Trump tariffs in perspective and some observations

The commentary in mainstream US media outlets is doing a good job of fuelling the narrative that lays all the blame for the crisis facing the global trading system on Donald Trump and his mindless tariff adventurism while almost completely overlooking its underlying cause of China’s beggar-thy-neighbour mercantilism. See this and this. This post tries to provide another perspective on the ongoing trade war. 

This narrative overlooks that it was the Trump 1.0 that took the festering China problem head-on and upended an entrenched equilibrium among vested interests. While the Biden administration continued and expanded on what Trump 1.0 began, it pursued an incremental strategy without meaningful diversification away from the excessive dependence on Chinese manufacturing. While it tightened restrictions on high-technology products, there were few plans to reduce the dependence on electronics, heavy equipment, critical minerals, renewable generation, etc. In fact, it presided over the steepest rise in China’s exports and trade surplus during the last four years. 

Trump 2.0 has rightly sought to focus attention on the underlying issue of China’s structural imbalances that manifest, among other things, in the large US trade deficits. It has recognised the need to go beyond incrementalism and move in and break things to be able to address the China problem. While it’s too early to definitively assess the magnitude of its impact, it cannot be denied that it has taken the disruptive actions of Trump 2.0 to force and expedite a decoupling from China. 

Having said this, its instruments and strategies to achieve this objective have been reckless and foolish. Specifically, its exclusive focus on tariffs, the abrupt and formulaic application of astronomical tariffs, the foolish tariff warfare on its allies, and finally, the undignified gangster-like threats to force allies and foes alike to the negotiating table. The conduct of trade policy on Truth Social and the countless flip-flops have destroyed the credibility of the US government. It has thoughtlessly conflated America’s structural economic problems with its trade deficits and free-riding (on the US security umbrella) by its allies. All this has been complemented with nationalistic and colonial rhetoric, bombast, and actions delivered in a demeaning and imperial manner. In short, it has opened up reckless wars on all fronts. 

While there are plenty of articles and papers in the mainstream Western media analysing and lamenting the disastrous impact that tariffs will have on the US economy, it’s difficult to find any that examines the impact it’ll have on the Chinese economy. On the contrary, some even claim audaciously, without any reasoning or evidence, that China is well-positioned to weather the trade war. There has been little by way of constructive commentary and proposals (like this and this) acknowledging the objectives sought to be achieved and the changes and additions required to Trump’s policies. 

All this is in line with the now common trend of a pathological ad-hominem fallacy about anything Donald Trump, which detracts attention from the critical underlying issue of a global trading system that had broken on the weight of China’s abusive practices that pre-dated Donald Trump.

Some observations in this context.

1. Donald Trump has landed a definitive blow to the current era of trade liberalisation and its global trading system underpinned by the WTO. While this trade war may appear to have been signed into effect by President Trump, it should not be forgotten that its underlying cause is Made in China. Besides, in recent years, China has not hidden its intent to weaponise its manufacturing dominance. It’s more accurate to describe Trump as only the trigger, a giant ill-directed bazooka at that, for the backlash that had been brewing. 

The world economy’s China problem, which had been allowed to grow unabated for over two decades, must count as the biggest collective action failure in modern economic history. Disturbingly, it’s now no longer a mere economic problem but a serious national security and strategic threat. Consumers, corporations, academics, commentators, and governments were complicit in allowing the concentration of manufacturing in China at the cost of manufacturing bases across sectors elsewhere and the destruction of good jobs globally. 

While it remains to be seen how the trade war plays out, it’s hard to disagree that the China problem had long become a giant negative externality on the world economy and it could not have been addressed through negotiations and incremental measures and without pain. While people may disagree with the scale and speed of the disruption, it cannot be denied that this kind of disruption is essential to get everyone meaningfully engaged in addressing the China problem. Incrementalism and negotiations can only get you so far. 

2. Now, with Trump putting on hold the reciprocal tariffs on all countries, if only for 90 days, while at the same time ratcheting up tariffs on China, this is emerging into a full-blown US-China trade war. The total tariffs on China now stand at a staggering 145%. Given that the trade war, though unleashed by President Trump, is Made in China, it was inevitable that China be treated separately and tariffed at a much higher rate. This is required to achieve the desired impetus to initiate a sustainable decoupling. 

The 90-day pause buys time to strike deals with trade partners. The separation of the 10% baseline tariff from the reciprocal tariffs and the decision to decouple tariffs on others from that on China may well turn out to be good decisions if followed up appropriately. 

The retention of the 10% baseline tariffs underlines the commitment to a new norm of higher tariffs. In this context, it’s important to bear in mind that the pendulum on trade liberalisation and tariff reduction has long swung to the other extreme. Too-low tariffs are just as distortionary as too-high tariffs. A balance is much required. 

However, there are two problems with the execution of the tariffs on China - it’s too abrupt and too high. While the high tariffs proposed are part of a negotiating strategy, its abrupt application is self-defeating given the level of dependence on ‘Factory China’. Even as a negotiating strategy, by doubling down repeatedly on the initial reciprocal tariffs, Trump may have shrunk the space available for negotiations. Instead, the high tariffs could have been announced in one go but come into effect over some time, thereby allowing firms to adapt and start to shift away from China. Oren Cass had proposed a two-year phase-in of the full tariffs. 

3. It’s reasonable to expect some iteration on the tariffs announced on China. The strategy of announcing tariffs to force partners to the negotiating table and then settling with them necessitates some iteration. While such iterations are inevitable, they ought to be part of well-thought-out plans. It would have been ideal to announce a phased tariff schedule instead of the abrupt and steep escalation. But now that the cards have been played and tariffs are on us, it’s required by the Trump administration to allow negotiations the opportunity to work. 

Unfortunately, that may not be the case given that there have already been five rounds of tariff announcements, and more are likely. Further, unlike the Rule of Law that we are used to historically from US governments, we now have a dispensation inclined to Rule by Law, or Trump’s Law. This is a recipe for confusion and deep uncertainty, a high-stakes Poker Game without any clear rules. 

Take the example of the announcement of the pausing of reciprocal tariffs on some electronics like smartphones, routers, chip-making equipment, and laptops. It gave the logic of the scale of dependence on China for consumer electronics but did not mention anything about other products with similar China import dependence - air conditioners, fans, tricycles, microwaves, dolls etc. Further, the initial announcement did not indicate any timeline for the pause, resulting in some market euphoria. However, within hours, there were repeated clarifications by senior officials that the exemption would be removed within “a month or so”, culminating in President Trump’s announcement (on Truth Social, where else) that the pause would be temporary. 

Similar confusion prevails elsewhere in the tariff policy. Some of the distortions like inputs being taxed seven times more than products (batteries and laptops with batteries) are plain stupid. Finally, the multiple tariff announcements have resulted in a complex patchwork of rates depending on what’s imported, materials used, its source, rates applied, exemptions etc. 

4. The combination of the 90-day pause on reciprocal tariffs and the steep tariffs on China have inevitably set in motion supply chain re-alignments. American importers and exporters are scrambling to find alternative sources and destinations while the process of relocating to the US gathers pace. The Chinese exporters will pursue a combination of strategies - look to route US exports through other countries (especially those with surpluses or lower deficits with the US), shift manufacturing to other countries and export from there, and diversify away from the US to especially developing countries. 

