Though the dust hasn’t fully settled, it appears that Trump is going to proceed with his plans to put tariffs on almost all imports into the US.
This is definitely going to affect the global economy. We need to be prepared for the economic challenges that ensue.
America’s imports totalled $3.4tn in 2024. Given the US’ gross domestic product (GDP) of $29.2tn, imports were 11.6% of US GDP by value.
Trump has said that he wants US producers to produce more of the goods that are currently being imported.
But that, obviously, cannot occur overnight. So, these goods will still have to be imported, but perhaps from a country with a slightly lower tariff.
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The impact of these tariffs on the US population will be a higher retail price for imported goods. The importing firms and retail outlets will try to pass as much of the increase in prices to the US consumers.
In the case of non-essential goods, which have a more elastic price-demand curve, US importers and retail businesses might absorb some of the increase in prices. [Elasticity of prices refers to the impact of prices on the effective demand for particular goods. Essential goods tend to have inelastic demand. In other words, people will have to buy them even though they are more expensive. Basic food products and medicines fall in this category.]
The tariffs collected by the US Customs will go to government coffers.
The income of US households will not be augmented in any way because of these tariff collections. On the contrary, the real purchasing power of US households will decrease by about 10-20% because the prices of goods have increased.
This decrease in real buying power (after taking into account the effect of inflation) will depress the demand for goods and services produced in the US and push the US economy into a recession. The increase in the cost of living is likely to increase the level of unhappiness among the US public.
Countries exporting to the US will also face recessionary pressures as the US market for their goods shrinks because of the decline in real buying power of the US population.
The countries punished with higher US tariffs might see their exports being substituted by relatively cheaper goods produced by countries that have been prescribed lower tariffs. The countries with the higher US tariffs will therefore face stronger recessionary pressures.
Global exports of goods amounted to $25tn in 2024 [UNCTAD figures. Trade in services accounted for about $7tn]. The total value of US imports of goods is equivalent to about 13.6% of the total export value of goods in the world.
This is significant. Taking into account the existing over-capacity in multiple sectors – housing, construction, iron and steel, and several commodities – this additional downward pressure is likely to push the global economy into a downward spiral.
This, as usual, will affect the bottom 20% of the population in all countries most adversely, as they are the least likely to have savings or be enrolled in social protection schemes.
If a recession unfolds, it probably will occur about a year from now, as it takes time for the negative multiplier effects – the knock-on effects of an economic event – to kick in. [For example, the reduction of total income received by the factory workers in a country due to loss of overtime (due to reduction of exports to the US) will lead to a decrease in aggregate demand in that economy, which in turn will lead to some lay-offs as well further diminution of overtime, which will further aggravate the decrease in aggregate demand.]
That gives us sufficient time to plan carefully how we in Malaysia can manage this downturn.
As the socialist party PSM stressed during the Covid-induced lockdowns in 2020-21, one of the primary policy goals should be to ensure that no one in Malaysia is deprived of basic needs – food, housing, health care and education. We have more than enough resources to ensure that. But we need to work on a good contingency plan.
PSM calls on the “Madani” (civil and compassionate) government to take the possibility of a global recession seriously and start working on a contingency plan to deal with it. – PSM
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