Trump, tariffs and economic chaos

In April 2025, president of the United States Donald Trump shocked the world with the scale of the tariffs he threatened to impose on imports.1 In this article, I identify the factors motivating Trump and the likely consequences. His message, that he wants to “Make America Great Again”, has found support among some workers who lost out during the neoliberal era of the past 40 years. However, there is also wider concern in the US ruling class about the relative decline of the economy, preceding the neoliberal era, and with it US imperialist domination of the world. For Trump, this decline reflects the hollowing out of the US’s manufacturing base and the large balance of payments deficit the US has with the rest of the world, particularly China. Although many in the ruling class thought they had secured global hegemony after the Soviet Union collapsed in 1991, China’s rise has challenged this.

Indeed, Trump is obsessed with China, something he holds in common with his Democrat predecessors—although his methods aimed at reversing the relative decline of the US are different. I argue that Trump is unlikely to be successful in his “Make America Great Again!” (MAGA) project. Instead, he has substantially increased the chances of plunging the US and the world into a period of “stagflation”, last seen in the 1970s, which would accelerate the decline of the country’s economy.

Trump takes on the world with tariffs

On 2 April 2025, dubbed by Trump “Liberation Day”, the US president imposed a basic tariff of 10 percent on every country in the world, regardless of whether they ran a trade surplus with the US. The tariff was imposed because, according to Trump, friend and foe alike had been ripping the US off for years. A further tariff was then imposed on top of the 10 percent calculated by a bizarre algorithm. This divided the trade surplus the country ran with the US by the total size of its sales to the US, then divided by two, treating the result as a percentage to be added on to the initial 10 percent tariff.2 Although Trump called these tariffs “reciprocal”, they were imposed regardless of whether the country in question imposed any tariffs or other trade barriers on the US. Some of the poorest, but newly industrialising, countries were hit hardest, simply because their population lacks the money to buy US imports to offset their exports to the US. Vietnam, for instance, received a 46 percent tariff.

Dire warnings were issued about the impact of the tariffs. Paul Krugman, a Nobel prize-winning establishment economist, described them as the greatest shock to international trade in world history.3 The right-wing Economist magazine dubbed 2 April “ruination day”.4 Billionaire hedge-fund trader Bill Ackman, who previously supported Trump, claimed the tariffs portended an economic nuclear winter.5 US stock markets fell almost immediately, and trillions of dollars were wiped off the paper value of companies, with the “big seven” tech companies among the biggest losers.6 However, Trump was not initially for turning, contrary to the prediction of many Trump-watchers. If there is no pain, there will be no gain, Trump opined, although he implied the pain would be relatively short-lived.7

The bond rout and Trump’s retreat

However, just seven days later, on 9 April 2025, Trump suspended the additional tariffs on all countries for 90 days, with the exception of those applied to China.8 The reason was the rout in the market for US government bonds, known as treasuries.9 This demonstrated beyond question just how powerful bond markets are. It was a dramatic fall in the price of British government bonds, known as gilts, that destroyed the short-lived Liz Truss government back in 2022, after her chancellor of the exchequer, Kwasi Kwarteng, proposed big unfunded tax cuts.10

Bonds are issued in exchange for money lent to a company or government. Unlike shares, bonds are certificates representing debt rather than ownership. They have a maturation date when the debt represented by the bond is to be repaid. In the interim, a certain fixed amount, known as the “coupon”, will be paid to the holder of the bond by the borrower. That is why bonds are called a fixed-income asset. As with shares, there is a secondary market where bonds are traded and in which the price of bonds might rise or fall.

If there is a rise in the price of bonds, the fixed payment the bondholder receives will be less relative to its price. Hence, as prices rise the effective interest rate, or yield, falls.11 The state of the bond market therefore affects the wider economy by altering the overall cost of borrowing, especially for governments or companies issuing bonds. A sell-off of government bonds makes it more expensive for the state to service or increase its debt.

The bond market rout was all the more shocking because treasuries have been a very safe asset. US government bonds, currently with an outstanding value of more than $36 trillion (about a third of the global gross domestic product, GDP), have anchored the world’s financial system, acting as safe collateral for loans across the world. When stock markets are spooked and there is a sell-off of shares, the money realised from those sales would normally be ploughed into treasuries, bringing down interest rates. Lower borrowing costs then help boost the faltering economy. In many previous financial crises, including the bursting of the Dot Com bubble in 2001 and the financial crisis of 2008, there was a flight into US government bonds.