Pre-empting any Chinese plans to shift exports away from the US to other countries, European Commission President Ursula von der Leyen has already warned that the EU “will not tolerate” Chinese goods hit by US tariffs being redirected to Europe and that Brussels will “take safeguards” if a new monitoring mechanism detected an increase in Chinese imports.

It goes without saying that the Trump administration will keep a close track of the impacts of these emerging trends on the US trade deficits. There will be surveillance of the emerging trade trends with the ‘connector’ economies through which re-routing to the US is likely to happen. 

The test of the success of this policy would be a reduction in US imports, a lowering of the trade deficit, and an increase in US manufacturing, all without causing high inflation and a long and deep recession. Inflation and recession may be unavoidable costs to pay for the rebalancing, and the policy challenge would be to ensure that both are mild and short. A recession and 4% inflation for a year or so may not be a bad bargain if the objectives are achieved. 

5. The Trump baseline tariffs will also be formalising a trend that has been afoot for some time now. While being critical of Trump, we tend to overlook that Europeans and others have been raising tariffs on specific products to counter discounted Chinese imports. India, with its border problems with China, has been one of the first to recognise the harmful economic effects of cheap Chinese imports and raise tariffs. This trend is bound to intensify into a higher baseline of tariffs across major economies on many manufactured goods. 

The trends of automation and decline in job creation, coupled with the rise of populist parties, mean that protectionism is here to stay for the foreseeable future. The era of ultra-low tariffs are over and a higher tariff baseline is the new norm. 

6. The emerging plays on the trade war and supply-chain response are important for countries like India, which hope to benefit from the displacement of Chinese exports into major economies by taking some share of the Chinese exports. 

For a start, given the critical importance of exports in sustaining growth in the face of a weak domestic economy, China will “fight till the end” to retain its export share. Further, the corporations buying from China too will struggle with alternative sourcing and will resist diversification, even if subterfuge. Also, India will face stiff competition in manufacturing from its current set of competitors among emerging economies, who might be feeling that they are the biggest beneficiaries of the trade wars. Finally, protectionism and populism will feed each other and work towards the onshoring of manufacturing in the larger economies. 

With the US, the Trump administration’s single-minded fixation on US trade deficits with partners limits the room to substitute Chinese imports. So, for example, if Apple relocates more to India and supplies to the US, it’ll invariably increase the trade deficit with India. It’s unlikely that the Trump administration will take kindly to this scenario. Only to some extent can oil, natural gas, defence and other purchases from the US offset the increased exports to the US. So there are hard limits to how much more India can export to the US without provoking the Trump administration. Finally, having realised the follies of concentrating its manufacturing in China, Apple is certain to ensure that it diversifies its supply chain among a few countries while also onshoring increasing portions to the US itself. 

In the aggregate, there’s an opportunity for India, with its very low baseline of manufacturing exports, to take up a share of the displaced Chinese exports and significantly increase its exports. But to seize this opportunity, Indian firms must be able to overcome competition from countries in the South East Asia for the US and European markets However, here, too, we must be realistic given the current state of manufacturing supply chains, the intensity of competition from other countries, and the general rise of protectionism. 

Further, for the foreseeable future, as long as the current phase of protectionism endures, trade deficits will be a lightning rod. This will act as a restraint on large-scale export successes. There’s no room for the emergence of another China-like export success, even at a far-diminished scale. 

7. For now, the only restraint on Trump’s Rule by Law appears to be the markets. The unwinding of the basis trades and its impact on the Treasuries (which are the most liquid instruments) spooked him and appears to have driven the pull-back from the reciprocal tariffs. The Liberation Day tariffs triggered a combination of four events - a steep fall in equity markets, a surge in bond yields, a decline in dollar value, and a very rare capital flight from the US. The Fed had to step in. Adam Tooze has a very good explainer. 

New frontiers are being breached in terms of dollar and Treasury volatility and capital flight, and don’t be surprised if the capital markets react more violently next. Another potential restraint will be public opinion, especially among his staunch electoral base and how the economic suffering is impacting them. It’s already being strained. 

8. The Trump war on the global trade order is a throwback to traditional unilateralism. The Trump administration has invoked obscure domestic laws - International Emergency Economic Powers Act, the National Emergencies Act etc. - to impose reciprocal tariffs and other unilateral tariffs on specific products from targeted countries. 

It has threatened to retaliate with reciprocal measures against any levy imposed on ships for carbon emissions, and it did not attend a meeting of the UN’s International Maritime Organisation to consider its support for the measure and a first-ever global price for an industry’s carbon emissions. It has also proposed to charge fees of up to $1.5 million on every Chinese-built vessel calling at its ports. 

The world’s largest economy has now warned in its message that the agreed targets for shipping “would unwisely promote the use of hypothetical expensive and unproven fuels”, adding that it “rejects any and all efforts to impose economic measures against its ships based on GHG emissions”. The US said it opposed “any proposed measure that would fund any unrelated environmental or other projects outside the shipping sector”, as well as proposals that would give preferential treatment to less developed countries… “President Trump has made it clear that the US will not accept any international environmental agreement that unduly or unfairly burdens the US or the interest of the American people,” the US said in its message to IMO member states. “While we will not ignore threats to our natural environment, President Trump promised the American people a return to energy dominance.”

Such unilateralism has guidance for countries like India. Till the contours of the new global trading order emerge, India must adopt a qualified and nuanced position on WTO and international trade. For example, it should be open to pursuing industrial policy measures that incentivise exports, however without explicitly flaunting them and provoking retaliation. Sticking nationalism to industrial policy will certainly invite attention and should be avoided. Similarly, in areas like the EU’s Carbon Border Adjustment Mechanism (CBAM), instead of merely opposing it, India must also figure out mechanisms to respond in kind with measures that force negotiated deals.

Weekend reading links

1. Good NYT oped about Mexico's President Claudia Sheinbaum, perhaps the most popular leader currently among all electoral democracies. 

2. Starbucks runs into rough weather in its India growth plans. The same story of the large consumption class not turning out as expected.

Starbucks has sharply slowed its ambitious expansion in India as hard-pressed middle-class consumers cut spending at the coffee chain’s stores. The US company announced in January last year it would nearly triple its Indian outlets to 1,000 by 2028, but in the last three months of 2024, it opened just over half the 30 targeted for the quarter... Starbucks, which currently has 473 outlets in 74 Indian cities, opened only a net 16 stores in the three months through December, down from a post-pandemic peak and quarterly record of 29 in the January-March period last year.

3. Trump's irreversible destruction of trust in America.

One of the great advantages that the US has over China or Russia is that it has a global network of allies, created over the long term. Countries like Japan, Germany, Australia, Canada and Britain have often had doubts about the wisdom of particular US policies. But they have stuck with America because they believed, in the last resort, that their alliances were based on a firm bedrock of shared interests and values. The tariff war launched by the US — combined with the often hostile language of the Trump administration — has shaken that trust to the core. Mark Carney, the new prime minister of Canada, says that the US is “no longer a reliable partner”. Friedrich Merz, the next chancellor of Germany, has called for Europe to “achieve independence” from America. Anthony Albanese, the Australian prime minister, says the Trump administration’s tariffs on Australia are “not the act of a friend”.

