Special Reports

The Real Cost of Tariffs on US Global Leadership.

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Foreword.

For the past four weeks, we have been publishing a three-part series called “The Real Cost of Tariffs on US and World Economies” (parts 1, 2, and 3). Today’s piece, free to access, highlights some of its most relevant findings. While most posts are free for anyone to access, this series, part of our premium content, is restricted and available only to subscribers. Unlike certain think tanks, which rely on donations and tailor their content to please donors, we enjoy the freedom to produce an unbiased service and thrive on delivering an excellent, objective product. It is a continuous process that demands attention, resources, and passion. If you enjoy our content as much as we do making it, become a subscriber; it is the best compliment and the easiest way to support our endeavor. If you’ve already subscribed, thank you; we really appreciate it.

Trump’s tariffs have a significant impact on the US and the world economy. Tariffs are simply taxes on imported goods that consumers pay, allegedly imposed to protect American industries and jobs. However, their impact has been far-reaching and multifaceted globally. 

While tariffs impact the economic variables of both the country importing goods and services and the one exporting them, in the long run, some countries will benefit from the imposition of these tariffs, mainly China, while others will face serious adverse consequences, with the United States being the most notable. The stated objectives (bringing manufacturing back to the US, creating jobs) will hardly be achieved; instead it is inducing a supply schock, increasing the risk of higher inflation and slower economic growth, along with strained relations with former allies, which will affect the US Dollar as the preferred currency and will increase the cost of servicing the already expensive mountain size of the US debt, which absorbs more funds than the total defense budget.

Screenshot of Graph: on Bloomberg.com

   The combination of changing policies and the destruction of institutions has already caused the wiping out of a few trillion on Wall Street, even considering that the value of tech companies trading in the stock market is artificial, as it does not reflect the actual value of a company’s assets or its ability to generate returns to investors in a given period (unless they sell their stock at a profit), but the result of speculation as to how much more the stock price can increase. This is a result of the deluge of funds dispersed as a countercyclical measure to boost the economy during the pandemic, which sent the stock prices of tech companies skyrocketing and broke the trillion-dollar benchmark. And the uncertainty about what comes next is hardly an invitation to make long-term investments.

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The effects of Trump’s tariffs on nearly every nation, except Russia, have disrupted global trade and sparked fears, uncertainty, and instability —a terrible combination. Most likely, we will live through a global recession as a result. The supply chains that took years to build will survive outside the US, but they will still experience some disruptions.

Image: Annie Spratt on Unsplash

    Even though the US Treasury Secretary stated that the China tariffs were a strategic tactic, evidence suggests that there was no strategy behind them, only tactics that have accomplished one objective: provoking the enthusiastic cheering of the MAGA loyalists. But the Chinese were prepared to respond with force for as long as necessary, knowing the strengths and vulnerabilities of the US and their own. China stopped exporting magnets and rare earths. This is relevant because China produces around 90% of the critical materials used by the tech industry. 

Image: alancrosthwaite on iStock

No one from the Trump camp told him that, although China has become the world’s leading manufacturer, its exports account for only about 20% of its GDP, and that its exports to the US represent only 14% of their global exports, which, if affected by tariffs, they could manage to direct those products elsewhere among the 120 countries with which it trades, or even domestically as the purchasing power of more than 300 million Chinese is more than enough to absorb it. Its population has seen a boost in income, which has translated into increased consumption, expanding the domestic market for many of its products.

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China is a $14 trillion to $15 trillion economy, and its exports to the US are around $550 billion. China’s factory output exceeds the combined manufacturing of the United States, Germany, Japan, South Korea, and the United Kingdom. The cost of China’s debt, at 1.67% for its 10-year bonds, is compared to 4.4% for US 10-year bonds. China is the second-largest holder of US Treasury bonds, behind only Japan. The IMF just predicted a reduction of only 0.5% in China’s GDP growth, down to 4%, compared to a 0.9% loss for the US’s GDP, down to 1.8%.

Screenshot of Image: on marketwatch.com

Also, as part of a long-term strategy conceived in the late 70’s, and in effect since then, scientific education and innovation are prioritized and promoted at all levels and sectors, making Western products less competitive and more expensive compared to local offerings. Suddenly, and to the surprise of many, China took the technological lead, with its companies defeating American champions such as Apple, Amazon, Meta, OpenAI, and Tesla, with Xiaomi, Alibaba, TikTok, Temu, DeepSeek, and BYD.

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It is understandable Trump’s fury when he learned that the mighty US auto industry, which used to be the leader in car exports, reached a total of just 1.45 million units in 2024, while China exported 6.4 million, Japan exported 4.22 million, and Germany exported 3.18 million. 

Photo: Getty Images for Unsplash

Trump has succeeded in angering and offending Canadians and most Europeans, creating a bitter mood towards anything related to the US. Could that be part of a strategy? Is this an extension of Trump’s role in “The Apprentice”? The humiliation to which he intends to subject Presidents and Prime Ministers – more than seventy-five have come to kneel before me, he has boasted – will that translate into some benefit for the US? Would such an exhibition of authority make the United States great again?

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Meanwhile, Trump is waiting for Xi to call him. Hopefully, he will sit in a comfortable armchair so he doesn’t tire. This happens when actions do not respond to a plan or strategy, but to random flashes of whim, fueled by faulty and poor advice. One thing is sure: Trump is ensuring that China will assume the global economic and technological leadership that the United States had until recently.

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This series has profited from published comments by Paul Krugman, Thomas Friedman, David Brooks, Keyu Jin, Niall Ferguson, Jorge Guajardo, and George Friedman, among others.


SEPGRA Economic Analysis Group

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