The new Trump administration’s tariff wars are causing costly, even dangerous global fragmentation, with coercive unilateralism that’s fostering 1930s-like xenophobia and far-right nationalism.

With its tariff wars, the second Trump administration is not only fragmenting seven decades of globalization. It is also contributing to a kind of geopolitical climate that set the stage for the rise of fascism in the 1930s.

Times are different today, but like then, globalization is no longer at crossroads. It is unraveling. The White House has opted for an ominous path with a dark historical precedent.

Dark legacies of the 1930 Smoot-Hawley Act

After the “Soaring Twenties,” US economy drifted into the Great Depression. Presumably to protect American jobs and farmers, two Republicans, Reed Smoot and Willis C. Hawley, pushed for a major tariff increase. This led to the enactment of the Smoot-Hawley Tariff Act, despite opposition by over 1,000 leading US economists. 

The ensuing tariffs were the second highest in US history. But instead of protecting American jobs and boosting US economy, the effect of the Act turned out to be precisely the opposite. 

Following the retaliatory tariffs of America's major trading partners, it reduced US exports and imports by more than half during the Depression. In Germany, however, international friction paved the way to the rise of the Nazi party. 

The US economy recovered only with the war effort serving as a huge fiscal stimulus. 

The Act of 1930 was a grossly misguided response to the economic crash. What it gained in the short-term, it lost in the long-term. It delivered neither US stability nor prosperity. Instead, it contributed to instability and worsened the economic malaise. 

In brief, the Act made the Great Depression worse, compounding the chaotic international status quo that prolonged the lingering contraction, thus paving the way for World War II.  

The Trump tariffs

The first round of Trump administration tariffs built on traditional trade wars focusing mainly on Canada, Mexico and China. The tariff costs amount to more than $1.3 trillion; that is, over 3.5 times more than the 2017-18 tariffs. 

The second round began with President Trump’s "reciprocal tariffs." It is an odd, Orwellian term for tariffs that are not multilateral, conceptually sound and appropriately estimated. Instead, the Trump tariffs are unilateral, flawed and mistakenly calculated – that is, coercive, illicit and miscalculated. 

Subsequently, the Trump White House boasted that “every country in the world wants to make a deal with America.” But that did not happen. Instead, the reciprocal tariffs were followed by a series of retaliations, which heralded the ongoing third round of tariff wars.

Nonetheless, under the US tariff attacks, many economies have been compelled to make deals with the Trump administration. In the short-term, they may contribute tens of billions of dollars to the US. But in the long-term, such intimidation tactics will cost US economy hundreds of billions of dollars, fragment globalization and erode the rules-based international trading regime.

US tariff wars and Smoot-Hawley in history (stylized)

Source: White House, Bloomberg, MUFR GMR, author

Dark parallels

Global economic prospects have been fragile since 2008. A decade later, in 2018, the first Trump administration’s tariffs and deglobalization undermined a promising recovery, with the US imposing punitive tariffs on $400 billion worth of Chinese goods which affected more than 90% of the trade affected. 

Instead of building a multilateral front against trade protectionism, Western powers sought to appease the first Trump administration. That emboldened the Trump trade czars and contributed to the Biden administration’s fatal decision not to reverse his predecessor’s tariff decisions. 

Devoid of any meaningful economic rationale, the Trump tariffs go hand in hand with major austerity tremors, which are set to erode what is left of Roosevelt’s New Deal and Lyndon B. Johnson’s dream of Great Society. Perversely, the new focus is on massive rearmament, a new Cold War, and destructive geopolitics, including US complicity in the genocide in the Gaza Strip.

Once the tariffs’ full impact is felt, global economic prospects will suffer more shocks. Worse, the Trump administration is doing its best to obfuscate the destructive impact of its tariff stance by firing federal economists dedicated to monitoring economic data, in order to replace them with uber-conservative ideologues and data manipulation. 

The result is a darkening economic picture that could cause a “big correction” in US markets, as America’s big investment banks are now alerting their clients.

Global costs of fragmentation

Globalization fosters the flows of trade, investment and people. From 1950 to 2008, it reinforced integration among economies, thanks to technological progress, reduced transport costs, and offshoring of value activities across countries. Thereby, it also enabled the rise of the Asian dragons, China and India and more broadly the Global South.

Conversely, deglobalization reflects the retrenchment of such flows between countries. It fosters de-integration and fragmentation. During the first Trump administration, the Trump administration tried to exploit deglobalization to overcome the longstanding secular stagnation in the West, compounded by the US tariff wars.  

With the second Trump administration, the net effect is geoeconomic fragmentation, due to “a policy-driven reversal of global economic integration,” as the International Monetary Fund (IMF) calls it. It is neither automatic nor inevitable, but a US policy choice, with horrible economic and human consequences. With the resulting trade war contributing to the weakest global growth prospects in decades, geoeconomic fragmentation is feeding into another Cold War, which the world cannot afford.

In the late 2010s, deglobalization translated to slowing growth in the Global South. Today, global economic fragmentation is effectively curbing the rise of emerging and developing world. 

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