4. Gideon Rachman compares Trump's approach to global markets as that of a "mob boss". 

There is a distinct whiff of Don Corleone in Donald Trump’s approach to trade and diplomacy. Like a movie mob boss, Trump knows how to switch between menace and magnanimity. Treat him with respect and he might invite you to his house, where you can mingle with his family. But the menace never disappears. As Trump once explained to Bob Woodward, he believes that “real power is — I don’t even want to use the word — fear.” Back in the Oval Office, Trump has employed fear and threats as a tactic for shaking down some of America’s top law firms and Ivy League universities. Like respectable members of the professional classes, unexpectedly threatened by the mob, Trump’s targets paid up quickly in the hope that all the unpleasantness would swiftly go away. Law firms like Paul Weiss and Skadden Arps agreed to do pro bono work for the administration to avoid being targeted by Trump’s executive orders.

He argues that this approach has limitations when faced with tariffs and sovereign countries. 

Trump’s assumption seems to have been that if he punched America’s trade partners hard enough, they would have no option but to make a deal. His son, Eric, urged targeted countries to see sense and to quickly buy off his dad. “I wouldn’t want to be the last country that tries to negotiate a trade deal with @realDonaldTrump,” he wrote. “The first to negotiate will win — the last will absolutely lose,” he continued. “I have seen this movie my entire life.” But the real world and the global economy turn out to be much more complex than the movies that Eric Trump was brought up on. The White House has started a trade war with every major trading nation simultaneously. It has also taken an axe to the supply chains of many of the world’s leading multinationals. There are simply too many actors involved for Trump’s mob boss tactics to work. There are all the investors who have rushed to sell their shares, causing stock markets to tank. There are the manufacturers who simply cannot do business under the conditions created by Trump — and who are shutting down production lines. And, as for Chinese President Xi Jinping’s mob, they have decided to fire back rather than buckle. This is getting extremely messy... Trump’s approach to America’s allies is to treat them like errant members of a protection racket. Some of them have fallen behind on their payments to Nato? They better fix that fast or, says Trump, he will encourage Russia to do “whatever the hell they want”... 

Trump treats Russian leader Vladimir Putin and Xi Jinping as if they are the heads of rival mafia families. There will be times when the families clash. Some foot soldiers and bystanders might get hurt. But, in the end, the goal is to reach a deal so that everybody can go back to making money. Geopolitical theorists might rationalise a carve-up like this as the division of the world into rival spheres of influence. But, it also resembles an agreement between different mafia families, to give each other a free hand on their own turf. The local godfather is then free to push around the smaller players in the neighbourhood — such as Taiwan, Ukraine or Canada — without comment from the rivals.

5. A peek into China's ultra-competitive and dynamic EV market.

From cars with roof-fitted drones to free self-driving software and five-minute battery charges, the rapid pace of electric vehicle innovation by China’s BYD is powering what some analysts believe is the most intense period of competition in the car industry... sales in China, the world’s biggest EV market, are forecast to rise about 20 per cent to 12.5mn cars this year. As EVs start to outsell cars with internal combustion engines, 78 per cent of those sales are being soaked up by just 10 companies, including 27 per cent solely by BYD, according to HSBC data. That leaves about 52 car brands fighting for the remaining 22 per cent of the Chinese market, including more than 30 marques that produce fewer than 30,000 cars a year and might soon face oblivion, according to Yuqian Ding, a Beijing-based analyst with HSBC. With a new car model released on average every two days in China, keeping pace with cutting-edge technology — such as assisted driving functions and the latest infotainment systems — has become crucial for survival as the market inevitably consolidates... Features such as automatic highway lane changing and automated parking were already becoming commonplace in China. But local carmakers are also increasingly developing more sophisticated autonomous driving software earlier than many analysts forecast, thanks to the help of AI-based large language models.

6. Tara Zahra writes about how globalisation and its consequences led to the World Wars. 

In 1913 the value of exported goods made up 14 percent of the world economy. By 1933, shattered by World War I and the Great Depression, it had slumped to 6 percent, and it did not recover until the 1970s. The backlash propelled the rise of right-wing authoritarian and fascist movements that promised to reverse or seize control of the forces of globalism. It ended in a catastrophic world war.

7. Challenges for iPhone manufacturing due to the Trump tariffs.

iPhone assembly is currently done in mainland China by companies such as Taiwan’s Foxconn and Pegatron and to a lesser extent in India, where Tata is building capacity as an Apple supplier. It is the final step in a vast chain of Apple suppliers, most of which are currently based in Asia. There are 387 individual parts involved in final assembly of an iPhone 16, according to market research group TechInsights, which include chips, circuit boards, batteries, wires, lenses, screens and metal and plastic parts. Apple’s most recent public supplier list, which covers the 2023 fiscal year, shows the 187 companies responsible for 98 per cent of the company’s direct spend that year. Of these companies, 169 had a manufacturing presence in mainland China and Taiwan.

Apple's efforts to relocate manufacturing to the US raises several questions. Given the reality of globalised supply chains, tariffs by the US on imports from Vietnam, Taiwan etc., not to mention China, would naturally make it impossible for US manufacturing to be competitive. Then there's the cost. 

It would probably cost Apple “several billions” of dollars to shift even a portion of its iPhone supply chain to the US, according to estimates by Morgan Stanley analysts. Wedbush analyst Dan Ives estimated it would take Apple three years and $30bn to move just 10 per cent of its supply chain from Asia to the US. “This is a company that has embedded itself in China and south-east Asia for decades, now seemingly looking at the prospect of being forced to change the entire way in which they think about building and pricing an iPhone,” says Erik Woodring, analyst at Morgan Stanley. The pressure comes despite Apple pledging in February to hire 20,000 staff as part of a $500bn US spending plan for the next four years that includes a new facility manufacturing servers for artificial intelligence in Texas. The fact that Apple does not currently run its own manufacturing facilities, but outsources them to Asia-based companies it has spent two decades and billions of dollars nurturing with specialist equipment, adds an additional layer of complexity.

8. This week saw the mother of all U-turns by President Trump on reciprocal tariffs, when he put them on hold for 90 days to negotiate deals with all trade partners except China (with who he ratcheted the tariffs to 125%) after having firmly ruled out any reversal on multiple occasions. 

Trump’s announcement, with the blue-chip S&P 500 closing up 9.5 per cent and the Nasdaq Composite surging more than 12 per cent. It was the best day for the S&P 500 since 2008 and the strongest for the Nasdaq since 2001. The massive rally in stocks added about $4.3tn to the market value of the S&P 500, according to Financial Times calculations based on FactSet data. The gains reversed some of the heavy losses for US stocks since Trump announced his wide-ranging tariffs a week ago.

The Bond markets did their bit to force the Trump reversal. While the stock markets unravelled in the face of tariffs, it was expected that the bond markets would in line with theory respond upwards. However, the opposite happened as the bond markets too tanked amidst signs of poor demand in a Treasury auction. A possible reason is the unwinding of "basis trades" (involving leveraged bets, often up to 100 times, so as to profit from the convergence between the futures price and the bond price) by hedge funds that had to exit US Treasuries in large volumes. 

Another factor driving the reversal was the push back from the plutocrats. Paul Krugman is spot on here. 

