Kaushik Basu: America’s capacity for self-harm is breathtaking

In response, both Canada and Mexico have announced retaliatory tariffs on key US industries, while Trump has vowed to impose “reciprocal" tariffs on “everybody across the board."

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Since no other country wields as much influence over the world economy as the US, these abrupt and unpredictable policy shifts have fuelled fears of a global slowdown, triggering a stock-market selloff—starting in the US. Trump’s trade policies may inflict more damage at home than abroad. 

While some of his moves, especially efforts to boost domestic semiconductor making, could prove beneficial, his erratic policy shifts jeopardize America’s economic stability, undermining its competitiveness and long-term growth.

Trump has long been frustrated by the fact that the US runs trade deficits with many countries. During his recent meeting with Indian Prime Minister Narendra Modi, he specifically raised concerns about America’s $45.6 billion trade deficit with India. In response, Modi pledged to increase energy imports from the US.

But not every trade relationship needs to be perfectly balanced. Trade imbalances are a natural part of global commerce, enabling economies of scale that ultimately benefit all countries. 

Consider daily transactions between individuals. Adam buys groceries from a corner store owned by Eve, who spends that money at various other stores and online platforms. Now imagine that one day, a furious Adam barges into Eve’s store and declares, “I keep buying from you, and you buy nothing from me!" He then demands to ‘balance’ their business relationship. If everyone insisted on such terms, commerce would grind to a halt, effectively dragging society back to the barter system.

Although striving for balanced trade with every country is uncalled for, America’s overall trade deficit does raise legitimate concerns. At the start of this year, the deficit reached an all-time high of $131.4 billion. Other countries are selling goods to the US and retaining a portion of the dollars earned for future purchases. But this is the price of having a currency the world trusts and depends on. The US dollar serves as a global reserve currency precisely because of the world’s confidence in its stability. Trump’s tariffs threaten to undermine the dollar’s global role.

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Pointing to the high tariffs some countries impose on US goods, Trump has repeatedly threatened to retaliate with “reciprocal tariffs," matching those countries’ tariffs product by product. While such an approach may appeal to him and his political base, its effectiveness is questionable.

Trade, after all, is fundamentally driven by comparative advantage, which means that the goods a country exports to one trade partner are typically different from those it imports from it. For example, one country might export pharmaceuticals while importing aircraft. Thus, matching another country’s import tariffs on a specific good would be futile, especially if the US does not import that good in significant quantities to begin with.

But let’s set aside these nuances. We already know what will happen if the US were to apply this policy “across the board." Canada and Mexico will raise tariffs on US goods, leading the US to retaliate, creating a vicious cycle.

This dynamic is already playing out between the US and Canada. In February, Trump announced 25% tariffs on Canadian steel and aluminium. In response, Ontario levied a 25% tax on electricity exports to the US, prompting Trump to declare a national emergency and double his steel and aluminium tariffs to 50%. Within hours, Ontario Premier Doug Ford suspended the surcharge after the US rescinded the tariff hike and agreed to negotiate.

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The same retaliatory cycle would likely unfold with the EU, China, Brazil, and many other trade partners. As a result, the US, which relies heavily on imports, will find itself behind a tariff wall—a strategy once favoured by many developing countries, often with disastrous consequences.

Trump’s tariff wall will drive up domestic inflation and increase US production costs, thereby making American goods less competitive and enabling Europe and China to outpace the US in key markets.

Notably, Trump’s tariffs have already sparked intense discussions among other countries about strengthening economic collaboration. India and the EU, for example, are close to finalizing a new trade agreement. There is also talk of deepening business and trade among Mexico, Canada and China. 

In the short term, Trump’s trade policies will undoubtedly cause economic hardship worldwide. But in the long run, the greatest damage may be inflicted on the US itself. Ironically, Trump’s MAGA agenda could end up driving a global shift that makes other countries great again. ©2025/Project Syndicate

The author is a professor of economics at Cornell University and a former chief economic adviser to the Government of India.