However, in April 2025, there was a sell-off of bonds, pushing up interest rates at the same time that the stock market and the dollar were falling. There is speculation about why this happened. It is possible that hedge funds were largely responsible. One activity of hedge funds is to borrow huge sums to speculate on small differences in spot (current) prices and future prices of financial assets like government bonds.12 If done at sufficient scale, this can be highly profitable. However, when there is some sort of shock to market expectations, prices begin to move in the wrong direction, and these financial intermediaries can face huge losses. Consequentially, they try to offload liabilities as quickly as possible and liquidate holdings of treasuries to make good their losses, further pushing down prices. Hedge funds may have helped US government sell bonds at lower interest rates through their speculative activities, but this has now entrenched serious potential instability in the bond market.13

The problems in the US bond market were compounded by the fact a quarter of treasuries are owned outside the US. Japan is the biggest overseas US bond holder, with Britain and China in second and third place. A selloff by Japanese bondholders may have added pressure on Trump to reverse course. Chinese bondholders appear to have held fire, and the Chinese government sought to retaliate in the first instance with its own reciprocal tariffs.

Faced with a meltdown in bond markets, Trump paused the additional tariffs, though not the basic 10 percent imposed everywhere. The stock market did bounce back, and the price of bonds recovered, but both markets continued to show considerable volatility. Moreover, almost each day saw a new announcement from the White House about tariffs being imposed or suspended. At the time of writing, it was unclear if the so-called “reciprocal” tariffs would be restored after the 90-day pause. Trump boasted that he would do trade deals with dozens of countries but more than a month after the suspension of tariffs, only a few limited trade deals have been agreed. Even a temporary deal to lower tariffs imposed on China from an eye-watering 145 percent seemed to strengthen the resolve of major US trading partners to resist disadvantageous deals, injecting more uncertainty into the economy.

The World Bank calculated the average tariff rate for the US in 2016 was 1.6 percent.14 Trump’s “Liberation Day” announcement lifted that to a massive 27 percent. Even with the suspension of additional tariffs, the tariffs still in place were calculated to be above 20 percent.15 Although tariffs were still a threat to the world economy, concerns also began to shift towards debt levels and in particular the massive US federal deficit.

What is the function of tariffs?

In Trump’s fantasy world, the US has been ripped off by almost every country for the past half century. The evidence he presents is the enormous trade deficit in goods the US has had for many years. Of this, there is no doubt. The US balance of payments current account deficit in 2024 was over $1.13 trillion or 3.9 percent of the GDP.

Trump further claims that countries are erecting unfair tariff and non-tariff barriers to US exports, hence their trade surpluses with the US. Tariffs, which are taxes levied on imports, are mobilised in part in order for Trump to seek to make more advantageous deals with foreign governments, playing hard ball to extract concessions. Some even argue that the outcome of this deal-making may be lower trade barriers worldwide, so tariffs would not only be temporary but a means to freer trade.

There are, however, two other justifications for tariffs, which suggest Trump believes they need to be more permanent. The first is the claim that they will encourage inward investment in the US (or discourage investment leaving). Aside from the desire to restore manufacturing, this also has a strong national security angle. The US’s rulers do not want it to be dependent—particularly in vital areas of manufacturing or in raw materials—on potentially hostile countries such as China. The problem with this is that it takes a long time to relocate production.16 Globalised supply lines in important industries have been constructed over the past 80 years, especially over the last 40 years of neoliberalism, and cannot be undone overnight. Not only that, but companies such as Apple depend on an affordable and skilled workforce. Such workers are abundant in China, and increasingly in India, yet in short supply in the US.17 There are also networks of smaller manufacturers, clustered in China and its neighbours, who supply parts for devices such as Apple’s iPhones. These could not be developed swiftly in the US.18 Some estimate that, if production were transferred to the US, an iPhone would retail at around $3,000. Apple CEO Tim Cook announced that Apple expected to take a $900 million loss from Trump’s tariffs and confirmed that, to avoid the tariffs on China, US iPhones would now be sourced from India and iPads from Vietnam—no significant transfer of production to the US.19

The second justification for the long-term use of tariffs Trump offers is to raise money to enable him to continue cutting taxes for the rich. He has claimed, implausibly, tariffs are already bringing in $2 billion a day. As discussed below, tariffs will not necessarily help, but Trump certainly does need to increase his tax take from somewhere—or massively increase already very high US state debt—if he’s to renew the tax cuts he originally brought in in 2017 and if he wants to extend tax cuts further.

Has the US been ripped off?

The idea that the US, still the richest country in the world by a distance, has been ripped off by other countries is ludicrous. The US manufacturing industry has been hollowed out in part because US-based companies such as Apple have located or relocated production to lower-cost countries to increase their profits. Even when they have not relocated abroad, they have sometimes done so within the US to states less hospitable to trade unions or used the threat of relocation to overcome union resistance. It is workers, both in the US and lower wage countries, who are being ripped off, often, if not always, by US-based companies.