9. Elon Musk and DOGE conflicts of interest.

Job cuts at the US traffic safety regulator instigated by Elon Musk’s so-called Department of Government Efficiency disproportionately hit staff assessing self-driving risks, hampering oversight of technology on which the world’s richest man has staked the future of Tesla. Of roughly 30 National Highway Traffic Safety Administration workers dismissed in February as part of Musk’s campaign to shrink the federal workforce, many were in the “office of vehicle automation safety”... The NHTSA, which has been a thorn in Tesla’s side for years, has eight active investigations into the company after receiving — and publishing — more than 10,000 complaints from members of the public. Morale at the agency, which has ordered dozens of Tesla recalls and delayed the rollout of the group’s self-driving and driver-assistance software, has plunged following Doge’s opening salvo of job cuts, according to current and former NHTSA staff... 

Musk has promised customers and investors that Tesla will launch a driverless ride-hailing service in Austin, Texas by June and start production of a fleet of autonomous “cybercabs” next year. To do so, Tesla needs an exemption from the NHTSA to operate a non-standard driverless vehicle on American roads because Musk’s cybercabs have neither pedals nor a steering wheel... After a spate of incidents, the NHTSA in 2021 introduced a standing general order that requires carmakers to report within 24 hours any serious accidents involving vehicles equipped with advanced driver assistance or automated driving systems. Enforcing the order has been a vital tool for the agency to launch investigations into Tesla and other carmakers because there is no federal regulatory framework to govern cars not under human control. It was critical for a recall of 2mn Teslas in December 2023 for an update that would force drivers to pay attention when its autopilot assistance software was engaged.

10. Costs of Brexit

A variety of studies by the National Institute of Economic and Social Research, the Economics Observatory and the Centre for Economic Reform suggest that by 2022, business investment would have been 10-12.4 per cent higher but for Brexit. Former Bank of England Monetary Policy Committee member Jonathan Haskel said lost investment had already cost the UK £29bn. Other studies are less downbeat — the strength of UK service industries has softened the impact — but all point in one direction. The Office for Budget Responsibility continues to predict a 4 per cent permanent hit to UK productivity and a 15 per cent long-run fall in exports and imports. Even a more hopeful recent report by the LSE’s Centre for Economic Performance found that 16,400 businesses had simply stopped exporting to the EU after 2021.

11. Big Law deserves the Trump treatment. The decision by Paul Weiss, a storied US Law firm, to cut a deal with the US Government has saved it from an executive order by President Trump that in effect banned it from appearing in federal courts and cases over claims that its work on progressive causes undermined the judicial system. 

Paul Weiss is not the only firm to have been targeted by the Trump administration, and judges have since frozen critical parts of similar orders against Jenner & Block, WilmerHale and Perkins Coie for being illegal. But rather than litigate, Karp cut a deal with Trump that cancelled the executive order in exchange for concessions including $40mn worth of pro bono legal services on issues important to the president... Skadden Arps, an arch-rival to Paul Weiss for many of its corporate clients, reached a deal with Trump to offer $100mn worth of pro bono services to avoid being hit by an executive order. And this week, the deals kept apace. On Tuesday and Wednesday, Willkie Farr & Gallagher and Milbank, respectively, reached similar agreements to the one Skadden struck, meaning four major firms have now forged deals with the White House. In the Willkie and Milbank deals, the firms agreed to perform $100mn worth of pro bono legal services to Trump’s pet causes... some such as Perkins Coie, Jenner & Block and WilmerHale have resisted.... “No one is willing to go on the record because everyone’s concerned. I don’t want to pop my head up because you don’t know how it’s going to get smacked. But that’s very different from saying we don’t support what was done.” Another corporate adviser is more blunt: “It was a mafia-like shakedown . . . There was no choice. Do you have a choice whether to pay the mob?”

... While a large number of small and medium-sized firms are willing to support Perkins Coie in its legal effort to fight sanctions imposed by the Trump administration, the Financial Times revealed at the weekend that not one of the 20 top law firms in the US — most of which have large dealmaking businesses — has so far given their “unconditional support” to the effort... Shortly after Trump targeted Perkins Coie and Covington, Karp contacted the heads of several law firms to try to organise support for them. The response was almost non-existent, and also failed to materialise when the White House issued an executive order against Paul Weiss. “Disappointingly, far from support, we learned that certain other firms were seeking to exploit our vulnerabilities by aggressively soliciting our clients and recruiting our attorneys,” he wrote in the email to employees of the firm after he reached a deal with Trump... Some clients warned the firm’s partners that unless the matter was resolved swiftly, they would move their business elsewhere... During the meeting at the Oval Office, in a move that was not expected by Karp, the president patched in on speaker Robert Giuffra, the co-chair of rival firm Sullivan & Cromwell and a Trump donor, to help hammer out a truce. Karp swallowed his pride and agreed to the terms imposed by Trump...

Paul Weiss is one of a handful of firms that has created a thriving free-agent market for lawyers. Partners a decade ago would make perhaps $3mn or $4mn a year and would enjoy lifetime employment and generous pensions. With the growth of private equity firms, hard-knuckled hedge funds and a regular churn of multibillion-dollar corporate acquisitions, a small set of lawyers now command eight-figure pay packages and have no reluctance about jumping firms for the highest bidder... today’s lavishly paid top talent are less likely to display allegiance... One lawyer who has gone up against Paul Weiss put it more bluntly: “There’s too much fucking money. When a Big Law partnership is $2mn a year, people can have some principles because the fall isn’t so bad.” The calculation changes entirely, the person says, “when they are making $20mn a year”. Under Karp’s leadership, the firm has often been a ruthless advocate for the powerful. Its biggest clients include Apollo Global Management and Goldman Sachs, while it has also represented members of the Sackler family, who founded Purdue Pharma, the pharmaceutical behemoth that has been accused by prosecutors of stoking the US opioid crisis. Indeed, one of the considerations for the firm was its stable of private equity clients, many of whom are Republicans. As one partner puts it, if the firm only acted for clients whose ethics they agreed with then they would have no clients.

Arizona is experimenting with a reform to break the stranglehold of Big Law.

Since 2021, Arizona has been dishing out law licences under an “alternative business structure” programme that allows non-lawyers to own and run law firms. In February, the state’s Supreme Court issued a licence to global accounting firm KPMG, which plans to challenge major law firms for low-margin, high-volume work such as reviewing contracts. It’s a notable departure from previous practice, whereby state regulators restricted ownership of law firms to practising lawyers and strictly forbade non-lawyers from sharing in the fees or profits from legal work... The state has already granted over 100 other ABS permits to businesses that range from a unit of cut-price legal adviser Rocket Lawyer to Axiom, a nationwide staffing company that rents out lawyers on demand, like an Uber. Texas, Utah and Washington are considering similar systems. Together, these add up to a significant shifting of the ground underneath the feet of traditional law firms in the US, and the list will soon be swelled by more accounting and wealth management firms of national renown, according to advisers working on those applications. Arizona’s initiative follows liberalisation of law firm ownership in the UK and other countries, and is turbocharging innovation in the business of law across the US, with entrepreneurs and investors already testing the limits of existing state bar rules... the UK, which opened up its legal sector to outsiders in 2011. Law firms there are permitted to accept outside investment or float on the stock exchange, while non-law firms can also add legal practices to their offerings.

