Trump, tariffs, inequality and war — we have been warned

Donald Trump, Xi Jinping, Vladimir Putin, Narendra Modi, then Tayyip Erdoğan, Benjamin Netanyahu, Viktor Orbán and Mohammed Bin Salman: each a self-styled “Big Man”, authoritarian, mega-rich, contemptuous of rules.

Democracy and more specifically social democracy is reeling, the international rules-based order under assault, so too publicly funded services and progressive taxation. 

Yet Trump is – like Brexit before him and  the rise of populist right-wing parties from Germany’s AfD to South Africa’s EFF – because of a broken global economic model, symbolised by the global banking crisis of 2008-9. Followed of course by the Covid-19 pandemic. 

Both cost mammoth amounts of public money, triggering recessions, stock market collapses, price surges and austerity. Bailing out banks cost $65-trillion globally. Covid cost $16-trillion or 90% of GDP in the US alone. 

That was on top of decades of neoliberal economics – small-government ideology favouring market forces wherever possible and tolerating state regulation only where absolutely necessary – which massively widened economic and social inequality, with South Africa now the most unequal society in the world. 

The rich became super-rich: the top 10% did well, the top 1% even more so, the top 0.1% stratospherically so and the remaining 90% falling well behind. No wonder political turmoil followed.

Yet, for 30 years after World War 2, Keynesian full employment and expanding social welfare delivered economic and social stability, faster growth and more just, more equal societies with fewer class differences. 

Trump’s tariffs are intended to help the deindustrialised casualties of the neoliberal fallout who voted for him and who across the world have been deserting progressive parties for right-wing populists by the million.  

But the tariffs are likely to trigger recessions, and tax and spend policy dilemmas in Europe, Britain, Canada and Japan, widening the gulf between the US and its postwar allies. While Trump talks of “liberation”, Germany’s new chancellor, Friedrich Merz, talks of “independence from the USA”.  

Trump’s disdain for Nato’s article 5 on collective defence has called into question the whole basis of European security post-World War 2. In turn prompting difficult decisions for European leaders facing the imperialist threat from Putin’s Russia: invading and subjugating Ukraine is not the limit of Putin’s abhorrent ambitions in Europe. 

It’s why Germany has dramatically amended its constitution, changing its fiscal rules for much higher defence spending, paid for by increased borrowing of €600-billion along with €500-billion in infrastructure investment. 

European Union leaders recently pledged €800-billion to radically increase military spending by allowing member states to take out loans and increase national debt without incurring the usual penalties under the bloc’s strict fiscal rules.

The UK’s Labour government is also increasing defence spending, so far financed by a humongous cut in overseas aid. But nobody seriously thinks Labour can leave it there. Nor that British frontline services like health, education or policing should be cut.  

The financial markets will have to grasp why today’s new security threats warrant increased defence spending financed in part by extra borrowing, like all Britain’s European partners are doing. That means modifying Labour’s rigorous fiscal rules for these exceptional, and exceptionally dangerous, times.

If Britain hadn’t done something like this in World War 2, Hitler would have won: Britain rearmed in 1938 by raising defence spending financed from both taxation and borrowing under the 1937 Defence Loans Act.

Today, extra borrowing for defence purposes only could be made possible by issuing special purpose financial vehicles like defence bonds up to set limits, as some European nations already have in mind.  

Meanwhile, every new Trump initiative is labelled “unprecedented”. Yet in June 1930 the Smoot-Hawley Tariff Act raised America’s already high average tax on imports by a further 20%. 

This destroyed a fragile tariff truce that had existed since tariff cuts had been agreed in principle at the 1927 World Economic Conference. A tidal wave of tariff retaliation followed, notably from Canada, Mexico, France, Italy, Switzerland, Spain, Australia and New Zealand. And a global trade war followed.

Read more: Trump’s tariff teardown, the broken maths behind it and the global fallout

That heated up in 1932 when free trade throughout the British Empire and Commonwealth was abandoned in favour of “Imperial Preference”, a system of lower import tariffs to encourage trade between members of the British Empire, but higher tariffs to discourage trade with non-members like the US and Europe.

By the time Franklin Roosevelt became US president in March 1933 the volume of world trade had dropped by 55%, representing a fall of 65% since the crash in the value of shares on the US stock exchange on Wall Street in October 1929.

Today, economists at the UK’s Aston University estimate that a 25% tariff on all US imports, admittedly higher than the standard 10% announced by Trump on 2 April 2025, could cause a $1.4-trillion hit to the world economy, disrupting trade, pushing up prices and causing living standards to fall.  

If other countries retaliated, the effects could be similar to the 1930s: world trade could spiral down dramatically.

Back to the 1930 precedent: fully 1,028 economists then called on US President Herbert Hoover and Congress to reject the Smoot-Hawley Act. Congress and the president didn’t listen, and the 1930s Great Depression went from bad to worse. 

We have been warned. DM