The long history of US imperialism also disproves the idea that the US has been ripped off. US imperialism has operated less through the colonisation of other countries. It has instead used its economic, political and military dominance, in the course of which huge profits for US multinationals and banks have been extracted from workers in poorer countries. Trump’s pronouncements on wishing to annex Greenland or Canada, or force Ukraine into a mineral exploitation deal, are an overt extension of the imperialist predation that has been a feature of US foreign policy since it emerged as a major power.20

The reason the US has been able to run a balance of payments deficit over a prolonged period is the sustained high value of the dollar; in other words, a willingness on the part of other countries to take dollars as an “I Owe You” (IOU). If a country runs a systemic balance of payments deficit and its currency floats freely against other currencies, as the dollar has since the early 1970s, conventional economic wisdom is that the rate of exchange between the currency of that country and those of other countries should decline. By that logic, the dollar should have lost value relative to the Japanese yen, the Chinese renminbi or the Euro. The decline in the value of the dollar would then make imports more expensive and exports relatively cheaper, helping reduce the balance of payments deficit. However, the dollar enjoys an exceptional status. It is the major international reserve currency, with most of the world’s international trade priced in dollars. This means that demand for, and therefore the price of, the dollar has remained relatively high, and certainly higher than would be needed to fix the balance of payments deficit.

The status of the dollar gives the US ruling class two huge advantages. First, it allows the US to import vast amounts of goods simply by printing dollars. Second, a strong dollar has enabled the US to exercise imperialist power over other countries by controlling their access to the international financial system, a politicisation of the use of the dollar which has become increasingly popular with both Republican and Democrat presidents in recent years.21 The dollar as a tool of US imperialism has nonetheless helped to weaken US economic power on which its imperialist dominance also rested, an example of the contradictions which run throughout the capitalist system.

From the roaring twenties to the Great Depression

Trump’s imposition of widespread tariffs represents a significant break from the neoliberal orthodoxy, known as the Washington Consensus, which prevailed over much of the past four decades.22 To understand how we got to this point, we need to briefly look at the past century of US capitalism. The US was relatively unscathed economically by the First World War. It only committed troops in 1917, and there was no destruction of its productive capacity. Although international trade was badly affected, only a relatively small proportion of the US economy was dependent on exports. Following the end of the war, the US economy grew strongly. During the Roaring Twenties, income rose and there was optimism about the future, manifested by the growth of the number of people engaged in exuberant high living. In the ten years from the end of the war, the US economy had grown by 40 percent.23

This all came to a juddering halt with the Wall Street Crash of October 1929. This heralded the start of the Great Depression, with a banking collapse coming some two years later. From 1929 to 1932, the US economy contracted by 30 percent. A quarter of Americans lost their life savings. Millions were thrown out of work. Deflation saw prices fall by a quarter.24

The underlying cause of the crash and the ensuing depression was a fall in the rate of profit, something Karl Marx had analysed in the third volume of Capital.25 Marx argues that capitalism is based on two fundamental divisions. On the one hand, there is the division between the owners of capital (which can include managers) and the working class who must sell their ability to work to these capitalists. Workers create more value than they take home in the form of a wage. This is the exploitation that lies at the heart of the production and the creation of profits. On the other hand, there are divisions within the ruling class itself, which Marx describes as a “band of hostile brothers”, who compete against one another to maximise their profits.

To outdo the competition, individual bosses are impelled not just to try to curb wages but also to increase the productivity of their workers. The latter almost invariably involves investing ever greater amounts in technology, operated by a workforce that is ever smaller in relative terms. However, technology does not in itself produce profit in the way that the exploitation of labourers does. All else being equal, the value of a machine simply passes into the value of the product over its lifetime, representing neither a profit nor a loss. This means that, across a capitalist economy, as investment in (profit-generating) labourers falls relative to investment in technology, the rate of profit (the ratio between profits and investment) will face a downward pressure. As the rate of profit falls, the least profitable firms can begin to fail. When this happens, even efficient firms can be caught up in the crisis because demand for their products slumps or debts are called in.26

There can also be sudden changes in sentiment in the financial markets. A stock market bubble occurs when share prices are hugely inflated relative to likely earnings of the companies issuing shares.27 Once something happens to prick confidence, market optimism is replaced by pessimism. Investors then sell shares, fearing share prices will tumble, resulting in a self-fulfilling prophecy. This is essentially what happened in the Wall Street Crash of 1929.

The effects of a stock market crash are rarely confined to the stock market. As their paper wealth falls, the rich curtail investments and consumer spending. That reduces growth in the wider economy. The loss of confidence in the stock market can also generalise to the banking system, as those with deposits fear that banks may run out of money. A bank run may develop, in which account holders rush to withdraw cash, but banks do not have the funds to meet the demand. This, again, is what happened some two years after the stock market collapsed in 1929.

Although the underlying cause of the Great Depression was a fall in the rate of profit, how bad a crisis becomes depends on a variety of factors, including the actions of the state. The actions of the US legislature and government, and its central bank, the Federal Reserve, made the situation far worse. The Fed, rather than propping up and bailing out the banking system, failed to lower interest rates or pump money into the system to ensure that debt obligations could be met and the nerves of bank account holders steadied.