12. US corporate profits are at record highs.

13. Great graphical feature on China’s shipbuilding industry. 

Shipyards across the United States built just five large ocean-going merchant vessels in 2024, combining to a volume of 76,000 gross tons (GT). In the same year, just one Chinese shipbuilder, the state-owned China State Shipbuilding Corporation (CSSC), delivered over 250 ships, adding up to a staggering 14 million GT. That is more vessels by tonnage than the entire U.S. shipbuilding industry has produced since the end of World War II combined. When adding in the rest of China’s shipyards, the scale of the challenge before the United States and its allies becomes impossible to ignore… China’s rise in the global commercial shipbuilding industry has been extraordinary. The country’s market share surged from a mere 5 percent of the world total in 2000 to over 53 percent in 2024. South Korea and Japan, the only two other prominent players in the industry, have seen their combined share slip from 74 percent to 42 percent over the same period.

There’s an important strategic dimension to shipbuilding industry, especially the way China has structured its industry.

Many of the shipyards that support China’s commercial production also produce warships for the Chinese navy. The ability to leverage dual-use technologies, infrastructure, and materials for both commercial and naval shipbuilding provides cost savings and strategic benefits. In peacetime, orders for merchant ships sustain demand that keeps dual-use production lines humming, and during economic downturns naval ship orders can help offset downswings in commercial markets. In wartime, commercial production lines can be converted to naval production, rapidly scaling up the ability to churn out and repair warships.

The article describes how a tightly interlocked web of private and state-owned shipbuilders has enabled China to build this dual-use industrial complex. Foreign buyers have been central to building and sustaining this Chinese industry at such scale.

Foreign firms—many of which are based in countries with close defense relationships with the United States—are pouring billions of dollars of ship orders and transferring key technologies to China’s military industrial base. As a result, they are inadvertently bolstering China’s naval modernization… Between 2019 and 2024, foreign firms (outside of China and Hong Kong) purchased over 70 percent of all ships produced in China. Despite the visible ties between China’s Tier 1 shipyards and China’s navy, foreign buyers have ordered heavily from these yards. Between 2019 and 2024, foreign firms purchased 305 commercial vessels from Tier 1 shipyards alone, collectively bringing in tens of billions of dollars in revenue and pushing China’s naval yards further into the forefront of the global commercial shipbuilding market… Taken together, the hundreds of orders placed by foreign companies into Chinese shipyards have amounted to a massive injection of funds. According to China’s national shipbuilding industry association, the country’s commercial ship exports brought in a staggering $43 billion in 2024.

Some thoughts on public land transactions

Many people consider public land monetisation as a low-hanging fruit to raise public revenues. This post will argue against outright land sales to raise revenues, highlight the practical problems and distortions arising from it, and instead propose land transactions to meet policy objectives (affordable housing, industrial development), land leases, and land sales only when value capture is maximised. 

There are two ways to allot government lands - administrative and auction allocation. The former applies to lands allotted to meet specific policy objectives. They include allocations to industries and institutions and sales by State Housing Boards or Corporations as part of affordable housing schemes. The latter applies to sales for other purposes and primarily aims to raise revenues. 

While it appears a logically simple activity, the practical challenges with land monetisation are enormous. I had blogged here outlining the challenges with land monetisation - the market’s absorptive capacity, litigation, rent-seeking opportunities, political economy constraints etc. It’s also borne out by the reality that there are hardly any examples of institutionalised land monetisation from any state or city in India. Even the much-touted Canada Land Company, in more than 60 years of existence, has struggled to sell land. 

Aside from allotments to industries and institutions, land sales nowadays are viewed primarily from the perspective of revenue mobilisation. The administrative incentives are aligned towards maximising the price at which land is sold. This has engendered some perverse incentives. 

For a start, the land market in India is vitiated by the persistent and large wedge between the market value and the government-determined guidance (or registration) value. This wedge remains intact despite demonetisation and other measures. It’s a measure of the resilience and persistence of the black money economy. Since all government land auctions are conducted at full price, and given the sky-high valuations, there’s only so much land (at those prices) that the market in any city can absorb. The full price of land is formally incorporated only for premium (Class A) commercial real estate transactions, which is a very small share of all real estate transactions. 

Other purchases of large parcels auctioned by governments end up as premium residential properties. Governments have sought to address the problem of the market’s absorptive capacity by subdividing lands into smaller parcels and then auctioning them. But this creates another set of issues. Given the acute scarcity of urban land and its attractions as investment, such smaller parcels tend to end up in unproductive end-uses. 

It’s far worse than land being locked up with government departments to have the same land locked up as mansions and bungalows of the ultra-rich or as their investment assets, instead of being used for productive purposes. For this reason, sub-dividing and selling scarce government land that can end up as unproductive uses like high-end residential properties should be strongly discouraged. 

The most damaging impact of public land auctions is to inflate land prices in the area. Since the government’s incentive is to maximise the sales price, the prices determined in the auctions end up becoming the benchmark for land prices in the area. Auctions, therefore, invariably push up the guidance values in the area in their periodic revisions. 

Besides, the rent-seeking dynamics around real estate mean that insider information on auctions triggers land purchases in the vicinity by powerful interests. They have an interest in the land auctions boosting land prices. This, in turn, reinforces the existing institutional incentives within the bureaucracy to maximise sale prices. The insiders actively boost prices by bidding aggressively for one or two small parcels, thereby raising the benchmark prices in the auction. Even if the rest of the auction fails to find bidders, their purchases would have served the purpose of inflating the benchmark price in the area, and thereby increased the prices of their own newly acquired properties. 

Ironically, the increased land supply by the sale of public lands, instead of lowering housing prices, ends up increasing land values in general through a combination of speculative activity and an expansion of the market in the land as an investment asset. In a market where land is in high demand as an investment asset and incremental additions will always be small (compared to the latent demand), such additions only fuel the demand. 

While I’m not able to locate studies examining such practices, it’s a widely held view with compelling anecdotal evidence to infer that government land auctions have been an important contributor to property market distortions in cities like Hyderabad.

In fact, a common feature of all the scandals surrounding land auctions involves land purchases in the vicinity based on insider information, speculative transactions, aggressive bids for some parcels, and a sharp rise in market prices in the area. And it’s rare to find clean land auctions without these features and associated scandals. 

In this context, here are a few thoughts. 

1. Given its scarcity and critical (direct and indirect) role in shaping urban growth, governments should prioritise policy objectives over revenue mobilisation when allotting lands. Accordingly, administrative allotments for affordable housing should be just as important as those for industries and institutions. Sales to mobilise revenues should be used only sparingly. 

Traditionally, government-owned housing boards/corporations across states have developed lands and allotted them through lotteries at administratively fixed prices. The prices were fixed to account for the costs and a small profit mark-up. The primary objective of these schemes was to expand the supply of land at affordable prices. Revenue realisation was only an incidental secondary objective. Such schemes allowed generations to benefit from access to lands at affordable prices. 

At a time when land prices are unaffordable for all but the richest in the big cities, there’s a strong case to revive these schemes. It can be an important step to address the problem of housing affordability, which is threatening to choke urban growth. The only difference from earlier should be that these land allotments should be only for high-density developments. Accordingly, it could be allotted to societies to develop high-rise apartment complexes with only affordable housing units. And these allotments should be complemented with measures that incorporate desirable urban planning norms like transit-oriented development. 

In this regard, the central government could come up with a model policy and a scheme for the allotment of public lands for affordable housing projects. This scheme should include a mortgage finance mechanism. 

