Trump's tariff chaos could reverse 80 years of economic progress

International trade and exploration have captivated the human imagination for millennia. From Alexander the Great to Marco Polo, from the Silk Road to the East India Company, history is filled with examples of commerce redrawing the map of the known world. But for much of history, trade was shaped more by power than by fairness.

This began to change after Adam Smith and David Ricardo showed that tariffs are economically harmful: they raise costs for importers, divert production to higher-cost countries, discourage innovation, and foster monopolies and corruption. Gradually, Smith's insights into the dangers of protectionism, the importance of predictable economic policy, and the rule of law prevailed.

The governance of international trade shifted dramatically after World War II, when the United States emerged as a dominant economic and military power. Instead of seeking economic concessions from defeated countries, American leaders championed the creation of an open, rules-based trading system.

The multilateral trading system – institutionalized through the General Agreement on Tariffs and Trade and its successor, the World Trade Organization – benefited the US and the rest of the world, ushering in eight decades of unprecedented economic growth. By the 1990s, even protectionist developing-country governments recognized free trade as an effective way to reduce poverty and raise living standards.

Over the years, trade barriers were gradually lowered as the WTO promoted open global trade, resolved disputes, and facilitated negotiations for reciprocal tariff reductions and the elimination of other trade restrictions. Until about a decade ago, this system was widely regarded as a success.

But after Donald Trump won the 2016 US presidential election, he began to reverse that progress. During his first term, Trump broke with decades of bipartisan support for free trade and launched a trade war with China. His successor, Joe Biden, was expected to restore traditional US trade policy. Instead, he retained many of the Trump-era tariffs and trade restrictions.

Trump has gone even further in his second term, tearing up trade agreements and launching a global trade war. Currently, all goods entering the US are subject to a baseline tariff of 10%, with a 90-day window for bilateral negotiations to avoid significantly higher rates. Tariffs on Chinese imports have been raised to 145%, following a week of tit-for-tat hikes during which China raised its own tariffs on US goods to 125%.

The Trump administration's erratic and unpredictable approach compounds the problem. Over the past three weeks, Trump has announced steep tariffs on almost every country in the world, lifted most of them, and then reinstated others, creating widespread uncertainty. His administration is clearly intent on reasserting the geopolitical hegemony of the rich and powerful, but so far, it has delivered only chaos.

Although Trump has occasionally suggested that his goal is to pressure other countries to lower tariffs or reduce their trade surpluses, such claims can no longer be taken seriously. The European Union, for example, offered to eliminate all industrial tariffs if the US would do the same – but Trump declined. He has also imposed tariffs on Mexican and Canadian imports despite the free-trade agreement he himself negotiated during his first term. Singapore, which maintains zero tariffs on American goods and runs a trade deficit with the US, was nonetheless hit with the baseline 10% tariff.

These actions are a flagrant violation of both the spirit and the letter of WTO rules, as well as the foundational principle of equal treatment among trading partners. They also represent a clear departure from longstanding American commitments, and from the rule of law to the use of power in bilateral relationships that prevailed before WWII.

When importers and exporters cannot predict future tariffs or count on stable market access, they are less likely to make long-term investments. Consequently, if the Trump administration continues on its current path, global growth prospects will most likely decline significantly.

If individual countries respond to Trump's threats by trying to meet his vague and shifting demands, the result could be a fragmented world economy marked by slower growth and greater instability. Given the stakes, the most effective way to restore global growth prospects would be for the US to reverse course and reassure the international community that the change is both genuine and lasting.

Alternatively, in the likely event that Trump remains unwilling to compromise, other countries should take the initiative and form a new trade alliance that upholds WTO principles while operating independently of the US. After all, the US accounts for less than 5% of the world's population and roughly 9% of global exports. Such a coalition could coordinate through an international trade body that facilitates dispute resolution, thereby reducing America's bargaining power. They can call it the Minus US Trade Organization (MUTO).

There is precedent for this kind of initiative. When the US effectively paralyzed the WTO's dispute-settlement mechanism by refusing to approve new appellate judges, many countries agreed to resolve trade disputes among themselves using the WTO's processes. If enough countries reaffirm their tariff and trade commitments within a new MUTO framework, American influence will diminish, and domestic stakeholders may push for a return to an open multilateral trading system.

Whenever tariffs and other trade barriers are implemented – whether in the US or abroad – they give rise to interest groups that benefit from their existence, making their removal increasingly difficult. If the countries targeted by Trump's 90-day trade demands can coordinate a timely and unified response, the outlook for the global economy could begin to improve. But if Trump's bullying – and the resulting uncertainty – persists, much of the economic progress of the past 80 years could be undone.

Anne O. Krueger, a former World Bank chief economist and former first deputy managing director of the International Monetary Fund, is Senior Research Professor of International Economics at the Johns Hopkins University School of Advanced International Studies and Senior Fellow at the Center for International Development at Stanford University

Disclaimer: This article first appeared on Project Syndicate, and is published by special syndication arrangement.