The rigidity of the gold standard added to the problems. Prior to the Great Depression, many countries sought to stabilise their currencies by pegging them to the gold standard, whereby a certain amount of currency could be exchanged for a specified quantity of gold. This was supposed to ensure monetary stability. Britain returned to the gold standard in 1925 at pre-war parity, having suspending participation during the First World War. That severely squeezed the British economy. However, by autumn 1931, many major states faced with the Great Depression had suspended the gold standard. The big exception was the US, which persevered in it until spring 1933, when it was forced to suspend participation, belatedly devaluing the dollar.

Remaining on the gold standard constrained governments, preventing them devalue their currencies. Devaluation could make exports cheaper and imports more expensive. However, as one country devalued to gain a competitive advantage, other countries followed suit, thereby eliminating that competitive advantage. However, the US was initially unable even to seek a boost to its exports through devaluation because of its commitment to the orthodox economic wisdom that a stable currency was the key to prosperity. Compounding the problem, the US Congress passed the Smoot-Hawley Tariff Act in 1930. This was supposed to protect beleaguered US businesses from foreign competition by imposing a 40 percent tariff on many imports. However, this protectionism was met by retaliatory tariffs from some of the US’s main trading partners, accelerating a collapse of international trade.

Most economists believe that tariffs prolonged and deepened the depression. Certainly, a combination of the turmoil in the financial sector, competitive devaluations and trade wars spread the Great Depression across the world’s major economies. Rising nationalism and inter-imperialist competition caused by the Great Depression culminated in the catastrophe of the Second World War. It was only the entry of the US into the war that finally brought an end to the Great Depression in the US.28

From the long boom to stagflation

After the Second World War, the US and its allies were determined to try to lower barriers to trade, avoiding any relapse into the protectionism of the 1930s. The framework for economic relations between states outside the orbit of the Soviet Union was laid down at the famous Bretton Woods conference of 1944. A system of fixed exchange rates was established, pegged to the US dollar, which itself was fixed against gold at the price of $35 per ounce. This was to stop competitive devaluations as had occurred in the 1930s, to provide stability and to discipline states to rectify imbalances in trade when they occurred. Bretton Woods also established two international economic institutions that still exist today, the International Monetary Fund and the World Bank.

The 1950s and 1960s were the decades of the “long boom”. Growth was sustained over this period, with only relatively mild downturns. Bourgois economists claimed that the tendency of the system to go into crisis had been defeated through enlightened economic management. Praise was heaped upon the stability established by the Bretton Woods system and the willingness of governments to engage in Keynesian “demand management”. The economist John Maynard Keynes was one of the chief architects of the Bretton Woods system. States avoided deep damaging recessions, it was claimed, by spending more, taxing less and/or easing credit restrictions whenever the economy appeared to be turning downwards.

Bretton Woods and Keynesian economic policies certainly helped to sustain the long boom. Fixed exchange rates were better than competitive devaluations when economies were booming. Increasing demand in the face of economic downturn was better than decreasing it through tariffs and austerity. However, the long boom was the product of deeper processes in the economy that arrested a fall in the rate of profit. The tendency of the rate of profit to fall can be slowed if, for example, some of the money that would otherwise be channelled into investments in productivity-enhancing technology were instead used for other purposes. In the period after the Second World War, this took the form of unprecedented peacetime arms spending by states, prompted by the Cold War. Arms spending guaranteed profits to the arms companies but constituted “unproductive consumption” because missiles or fighter jets do not play a direct role in future production. This slowed the overall pace of accumulation.29

Investment in arms was concentrated in the US, and to a lesser extent Britain and France, as well as the Soviet Union—the victors in the Second World War. Japan and West Germany, as the perceived aggressors in war, were prevented from making such investments. They took advantage by investing in products for the increasingly international market that grew throughout the long boom, benefitting from the arms spending elsewhere without bearing the burden.

This enabled both Japan and West Germany to grow more quickly than the US or Britain, increasingly generating balance of payments deficits in the latter countries. In the US, both the federal government and the trade deficits rose as a result of the Vietnam War. The administration of Lyndon B Johnson preferred to borrow rather than tax to pay for the war. Sooner or later, something had to give under the fixed exchange rate regime system. Further adding to the pressure were the large holdings of dollars that had accumulated outside of the US. These dollars, lying outside the control of the US authorities, became known as the Eurodollar market, because they were initially accumulated mainly in Europe (subsequently this came to refer to all dollar holdings outside the US). Confidence in the dollar began to decline and European countries in particular began to demand that their dollar holdings be exchanged for gold held by the US.

