How the world can stand up to Trump’s trade blackmail

Donald Trump’s tariff chaos has already offered some valuable lessons about both the US economy and Trump himself.

By applying these lessons to their tariff responses, countries can sharply undercut Trump’s ability to bully and coerce them.

Read more in the column by Paul De Grauwe, London School of Economics professor – The best response to Trump: how the world should answer US president's blackmail.

One lesson is, according to the author, that the US economy is more fragile than expected, owing to the strong link between the real economy and financial markets. Fears about future troubles in trade and production quickly spilled over into equity, bond, and currency markets.

According to him, the US financial system’s central weakness is that large downturns in the stock market can force highly leveraged, largely unregulated hedge funds to scramble for liquidity, leading to massive fire sales of assets, particularly government bonds.

"It is this potential for panic that makes the US economy more vulnerable than others", de Grauwe mentions.

A second lesson is that Trump’s bombast belies a fundamental weakness.

When his tariffs threatened his billionaire friends’ business interests, he yielded.

As the professor writes, a far better strategy is to exert maximum pressure on the US economy, which will then reveal its fundamental weaknesses, scare Trump’s billionaire friends, and ultimately force him to blink (again).

"This can be achieved by rejecting any negotiation and pursuing proportional acts of retaliation. If enough countries adopt such an approach, America will find itself isolated", he claims.

De Grauwe reassures that By imposing reciprocal tariffs on US goods, countries can harm the US export sector, thereby creating a domestic lobby for ending the aggression. In the absence of such a countervailing force, the lobby for import substitution (industries producing goods that the country currently imports) in the US will have Trump’s ear.

According to de Grauwe, it also would maximize the harm done to the US production and trading system, thus rattling financial markets – the key factor that made Trump blink the first time.

By contrast, if other countries fail to cooperate, they are effectively handing Trump a stick with which to beat them.

"To solve this collective-action problem, we need political leadership. China has already shown the way with its reciprocal tariffs on US goods. If the European Union were to join it, there would be two leaders big enough to harm the US significantly, and others would have an incentive to join the coalition," the author concludes.