2. Land is arguably the most important privately appropriated natural resource. As cities have rapidly expanded, the land available for further expansion has become scarce. Land is also required for utilities and community infrastructure that are essential to support densification. It’s therefore important to ensure that governments retain control over a bank of public lands and use it for public purpose requirements that will inevitably emerge over time. 

Therefore, instead of outright sales, governments could consider the option of long-term leases (say, for 25-33 years). Such leases may be easier to execute, less controversial, generate far less incentive distortions, and ensure that ownership remains with the government. The last part is especially important given that there’s only so much land available for posterity. In this context, it’s pertinent that China’s spectacular economic success was financed in large measure through revenues mobilised from long-term land leases.

One policy facilitator to promote leasing is to encourage banks to lend against leasehold lands where the government is the lessor. Currently, banks insist on free-hold title registration for loans. This deters private interest in leasehold rights. While there are practical problems associated with the repossession and re-lease of these lands, enabling measures should be explored to ease lending on leasehold rights. 

3. Market sale of government lands should be undertaken only under exceptional circumstances and should be structured to maximise value capture. The end-use should be specified, and all the external and possible internal infrastructure should be completed. Ideally, the property development should be done as a PPP, with the government maximising value capture. Such sales should be confined to commercial Class A real estate development. 

Such transactions require high institutional capabilities. It’s therefore appropriate that there be a dedicated entity in each state and for all central government departments that aggregates and undertakes such sales by maximising value capture, and that too only for specific use cases. Accordingly, any sales of government land by state or central government departments, agencies, or corporations should be done through this dedicated entity. Their transactions should be as per the suggestions above. 

4. Another alternative to outright sales through auctions would be administered price (say, at the guidance value) sales to other government agencies for offices and other public purpose requirements. There’s considerable demand within state and central government departments and corporations for expanding their facilities. There should be a simple mechanism in the state and central governments that simplifies the transfer of government lands across departments and their entities. 

Some early thoughts on Trump 2.0

Now that Trump 2.0 is on us with some force in less than 100 days, it may be useful to understand the reasons and speculate on how things might be in the months ahead. It’ll be interesting to revisit them periodically and see how many of them have aged well. 

So here are some observations, explanations, and predictions. 

Context and observations

1. In terms of sheer effectiveness in stamping its authority, implementing its agenda from the first day in office, and upending the status quo, the Trump administration would stand out among incoming governments in any country in the post-war era. Whether we agree with its policies or not, it cannot be denied that the near-clockwork precision and force with which its primary agendas on deregulation, trade, and political cleansing have been pursued and implemented are mighty impressive. 

Generally, political leaders who assume power after having campaigned promising transformative reforms quickly run into difficulties with implementing their agenda. An important reason is that their Ministers and advisors combine with the status-quoist institutional restraints to willy-nilly slow down the agenda. The difference here has been the single-minded focus of Trump and his having packed the entire team with loyalists whose fealty is to his agenda and orders (and nothing else). 

2. The speed, unison, and effectiveness are also in stark contrast with Trump 1.0. This time, the Congressional confirmation hearings of Trump 2.0 nominees could not have been more swifter or smoother. The internal dissonances, back-biting, and selective leaks, a feature of Trump 1.0, are absent. It helped that unlike the Trump 1.0 administration, which contained several old-guard Republicans, Army Generals, and Wall Street leaders who held back on the pursuit of extremist agendas, Trump 2.0 has been packed with loyalists whose only commitment was to implement what the leader wanted. Thanks also to the likes of Project 2025, this time, the agenda was fully cooked and ready to be implemented. 

3. While the speed of translating the administration’s intent into action is remarkable, its manner points to limited deep thinking and planning. While DOGE is an extreme example, even in trade, the manner of policy execution betrays poor thinking and even stupidity. For a start, the one-size-fits-all formulaic application of tariffs, especially on tiny and extremely poor countries, will surely alienate everyone without achieving anything in return. The indiscriminate application across industry segments and products, too, is baffling. Tariffs on clothes, footwear, toys, lumber, aluminium, etc., would only raise prices without achieving any reshoring. The indiscriminate tariffing of allies, especially in Europe, Japan and South Korea, while also seeking to isolate China, can only be foolish. Similarly, mindless application of the highest tariffs on very poor African countries like Lesotho and Madagascar speaks of lazy policymaking. Instead of uniform application of tariffs based on ideologies and beliefs, effective targeting of countries and products would have required serious groundwork. And that requires expertise. 

4. The speed and scale of the collapse of America’s famed institutional checks and balances and restraints is astonishing. The fear that has gripped the establishment, corporate America, and the media is unbelievable. It’s a testament to the limits of institutional restraints when faced with powerful leaders who are deeply committed to making changes. It’s also a reminder of the tenuous nature of the social and political contracts on which democracy hangs. It also highlights the weaknesses of American democracy, its not-so-distant history of patrimonialism and clientelism, that scholars like Francis Fukuyama have described. 

On a related note, the US under Trump 2.0 is a good example of how the Rule of Law can quickly be twisted into Rule by Law. The Trump administration’s widespread use of Executive Orders signed by the President, even when in egregious violation of statutes, is a great example of Rule by Law in modern democracies.

5. The policies of Trump 2.0 are also a reminder that when significant sections of society feel marginalised socially and economically for long enough, it’s only natural that it generates discontent that manifests in the form of left or right-wing populism. They feel that the good things about America since the millennium - Great Moderation, low inflation, stock market boom, technological advances, economic and social stability - have all bypassed them. Trump has been smart in tapping into this discontent. In this context, it’s important to make the distinction between the underlying cause for such alienation (diagnosis) and the trigger for the consequent backlash (symptom). It’s a mistake to place all the blame on the cause while overlooking the symptoms, and vice-versa. 

6. When all’s said and done, of all the reforms that Trump has embarked on, deregulation is likely to be the most ineffectual. Its contrast with trade reforms is instructive. While there was a clear plan on trade with proficient ideologies and thinkers, deregulation appears as a hotch-potch of poorly conceived and even more poorly planned bluster by a make-shift bunch of amateurs led by Elon Musk. Even with good plans, deregulation is a daunting challenge. This effort stood very little chance of success. Even blind Trump loyalists in the Cabinet would not be spurred to cut the branch they are sitting on. 

7. The only real success of DOGE has been the dismantling of the USAID. Given its deep disconnect with the practice of development and the cosy, self-serving club that international development has become, it’s apposite that the existing equilibrium on aid has been unsettled. Far too much of international development resources and efforts are frittered away on causes and ideas that are based on the beliefs and values of a handful of elite opinion makers from multilateral institutions, academia, think tanks and philanthropic foundations, which are widely disconnected from the messy realities of developing country contexts. 

8. Only a maverick and an outsider like Donald Trump could have so definitively upended the status quo and reset the equilibrium on important and highly contested areas like China, trade, globalisation, immigration, multiculturalism, social values, national security, aid etc. New norms and equilibriums have been established in each, and while there might be some rebalancing, the broad direction of shift will remain even with a Democratic administration. A bipartisan consensus is likely to emerge on each. Without saying anything about its merits, Trump is certain to leave a legacy, one that no post-war President can match.