In 1971, the US faced a massive fall in US gold reserves. Richard Nixon, who replaced Johnson as president in 1969, ended the right to exchange dollars for gold. He also imposed a wage freeze to lower domestic US costs and a surcharge on imports. Together with a lower value of the dollar, these were intended to reduce the US balance of payments deficit, which had undermined the Bretton Woods system of fixed exchange rates. The system would finally come to an end in 1973, with currencies now floating freely against one another. Freed from a restrictive monetary regime, western governments sought to revive their faltering economies with the first real post-war Keynesian-style reflation, cutting taxes and/or increasing spending. However, the result was not a return to higher rates of profit and economic growth but rather inflation, a general rise in prices, in combination with stagnating growth: “stagflation”. This was exacerbated by two big hikes in oil prices as oil-producing countries, now organised as the Organisation of the Petroleum Exporting Countries (OPEC) cartel and encouraged by nationalist regimes in Iraq and Libya, sought to get a much bigger cut of oil revenues, which had hitherto been monopolised by Western oil companies.30

The arrival of neoliberalism

The 1970s effectively discredited the Keynesian economic philosophy in ruling class circles. On top of that, US multinationals and banks sought to avoid financial constraints imposed by governments operating under the Bretton Woods settlement. Traded goods were increasingly being shipped long distances, facilitated through the containerisation revolution. Multinationals also looked to selectively relocate production to lower cost countries. With the expansion in international trade and production, they also wanted greater freedom to invest wherever profits could be made. This was the material basis for support for a new economic philosophy: neoliberalism.31

An International Monetary Fund paper in 2016 characterised neoliberalism as having two main planks: “increased competition…through deregulation and the opening up of domestic markets, including financial markets, to foreign competition” and “a smaller role for the state, achieved through privatisation and limits on the ability of governments to run fiscal deficits and accumulate debt”.32 This is a very narrow definition. For instance, neoliberalism also implied monetary stability as a key target for economy management, with the expectation that stable prices and market dynamism will promote growth and create employment. Nonetheless, states did retreat from Keynesian-style economic management and allowed deregulated markets a greater role in allocating resources. Governments were encouraged to abandon industrial policies. Central banks had to be independent from political influence and control, where they were not already prioritising “financial rigour” over political expediency.33

Beginning in October 1979, Paul Volcker, chair of the US Federal Reserve, raised interest rates dramatically in an effort to squeeze out inflation, beginning what became known as the “Volcker Shock”. This resulted in a big rise in the value of the dollar, which, together with higher interest rates, precipitated a recession and a shift in production out of the US to lower cost producers elsewhere. The Volcker Shock also generated a debt crisis in developing countries, allowing neoliberalism to spread to many of these countries through Structural Adjustment Programmes applied by the International Monetary Fund in exchange for debt relief. In Britain, Margaret Thatcher’s government adopted monetarism in the 1980s, which similarly produced higher interest rates and a big rise in the value of the pound, causing a recession and a hollowing out of manufacturing. In the early stages of neoliberalism, the defeats of workers’ struggles and the passage of anti-union legislation also weakened organised labour. This weakening of the defence organisations of the working class was intended to restrain rises in wages and to force workers to work harder and longer, raising productivity. The intention was to raise the rate of exploitation and thereby boost profitability.

Neoliberalism was supposed to deliver what the previous Keynesian period of state economic management and the mixed economy had stopped delivering—higher rates of profit and economic growth. There was to be a restructuring of economies with the weak and inefficient going to the wall. For the US ruling class, this was also intended to ensure the revival of the strength of US imperialism so badly dented by defeat in the Vietnam War and the 1970s stagflation.

Neoliberalism’s success?

At first, neoliberalism seemed to be a successful strategy. In 1989, the Berlin Wall fell and not long after, the Soviet Union collapsed.34 With the end of the Soviet Union, there was, for a time, only one superpower left, the US, which seemed destined to be the major beneficiary of the expansion of free markets across the world.

By contrast, the German and Japanese economies, which had grown more strongly than the US between 1950 and 1990, ran into problems. Germany had to struggle with the costs of the reunification of two very differently structured economies. Meanwhile, Japanese exports were squeezed by the Plaza Accord in 1985, which lowered the value of the dollar against the yen. That was followed by a devastating collapse of Japanese stock and property markets in 1992. At the height of the Japanese financial bubble, the value of property in Tokyo was estimated to be greater than the entire land value of the US. The bursting of that financial bubble left a legacy of falling prices and low growth, or deflation. It also left a legacy of massive government debt. In 2023, the International Monetary Fund estimated Japanese government debt to be a massive 250 percent of the country’s GDP, by far the highest for any advanced industrialised country.35

The US had seemingly put the Vietnam defeat and the era of stagflation behind it. It had won the Cold War and was now dominating the world market by spreading US capitalism and US capital across the world. We had reached, it was claimed by Francis Fukuyama, the “end of history”. Some form of relatively benign liberal democracy was going to preside over both a peace dividend and a more dynamic capitalism, delivering not just for the rich but the vast majority of the world.36 Yet, this is not how things turned out.

Neoliberalism’s failures

Neoliberalism has not delivered what it promised to the ruling class, whether in the US or elsewhere. The neoliberal era has been characterised by slower growth than during the long boom. Commentators have discussed a “puzzle” of low productivity growth. There are widespread discussions of “zombie companies”, which do not invest or make profits, but just recycle their debts, alongside highly profitable, monopolistic major companies. Such phenomena are a symptom of deeper problems within capitalism.

Marx did not just outline his law of the tendency of the rate of profit to fall. He also pointed out that economic crises have the function of helping to restore profit rates, enabling the system to boom again.37 In part, this is because it can lead to a rise in the rate of exploitation. The rate of exploitation of the working class has undoubtedly increased, most dramatically reflected in stagnant wages and worse for workers in the US and many other places. However, this has not fully resolved the fall in the underlying rate of profit in the productive sectors of the economy, which had brought the Long Boom to an end. Another, more important factor in crises is the clearing out of inefficient and unprofitable companies. This has not happened on the scale necessary to restore profitability to levels achieved during the long boom. This remains the fundamental problem for the ruling class.38

A sufficient devaluation and destruction of accumulated capital could take place if states, and nowadays particularly central banks, allowed economic crises to let rip. The neoliberal era has seen a series of very serious financial crises. There were recessions in the West and the so-called Third World Debt Crisis of the early 1980s. The Savings and Loans crisis in the US in the late 1980s saw about a third of US building societies go bust when they had to pay much higher short-term interest rates on their borrowing after lending long at much lower interest rates. A further sharp recession in the early 1990s was followed in the late 1990s by the crisis of the so-called Asian Tiger economies, whose currencies fell dramatically after over-investment in real estate led to hot money fleeing some of the most dynamic economies in the world. That was followed by the bursting of the Dot Com bubble in the US in 2001. Soon, the Great Financial Crisis (GFC) of 2008 unfolded, then the Eurozone debt crisis that began in 2010 and the Covid crisis of 2020.

However, to allow the financial system effectively to collapse in any of these successive crises would have been economically devastating, returning us to the kind of conditions seen in the Great Depression or worse, with untold political consequences. Not surprisingly, governments and central banks thought it best to avoid this. Instead, government intervention took place to limit the effects these crises.

For instance, the US Fed responded to the 2001 recession by cutting interest rates, helping to fuel a bubble in the housing market. When the bursting of this bubble sparked the GFC, this was met with extensive intervention both directly by states, which rescued their financial systems and central banks, cut interest rates and engaged in unorthodox monetary measures such as quantitative easing (QE).39 Although it was argued that QE could encourage investment, the additional money created was largely used by the rich to speculate in the stock and property markets, leading to significant asset price inflation. QE, together with ultra-low interest rates, did enable companies that would otherwise have gone bankrupt to remain just about afloat. Such zombie companies, saddled with debts, have grown considerably in recent years. A 2021 Federal Reserve study estimated their number to be around 10 percent of US companies; others put the figure higher.40 Alongside the zombies, there has been the growth of very large companies able to lobby the government to provide them with profitable contracts and other forms of support, again undermining the competition supposedly essential to securing growth.

In the aftermath of the GFC, stimulating economies through Keynesian means, or running larger government deficits to increase aggregate demand, was ruled out on the grounds that the bond markets would not accept such policies. Instead, spending was cut back during the period of austerity, with devasting social implications for working-class people.

Neoliberalism, China and Trump

For 45 years after the Second World War, the principal inter-imperialist rivalry was between the US and the Soviet Union. With the collapse of the Soviet Union, the US became the dominant imperialist power. However, its relative economic strength had declined during the Cold War, and it soon found limits to its imperial reach in both Iraq and Afghanistan, and then Ukraine. Meanwhile, the extraordinary growth of China’s economy helped China to become the main imperialist rival to the US, albeit still a junior rival. This has driven all US administrations in recent years and is a key element in Trump’s tariff strategy.

What irks Trump about neoliberalism as practiced in recent decades is, above all, China’s growth after admission to the World Trade Organisation (WTO) in 2001. Between 1950 and 1980, Chinese per capita production doubled. After market reforms were introduced under Deng Xiaoping, economic growth accelerated. Then, after its accession to the WTO, China offered the prospect of a relatively cheap, disciplined and educated workforce, able to work in the production facilities for US multinationals, providing the latter with increased profits as they sold relatively cheap products to western consumers. During its time in the WTO, it has grown from the sixth largest economy in the world to the second largest. It now has some of the largest multinationals and banks in the world. This extraordinary growth, unprecedented in the history of capitalism, is seen by a broad swathe of the US ruling class to seriously threaten US imperial hegemony.41 Barack Obama’s administration began a serious reorientation towards the perceived threat of China in 2015. China was also a major concern of the first Trump administration, which introduced tariffs and other restrictions on Chinese companies in 2018. Joe Biden, who succeeded the first Trump administration, retained some of these tariffs. Biden also proposed a partial break with elements of the old neoliberal Washington consensus, proposing an “active state” approach, in which the US government would actively intervene in the economy both to try to restrict Chinese advances in key areas and to subsidise and promote production considered to be of strategic importance for US national security. Dependence on China had to be reduced by “friendshoring”, moving production to political allies, or reshoring production of key items. There is an important line of continuity between Biden and Trump, although Trump seeks to achieve similar objectives through rather different and more dramatic and disruptive means.

