Only a Trade Deal Between US and China Can Save the World Economy

US treasury secretary Scott Bessent described Trump's disruptive tariffs as a conscious policy of causing "strategic uncertainty" in the global economy. He said this policy is merely being used as a strategy in the ongoing negotiations with trade partners.

Bessent thus implies that the US is fully in control of this policy tool even as the rest of the world is reeling from uncertainty. If so, why do leading CEOs of America not share Bessent's optimism and most of them predict that chances of recession in the US are very high now. Early warning signs are there already. The GDP growth numbers released last week clearly do not support Bessent's optimism as the US economy output declined 0.3% in the Jan to March quarter.

Experts say the decline may have been caused by sharp changes in consumer and business behaviour in anticipation of high tariffs. Businesses may be cutting export driven production, preparing for a trade war with China, EU etc. Also, the economy saw an unusual surge in consumer imports before the early April tariff announcement by Trump.

"This artificial front-loading of demand sets the stage for a sharper demand cliff in Q2(April to June) – a far more troubling phase of the ongoing economic slowdown." EY chief economist Gregory Daco told CBS News.

Trump supporters such as Jeff Bezos are deeply unhappy

Whether strategic or otherwise, uncertainty is not good for economies because businesses simply won't invest in such a climate. In fact businesses, both big and small, will be busy next few months cutting their losses by readjusting their supply chains rather than focus on expanding investments or setting new projects.

An Indian origin small businessman based in Canada who supplies packaging equipment to the US but also has a factory in India said he may have to review his business plans completely. This is what Trump's "strategic uncertainty" will end up doing. The worst hit will be the American consumer who is bracing to pay over double the price for a large number of Chinese consumer goods which are sold in America via global ecommerce platforms like Amazon , Shein and Temu.

The American middle class consumed a large number of items from China under a special scheme which allowed zero duty imports of goods valued at under $800 on global eCommerce platforms. The majority of Americans use this route for buying consumer goods. This has been banned by Trump for the first time in decades.

Amazon's Jeff Bezos, a big supporter of Trump, is deeply unhappy about this. Amazon in the US decided to display on their platform the doubling of prices on all items caused specifically due to the 145% tariffs imposed on China. This was seen as a politically hostile act by the US authorities. But the people are not fools. Trump's ratings on economic performance are already plummeting to unprecedented lows as trillions have been lost in the stock markets and the Trump voters are preparing to deal with the unprecedented price rise.

Sooner than later the American middle class will realise their folly of electing as President a man who is causing their impoverishment so fast. Trump is imposing a kind of economic sanction on his own people. So Bezos need not remind the American consumers via Amazon's price tag about their impending tragedy.

Thus, even as the US GDP growth is sharply in decline and inflation is likely to peak soon, an unprecedented condition of stagflation is the only outcome on the horizon.

Monetary policy becomes an impossible task in a situation where growth is collapsing and inflation is rising. Should the Fed Reserve cut interest rates to boost growth or increase the interest rate to quell inflation.

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This dilemma will consume the US Federal Reserve which is already under public attack from Trump. While Jerome Powell, the Fed Chief, is grappling with this terrible dilemma, Trump would have us believe that the deep economic uncertainty faced by the US, and indeed the rest of the world, is "strategic" in nature!

Trump accuses Jerome Powell of being behind the curve on cutting interest rates perhaps because he and Bessent know something that Powell doesn't. Or for that matter many sensible Nobel prize winning US economists and the top business CEOs are also unable to appreciate the "strategic" nature of uncertainty being cooked up by Trump and his close advisors. Most global forecasting agencies like IMF, World Bank, OECD have cut their GDP forecast for the world economy in 2025.

There is no doubt that all major world economies will suffer the terrible consequences of the exalted policy which the US Treasury Secretary likes to describe as "strategic uncertainty" aimed at optimising trade negotiations with nations. Most rational economists however think this is nothing short of voodoo economics.

So the rest of the world must live with this contestation the next few months until Trump and his team thrash out trade agreements with over 75 countries.

China remains the big elephant in the room

Indian policy makers believe India will be less affected by Trump's policies. India was already reeling from a severe slowdown in growth, consumption demand as well as private investment even before Trump won the elections last November.

The sudden quarterly slump in GDP growth to 5.4 % in July-Sept 2024 was explained away by optimists as just a blip caused by a temporary slowdown in government capital expenditure during the election season. But there are little signs of a significant pick up in government capital expenditure as per latest data.

And private investment remains in a kind of long term limbo. Against this backdrop there is little chance that the new uncertainties caused by Trump policies will attract new investors , domestic or foreign. We are truly in uncharted waters in the medium term. India is hoping for a reasonable tariff deal with the US. Even if the US does similar deals with other countries, it may not be enough to move the needle for the world economy because China remains the big elephant in the room.

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At present, China has about 32% share of world manufacturing and the US accounts for 17%. A UNIDO report titled,"The Future of Industrialization" says by 2030, China's share of world manufacturing could go up to 45% and the US's share is likely to come down to 11%. This is the prospect that worries Trump and is causing all the irrational behaviour.

So unless the US and China reach some substantive trade deal, the prospect for the world economy will remain very bleak as supply chains run by the US and Chinese companies are deeply intertwined across the world.

A deal between the two giants is what will truly release the world from the current uncertainty. In the larger scheme of things India is not an influential player. Trump also knows this. There is no running away from this reality.

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