Trump Coalition

9. The Trump coalition has three legs - the MAGA populism, nationalism, and the plutocracy. The first group drives the electoral base, the second provides the ideological basis, and the third provides the financial muscle. The first two legs are integral to Trumpism, the forces that have catapulted him to power. The plutocrats are late arrivals, embracing Trump only when it became clear that the die was cast for at least four years. Today, the entire American plutocracy, spanning Big Tech, Wall Street, and Corporate America, have prostrated before Donald Trump. 

10. This dalliance with plutocracy creates tensions in the coalition. Trump has often claimed that he wants to drain the swamp and loosen the traditional elite’s capture of the establishment and the economy. This has been one of the slogans of the MAGA populists. While he has surely managed to considerably weaken the hold of the traditional political elites, especially within the Republican Party, the economic elites have managed to worm their way back. The only thing that prevents them from being fully back in charge is the mercurial Trump himself. 

11. Even with everything else that Trump 2.0 would have done, meaningful improvements to the economic fortunes of its base, the MAGA populist households, who have been bypassed by the recent years of growth, will happen only when fundamental distortions in the economic structure are addressed - tech oligopolies and business concentration, financialisation, capital-labour power balance and the sharing of corporate profits etc. 

These issues cannot be addressed unless Trump 2.0 dislodges the elite capture of the establishment by the plutocrats and the alliance of Big Tech, Wall Street, and Big Business. Given how quickly they switched camps (and have also been accepted there), it’s most unlikely that Trump 2.0 will be able to drain this part of the swamp. Further, they will change their allegiances and end up being welcomed by any incoming Democratic Party administration. And an opportunity would have been lost for a reformative shift in the economic paradigm, by saving capitalism from the capitalists.

12. But the plutocrats are not having it all their way. They have suffered by way of massive wealth erosion from the stock market crash, with more likely to come. The tariffs are surely not to their liking and they are protesting. Trump’s appointment of pro-anti-trust Gail Slater to succeed Jonathan Kanter to head the DoJ’s anti-trust division is not what Big Tech and Wall Street wanted. But Trump will surely make the tax cuts permanent, and his deregulatory agenda will benefit Big Business. Notwithstanding, the sympathies of the likes of JD Vance with the work of Lina Khan and Co, it’s most likely that anti-trust will lose its momentum, and there’s unlikely to be any big break-ups of Big Tech (unless President Trump personally wants it to happen). All this means that the drain-the-swamp agenda will remain stillborn. The trends of oligopolies, business concentration, elite capture, financialisation, and widening inequality will continue. 

Trade and Economy 

13. While most people will vehemently disagree with the Trump trade agenda, with its excessive focus on deficits and tariffs, it’s a mistake to dismiss it as mindless lunacy. Instead, it’s the climax of a long-held worldview (see this 1987 advertisement in The New York Times) that America is being weakened and short-changed by its allies. It must be especially satisfying for Donald Trump to be able to finally redress his long-held grouse that its allies have been taking advantage of America. There’s at least some merit in the argument that its allies have given back too little in return for their access to the massive American market and protection from America’s strong security umbrella. However, it cannot also be denied that Trump is being disingenuous by ignoring the exorbitant privilege and the economic and political power America has enjoyed because of its trade status. 

14. It’s unlikely that Trump will be able to swing a Mar a Lago Accord of the kind that Stephen Miran or Robert Lighthizer have proposed. Its allies are unlikely to play ball and swap their holdings of American Treasuries for some form of perpetual bonds. So, America will have to find ways to finance its debts and deficits. But the Trump offensive has ensured that the US will extract a much higher cost for its security umbrella, even in its shrunk form. The free-riding on defence among its allies is a thing of the past and defence spending among them will rise substantially. For the Europeans and East Asians, the peace dividend from the US defence umbrella is over and this is the new norm. 

15. The reciprocal tariffs are the Big Bazooka in President Trump’s tariff armoury. Now that it has been fired, we must now await how it plays out. There will be a period of deal-making, though it is unlikely that there will be any reversal of the broad direction. The baseline tariff is here to stay, with at least a significant part of the reciprocal tariff. It cannot be doubted that Trump has demolished the post-war global order on international trade that was institutionalised through the WTO regime. The long period of trade liberalisation has been definitively reversed. 

This outcome must be welcomed to some extent since, as the likes of Dani Rodrik have written, globalisation has gone too far in eliminating tariffs. The WTO itself had not only no answer to addressing the world economy’s China problembut ended up feeding it. The global trading system was broken even before Trump arrived, and nobody was intent on fixing it. However, the Trump recalibration has pushed the needle too far in the other direction. While it’s unlikely to return to any balance during the next four years, there’s a strong likelihood that conditions will be ripe for some form of balancing after Trump leaves office. However, not even Democrats will want to reverse tariffs to status quo ante. This new norm may well be Trump’s biggest positive legacy, and it’s unlikely to have been realised in such rapid time without Trump 1.0 and 2.0. 

16. While America is unlikely to regain its old glory in manufacturing, it’s most likely that manufacturing will return in critical sectors like automotive, green technologies, batteries, semiconductor chips, critical minerals refining, pharmaceuticals etc. America will do more of “making” instead of passive “taking”. There are already signs of this, and it will be another remarkable achievement. Ironically, the major credit for this should go to the Biden administration with its Big Push through the CHIPS and Inflation Reduction Acts. Fortunately, despite all talk to the contrary, I don’t think Trump 2.0 will reverse these industrial policy decisions. 

17. The Trump shock is almost certain to result in higher inflation and trigger a recession. The question is their magnitude and duration. Domestic consumption in the US will be dampened and even decline. And this may be a good thing since America has for some time now been borrowing and consuming far more than is sustainable. The reduced access to Cheap Chinese exports and higher inflation may be the right medicines to rebalance consumption. If the recession is the price to pay for this rebalancing, it may be one worth paying.

18. Trump 2.0 is unlikely to damage the dynamism, enterprise, and productivity of corporate America, especially the Big Tech. The country is the global leader in the latest general-purpose technology of artificial intelligence, and this headstart will sooner or later start to show economically. Even with a recession, the balance sheets of Big Tech are unlikely to be hurt in a manner that makes them cut back significantly on AI investments. That ecosystem is only likely to flower more and expand. The combination of early-stage AI, Big Tech, technical talent, and its deep VC ecosystem will, at least for the foreseeable future, keep America at the frontiers of innovation and technology. Even with the occasional surprises from China (like Huawei’s Kirin chips and DeepSeek), it’s hard to see them as a serious enough competitor.

19. While climate change concerns and policies have been marginalised, I’m inclined to believe that this might be a temporary phenomenon. It’s most likely that even before the Trump regime exits, many elements now placed on hold will make a comeback in the US itself. There will be enough recurrent shocks forthcoming to shake everyone adequately enough to restore the status quo ante on climate change mitigation and adaptation. 

Dollar and geopolitics

20. The actions of Trump 2.0 look set to expedite the erosion of the dollar’s dominance and with it the exorbitant privilege. There are three important legs to the US dollar’s role as the global reserve currency and the dollar-based global financial system - the US-controlled SWIFT global payments system, the perceived safe-haven status of the US Treasuries, and access to the massive US market and its role as the buyer of last resort. The first is under threat from the recent trends of its weaponisation by the US, most notably by decisions in recent years to freeze out adversaries (and also those who don’t comply with US sanctions) and competitors to SWIFT for bank transfers. The second is threatened by the burgeoning US debt and deficits. Now, the war on deficits and tariffs threatens the last leg. The new Cold War with China, the eviction of Russia from SWIFT, and the repeated use of sanctions to achieve its geopolitical goals have already strained the dollar-based system. The global payments system, one of the important levers that allow America to exercise outsized global influence, may well be the first leg to give way. 

21. Even with the Trump tariffs, this decline in the dollar is likely to be a slow process, especially because there are few alternatives. However, the creation of an alternative payment system, if successful, can expedite the transition. Therefore, while the dollar and US Treasuries will continue to remain the primary safe-haven assets, diversification and building their own alternatives will become a conscious priority for even America’s allies. The decline of the dollar and, with it, America’s exorbitant privilege of being able to borrow cheaply globally in its own currency will get expedited but will still only be gradual, given the lack of alternatives. For political, economic, and historical reasons, China under Xi Jinping will not be able to seize the opportunity to establish itself as a trusted and credible partner.

22. Economically, the biggest loser from the Trump resetting of the global trade order will be China. It’s hard not to imagine that the tariffs are a body blow to the Chinese economy. Export-driven growth that has been a major contributor to its three-plus decades of spectacular growth is over. There will be efforts to re-direct trade towards Europe and emerging economies and shift production to “connector” economies. But protectionist barriers are rising everywhere. China has no choice but to look inward and rebalance its economy towards consumption. That’s a good thing. But before that, it will have to address the issue of excess capacity and find ways to mitigate the economic pain and political instability risks from factory closures and job losses.

23. The Trump resets present yet another opportunity for India to integrate with the global value chains and expand its trade share. It has gotten away less worse than China and rivals like Vietnam. There will be some re-alignment of the global value chains away from these affected countries towards those like India. However, given that it already had a $37 billion trade surplus with the US in 2024, and the salience of trade balance and protectionist sentiments, there’s not much space available for India to expand its goods exports to the US. Besides, India’s tariffs are among the highest which explains why President Trump mentioned India’s tariffs as the highest number of times in his Executive Order on reciprocal tariffs. Finally, even if India exports more to the US, it must do so while also lowering its current surplus, which may not be possible even with a significant increase in imports of oil and gas. 

24. Trump has made it very clear that he will not entangle America in disputes in far-off lands. He has said it about Europe and Taiwan. He’s more likely to favour an arrangement that divides the world into spheres of influence, allowing Russia and China suzerainty over their respective near-abroad. This also means that leaving aside relying on the US to balance China, alliances like the Quad Group will be useful to the US only for tactical purposes (as instruments in Trump’s deal-making process). 

25. Just as China is a big loser, Europe is likely to emerge as a winner. This may have been the kick-up-its-butt that Europe needed to get its act together and Make Europe Great Again (MEGA). The realisation that they must take responsibility for their security is a blessing in disguise. Apart from increasing their national defence allocations, it will also create the conditions to get them to work more closely together. Even if the Democrats come back, this experience will not be forgotten. The German decision to junk its debt brake is not just any executive decision but a landmark constitutional amendment. The events since the Trump inauguration and what will follow are likely to spur the European economies to adopt some of the recommendations of the Draghi Report to regain their economic dynamism and competitiveness. 

US Politics

26. It’s most likely that economic weakness and internal contradictions in Trump’s policies will result in Democrats regaining the House of Representatives in 2026, leaving Trump hamstrung for the last two years of this term. He’s, however, unlikely to back down and, even if in an attenuated form, will pursue his agenda for the full four years. Stalemates and gridlocks will be a feature. 

27. The Republican Party has been completely taken over and remade by Donald Trump. In the next four years, enough Trump loyalists would have become entrenched in the Party. Trump will surely determine who succeeds him (if he does not manage to run for a third term). I’m not sure that JD Vance will be able to muster the support and chops to emerge as the leader of the Republican Right. It’s more likely that the Republicans will suffer a period of turmoil (like the Democrats now) before a new crop of leaders take over.

28. While the Democratic Party appears to be in shambles, it may well be what it takes to ease out its septuagenarian and octogenarian political leadership and usher in a new generation that takes the Party forward. It may also be the opportunity to break free from its capture by conflicted ideologues, corporate interests, and wealthy donors. The critical question is whether it can stitch a coalition that sheds this elite capture and reconnects with its traditional working-class base. If they can rebalance their views on immigration, race, social values, trade, climate change, etc., from its current woke extremes, they could even attract a part of the MAGA populists, a fair share of whom are certain to become disenchanted with Trumpism once the economy weakens. I’m not optimistic about either. The most likely outcome is a more progressive Democratic Party, but one still controlled by many of the current ideological elites. 

29. The squeeze on institutions like media and academia will likely blow over, though norms are likely to be rebalanced everywhere on cultural, social, economic, and political issues. I think these institutions have enough resilience for this episode to blow over. 

30. The US Supreme Court is an important actor. Given its Republican dominance, it’s likely to allow Trump some leeway but will step in if things deviate too far from the norm. It’ll adhere to the conservative agenda and protect corporate interests, and go along to the extent Trump is promoting them. But it is unlikely to stand by if abuse of executive power crosses a line and would not be beholden to the MAGA populist agenda. Trump and Musk’s vocal criticism of Judges and their decisions has already earned a rebuke from Chief Justice John Roberts. 

Conclusion

Finally, Trump 2.0 would have seriously eroded America’s political and economic credibility among its allies and partners. Even with the most optimistic post-Trump rapprochement, the scars of alienation felt by Europeans, Japanese, and even its North American neighbours would not heal quickly. The continuous weaponisation of America’s economic, trade and financial market policies in recent years, too, are reminders about the perils of relying on a global order that’s controlled by the US. Trump 2.0 has ensured that no alliance and relationship is immunised. This will seriously erode America’s diplomatic influence in mobilising its allies on issues it wants to promote.

The unpredictability in political and economic policy spheres introduced by the Trump 2.0 administration will certainly increase the risk premiums that politicians, investors, and others hold about America as a reliable and trusted partner. More than its military strength, America’s superpower status comes from more than a century of leadership on global issues and in responding to crises, shaping the global order in many areas of cross-border cooperation, the role of the dollar as the global reserve currency, and allowing unhindered access to its massive economy, dynamic financial markets, and vibrant academic institutions. 

As mentioned above, the safe-haven asset status enjoyed by the dollar and US Treasuries will certainly erode in value. The long period of happy equilibrium from the perspective of the US, which everyone took for granted, has been rocked repeatedly in recent times, culminating in the Trump actions. Even the Europeans are now actively pursuing diversification from the dollar. The deal-making strategy through tariffs brings in unpredictability and will leave prospective foreign investors unsure. For long developing countries have been accused of being flippant in their policies and this has been blamed for their failure to attract investments. Allies will surely hesitate to rally around the US or trust US leadership on global issues, and worse still seek out other alliances. America’s hard-won credibility and trust won over nearly a century is being seriously damaged, and most likely irreversibly so. 

Having said all this, there are black swan scenarios. One would be that the economy chugs along, the MAGA coalition solidifies, and Trump engineers a third term in 2028. Another will be that of a recession that is deep and long enough to inflict widespread pain and suffering among Trump’s support base and the American economy itself. A third scenario would be a counter-populism from the left once Trump leaves office. Their implications will be different.