China is certainly likely to take a hit from the tariffs Trump has imposed. It will add to problems already besetting the Chinese economy. In the long term, China faces a dramatic fall in the size of its active labour force, projected to fall from some 750 million to 550 million. To sustain and grow its economy over the next few decades, China will either require a massive rise in productivity or mass immigration­—or combination of both. In the short term, the bursting of the property bubble, which had sustained Chinese economic growth, has continued to weigh down consumer spending and limit attempts by the state to boost it. Attempts to boost domestic consumption by encouraging higher wages also faces the problem that this would further squeeze the profits of companies already suffering under tariffs. Trump also increasingly poses the trade war as a military contest with China. Tensions are likely to rise over access to rare earth minerals, for example in the Congo and over Taiwan, which produces advanced semi-conductor chips, with the real danger of trade war spilling over into something far worse.42

China nonetheless holds some important cards against Trump. China was the largest market for US agricultural exports in 2022 and still accounted for 14 percent of US agricultural exports before the introduction of tariffs.43 Chinese tech and rare earth minerals remain vital to the US. China can also switch US exports to other markets. Chinese exports to the US account for only 14 percent of the total. According to the Lowy Institute, more than 145 countries now trade more with China than the US, compared to just 30 in 2001.44 The US has itself become more dependent on international trade, comprising some 14 percent of the US economy. China also holds some $750 billion in US bonds. Moreover, Trump’s attempts to isolate China by gathering allies have not been helped by attacking those allies. The European Union has come in for almost as much vitriol from Trump as China. Meanwhile, the Chinese government has proceeded to engage in a charm offensive, denouncing Trump as a bully and declaring the US cannot be trusted to maintain open and stable trading arrangements. Ironically, a state capitalist regime, “Communist” China, now portrays itself as the most enthusiastic defender of the virtues of “free trade”, while the avowedly pro-capitalist Trump appears the most opposed.

What can the state do if stagflation threatens?

It has become much more likely that the US and the world economy now face the twin evils of stagnation and inflation—stagflation—or worse. Wealthy investors have become wary of the uncertainty that has been injected into the economy both by the tariffs themselves and Trump’s volatility. The rich do not like this kind of uncertainty and will be more likely to hold off ploughing funds into long-term productive projects.

The top 10 percent of US earners now also account for 50 percent of consumption spending in the US, up from 36 percent just 30 years ago. The wealthy, moreover, feel much richer as the shares in which they invest rise in value. This wealth effect encourages them to spend, but the opposite happens if share prices fall as they did in the aftermath of “Liberation Day”. Their consumption spending falls and, of course, that means less demand in the economy and less economic growth. The tens of millions of US workers who are far less well-off now face potentially price rises in the goods previously purchased from China, if they are able to obtain them at all. Add to this the effects of the sacking of tens of thousands of government employees by Elon Musk and his Department of Government Efficiency, and the growing number of lay-offs and redundancies as global supply lines into the US seize up—and consumer spending by workers is likely to fall significantly. If Trump were to be successful in his aim of deporting 11 million undocumented migrants, most of whom contributing to the US economy, it is estimated the US economy could contract by as much as 7.4 percent by 2028.45

The likelihood of a recession has therefore substantially increased. What is the capacity of the US state to respond to this? The Federal government deficit is currently running at $1.9 trillion (£1.4 trillion) a year, or some 6.4 percent of GDP.46 That is adding to a national debt now at $29 trillion (£21.5 trillion) or 100 percent of GDP, twice the size of the fiscal deficit and national debt laid down as targets in the EU growth and stability pact in 1997.47 The renewal of Trump’s “Tax Cuts and Jobs Act” will cost an estimated further $4.5 trillion. Musk originally claimed he would cut $2 trillion from the Federal Budget. However, Musk’s job cuts appear to have amounted to a cut in federal spending of just $150 billion, and even some of that is thought to be smoke and mirrors, closing programmes not yet in place.48 The budget that Trump proposed at the beginning of May was intended to knock another $163 billion off federal spending, targeting the poor in particular while increasing arms spending.49 However, Trump is likely to face opposition in Congress on both aspects.

Even if there are more swingeing cuts in federal spending, this is likely simply to pile more recessionary pressure on the US economy. A slowing economy will make the budget deficit worse by reducing tax income. All three major credit rating agencies, Standard & Poor’s, Fitch and Moody’s, have now downgraded US government debt, helping to further push up interest rates.

Growing debt fragility

The enormous US fiscal deficit and increasing national debt are themselves a symptom of a much wider debt problem in the world economy. Debt was a crucial ingredient in promoting globalisation, which was supposed to produce higher levels of economic efficiency and growth. Debt is benign if growth is sufficient to ensure that debt obligations are met and repaid. The problem is when growth is inadequate to stop the burden of debt growing. The overall level of debt across the world economy now stands at more than three times the total annual value of global production.

After the GFC, central banks sought to strengthen rules and regulations about reserve requirements, the amount of ready funds the bank has to hold in the event of financial stress. The regulated bank sector may be a little more secure as a result, but there has been a massive growth of the shadow banking sector, which lies outside the regulatory regime imposed on banks. The international Financial Stability Board puts the figure for financial assets held in the shadow banking sector in 2023 at $239 trillion, almost half the world’s financial assets, a figure that has almost trebled since 2008-9.

Private equity companies, a significant part of the shadow banking sector, have been in the lead in growing the US economy in the past few years, during which the US boasted higher levels of growth than the laggardly European Union. However, that growth has been generated by a plethora of hi-tech start-ups and by loading companies with potentially unsustainable debt to make short-term profits for those private equity firms. Trump’s abandonment of free trade as a key pillar of neoliberalism certainly does not extend to reining in the financial system, which has also been central to neoliberalism. In fact, he favours further deregulation and has been championing cryptocurrencies from which his family has already reaped a fortune.

If a fiscal stimulus to a faltering US economy is potentially ruled out by high levels of debt and the pressure of financial markets, that leaves the US central bank, the Federal Reserve, as a potential source of monetary stimulus through measures such as interest rate cuts. However, Jerome Powell, the Federal Reserve chairman appointed by Trump in his first term, is cautious about reducing interest rates, believing that the scale of tariffs threatens a revival of inflation by raising the price of imports and easing pressure on domestic producers to restrain prices rises. This has been exacerbated by a fall in the value of the dollar, down 9 percent against the Euro between Trumps’ inauguration and the end of his first 100 days in office.50

Trump has publicly argued that interest rates should be cut by the Fed. The president even explored the possibility of sacking Jerome Powell, tweeting that the “termination” could not come fast enough.51 However, any appearance that the Fed were coming under political control would again spook the financial markets. Central banks generally have acquired greater independence in the neoliberal era precisely to reassure the markets that there is an unelected, pro-banking authority at the heart of monetary policy. In another retreat just days later, Trump abandoned any attempt to replace Powell.52

A provisional conclusion

Within his first 100 days as the 47th president of the US, Trump has single-handedly delivered a series of profound shocks to an already fragile US and world economy. The future is unpredictable, but the US economy is caught between a rock and a hard place. There are both recessionary and inflationary pressures arising from Trump’s tariff fetish and limited means whereby either the government or the central bank can avoid recession and inflation.53

It was sad to see Richard Trumka Jr, when he was president of the US trade union federation, the American Federation of Labor and Congress of Industrial Organizations, initially supporting tariffs during Trump’s first term or the Teamsters, representing 1.3 million workers, supporting them as recently as March this year. Even some on the left think that the “Trump administration’s stated goals of reshoring jobs that years of pro-corporate free trade deals had sent out of the country and reconstituting the US manufacturing base are good and arguably necessary”—in the words of a staff writer for Jacobin magazine.54 In the current situation, the working class, which produces the wealth through which capitalists make their vast profits, has no interest in supporting tariffs or other forms of import control. Aligning the working class with nationalism is not in the interests of workers.55 The neoliberal era has been characterised by rising inequality across the globe and acute economic instability. To oppose Trump’s tariffs is not for a moment to suggest that a return to a more globalised capitalist economic system would be to the advantage of the working class either. However, tariffs will not bring better-paid and more secure jobs, and they threaten to disrupt the world economy again with inflation and stagnation to the detriment of working-class people.

We live in turbulent and dangerous times. In the face of the economic disasters that are likely to lie ahead, and which may soon be upon us, I think we can be certain that the government and the ruling class will do their utmost to make the working class pay for these economic disasters. Workers have no responsibility for these disasters. We need to be clear which side we are on and that we will have to fight back, seeking to persuade an ever-larger number of people that there has never been a greater need for a genuinely socialist alternative to this endemically crisis-ridden and exploitative capitalist world economy.

Rob Hoveman has spent many years studying and teaching philosophy and economics and is a member of the Bradford and Calderdale branch of the Socialist Workers Party.

Notes