Daily Maverick
Dailymaverick logo

Opinionistas

This is an opinion piece. The views expressed are not that of Daily Maverick.....

New economic landscape as Europe emerges resilient while US self-destructs

Natale Labia
By Natale Labia
16 Apr 2025
Facebook
0
The idea that protectionism will bring back lost industry is not just naïve — it is fundamentally flawed. Tariffs don’t breed globally competitive industries; they create inefficient, insulated ones. Instead of being able to choose between compelling alternatives, consumers were stuck with inferior, expensive, locally manufactured products.

What we know for sure is that we don’t know. And neither do Donald Trump, JD Vance, Scott Bessent, Marco Rubio, Peter Navarro or Howard Lutnick. The whiplash of policy shifts, empty “Liberation Day” threats followed by meek reversals, is not strategy — it is confusion. This is no “art of the deal”; it is chaos.

To imagine there is some “cunning plan” behind it all — as Janan Ganesh wryly noted in the Financial Times by invoking Blackadder’s hapless sidekick Baldrick — is either wishful thinking or a coping mechanism. What we are left with is uncertainty, and if markets, investors, and economies hate one thing unanimously, it is that.

Tariffs are economic suicide


Perhaps the most appalling part of this carnage is its utter futility. In his 2 April 2025 “Liberation Day” speech, Trump invited retired autoworker Brian Pannebecker to speak about Detroit’s decline and how tariffs might revive it. 

“I have watched plant after plant after plant in Detroit… close. (The president’s tariff) policies are going to bring product back into those underutilised plants… I can’t wait to see what’s happening three or four years down the road.”

But the idea that protectionism will bring back lost industry is not just naïve — it is fundamentally flawed. Tariffs don’t breed globally competitive industries; they create inefficient, insulated ones. I worked on the Argentinian economy in the 2000s: yes, protectionist policies led to trade surpluses. But these were not a result of strong exports — they came from a collapse in imports. Non-resource exports barely moved. Protectionism hurt competitiveness, leaving the economy stagnant and vulnerable. Instead of being able to choose between compelling alternatives, consumers were stuck with inferior, expensive, locally manufactured products.

The US is now on track for the same result. Imports may shrink, but exports will too. The trade deficit — ultimately shaped by income and spending, not border taxes — will barely budge. Meanwhile, the global economy will be worse off. As Germany’s Kiel Institute pointed out, the biggest loser from US tariffs will probably be the US itself. Protectionism, in practice, is an own goal.

Trump

As with Brexit, the unequivocal judge on the merits of these policies are currency markets. Since the start of the year, the dollar — the traditional safe haven in turbulent times — has been sold off heavily, weakening against the euro, Canadian dollar, and yen. This is the opposite of what tariffs are supposed to do. In theory, tariffs should boost a currency by reducing imports. But investors simply no longer believe that these tariffs will have that effect on the economy, or at least in a way that will strengthen it. Instead, they see these policies as economic self-immolation.

Signs of stress are mounting. Last week saw simultaneous selloffs in both US equities and treasuries — an unusual and alarming development. Treasury yields surged by the most since 2001, with the 10-year rate jumping half a percentage point to 4.49% in just five days (bond yields move inversely to prices). Higher yields mean more expensive borrowing across the board, further dragging the economy down. Bonds, usually the safe fallback during market turmoil, no longer offer much comfort.

It is commonly accepted wisdom that no one wins from trade wars. But surely some will lose less than others? Until last week, the market had assumed that the net-net “winner” would be the US. That assumption has sharply been called into question.

Europe is now setting the agenda


Europe, by contrast, looks increasingly resilient and a true safe haven in this economic maelstrom. The European benchmark Stoxx 50 is roughly flat year to date, compared to the US benchmark S&P 500 which has had its worst start to a year for decades, already down almost 10%.

As discussed in this column last week, the response from Europe, Japan, and China will shape the future of global trade. And that response is taking form. Spanish Prime Minister Pedro Sanchez, following a meeting with Chinese President Xi Jinping in Beijing, called for stronger EU-China ties, brushing off US pressure. Plans are under way for a July summit between Xi and all 27 EU leaders, following a similar summit in Japan.

“We need mutually beneficial relations and to promote balanced trade and investments,” Sanchez said. “Spain is a deeply pro-European country and sees China as a partner of the EU.”

However, there is more that the EU can and should do to further its gain from the US’ hubristic self-harm. So far, its response to the Trump administration’s barrage of tariffs has focused narrowly on trade. But there’s a broader opportunity: to promote the euro as a global reserve currency and eurozone assets as a safe haven. That would require bolder steps, such as issuing more common EU debt to compete with US treasuries — a move that could shift the global financial balance. Ironically, Trump is hastening the very outcome he fears the most; the end of the dollar’s role as the global reserve.

It is impossible to know how this will all end. However, we can be sure that the US economy, and indeed the global economy, will be structurally and systemically different. The US will be less dynamic, less competitive, and less influential. Retreating behind its wall of tariffs, in whatever eventual form they may take, it will almost certainly experience recession this year.

Already, America — once lauded as that “shining city on a hill” — has lost its moral authority on Gaza and more recently Ukraine. Now it is surrendering its economic credibility, too. DM

If you wish to comment on this issue, please send an email to [email protected]

Letters will be edited.

Categories:

Tags: