Trade War: Pause or cease-fire?

The world has breathed a sigh of relief with Trump's reversal of his earlier decision to impose high tariffs on goods entering the US market. Trump has declared a unilateral pause on his executive order for imposing reciprocal tariffs for 90 days against all countries except China. 

However, the experts do not want to call it 'pause'; instead, they like to define Trump's decision as a "cease-fire" in the trade war. There is a difference between "pause" and "cease-fire" in war strategy. In general, "pause" refers to the unilateral decision taken by any warring party for their own purpose without expecting a counter response from other parties. 

On the other hand, "cease-fire" is defined as a mutual strategic approach expecting some subsequent actions, which may include negotiation towards ending war, reinforcement, and some other options. 

There is no reason to believe that Trump has willingly paused his reciprocal tariff. As learnt from the media, lawmakers, corporate executives, foreign leaders, and more than a dozen lobbyists have relentlessly persuaded the Trump administration and finally been able to convince him to put the trade war on pause for the next three months. While announcing the decision to pause, President Trump has expressed his reaction by saying that he is getting a bit happy.    

In defusing the escalation of the worldwide trade war, one of the key roles has been played by Chief Executive Officer of JPMorgan Chase Bank, Jamie Dimon, who has expressed his fears of recession because of high tariffs and their retaliatory measures. Dimon was a very strong supporter of Donald Trump in the last presidential election. As reported in the media, Dimon has written his annual letter to shareholders wherein he has stated that high tariffs would most likely drive up inflation and slow down growth. He even appeared in a Fox TV business discussion program, where he reiterated the same point, especially apprehending economic recession. 

The trade war resulting from high tariffs imposed by President Trump and consequential retaliatory measures from other counterparts was pushing the world economy towards recession, the epicentre of which was going to be the US economy. The indication of economic recession in the US was apparent as the stock market plummeted with a big fall in share price index with depleting over three trillion dollars in market capital from Wall Street. 

Many large retailers, including Macy's and JC Penny, have declared the closing of several stores, apprehending a drastic fall in sales likely to be impacted by the trade war. In response to the economic condition, Trump, as reported in media, has said that he was aware of the pain of his tariff escalation but was not ready to concede big pain. 

The world economy has been extensively dependent on the US market, which Trump has tried to weaponise in spearheading trade wars across the world. The simple equation is that for any trade action, including tariffs and barriers, other counterparts get hit three times harder than Americans are pained. 

Based on this notional theory, Trump and his administration have gone for imposing indiscriminate tariffs against almost all trading partners, which eventually triggered a trade war across the world. So, Trump knew that there would be pain for Americans if he moved ahead with his trade policy. As learnt from the media, President Trump has told his advisers that he is willing to take the pain. He has privately acknowledged that his trade policy could trigger recession, but he wanted to make sure that it does not cause depression. 

Because of Trump's decision to pause reciprocal tariffs for 90 days, some people, especially his critics, have remarked that he has retreated and lost the battle, which others do not believe. 

Trump is a businessman and strategic person who knows very well how to keep the world's politicians in a race and thus get good deals. His goal was not to punish his allied members but to bring them at par in spending money in the different world forums, including NATO and the UN. He was determined to ensure a win-win situation in the cross-border trades for which negotiation is the key. But his understanding was that no trade partner will agree to reach consensus unless they are compelled to do so. 

In the last WTO (World Trade Organisation) annual conference held in Davos, Switzerland, the issue was discussed among leaders of the USA and EU, where Trump's representative made it very clear that "America First" is the slogan of the new president. So, they urged EU counterparts to come forward with their commitment, which was not taken into cognisance by EU leaders. 

Therefore, Trump had to apply a different approach, leaving the world leaders in a stressful situation by escalating trade-war with imposing high tariffs irrespective of his foes and friends. When the world was overheated with the fear of imminent recession and even depression likely to be caused by high tariffs and retaliatory measures, the world leaders realised that only discussion could resolve the crisis. 

So, negotiation started. Mayors of most cities in Canada and leaders from other countries rushed to the States for negotiation and resolving the crisis. Italian Prime Minister  Giorgia Meloni met with President Trump, who termed the discussion very fruitful and optimistic. 

It is learnt that 75 countries, including almost all developed nations, have reached out to the Trump administration with their intent to discuss the tariff issue and agreed to deescalate the trade war. Even Japan was in the top of the countries that were strongly pursuing the White House for defusing the heat of tariff escalation. Besides, many corporate executives and Wall Street mandarins were relentlessly persuading Treasury Secretary Scott Bessent to convince Trump to reverse his decision. Having been effectively influenced by leaders and executives, 

Bessent approached Trump, saying that a scope of good negotiation has been created as all powerful trade partners have now agreed to come to the negotiation table. So, he was confident that the primary objective of escalating the trade war with high tariffs has been achieved. This rationale has convinced Trump to reverse his stance and thus announce a 90-day pause on applying reciprocal tariffs. 

Whether temporary de-escalation of the trade war should be considered a "pause" or a "cease-fire" remains to be seen in the next few months. However, the prevailing situation and trading prospects do not afford to believe that the trade war has ended; instead, it has taken on new dynamics, where the target has been diverted to China. 

Reciprocal tariffs remain effective against China, which has retaliated with a counterattack imposing excessively high tariffs on American goods. Through this pause approach, all other countries, particularly rich nations, have been sidelined while China has come to the forefront of the trade war. So, tariff escalation with China and its contagious effect will keep continuing over time and is feared to turn into a partially prolonged trade war in the coming years. 

Nironjan Roy. Illustration: TBS

Nironjan Roy, CPA, CMA, CAMS is a Certified Anti-money laundering Specialist and Banker   based in Toronto, Canada. He can be reached at: nironjankumar_roy@yahoo.com. 

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions and views of The Business Standard.