters next year and still need the backing of big money donors from the corporate sector. And while Americans might be prepared to sacrifice their living standards for a higher purpose, that is certainly not what they signed up for. The biggest issue in the November election was lowering the cost of living, not raising it.
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