The global economy that will greet President-elect Donald Trump’s next term is very different from the one that existed existed in his first term, potentially putting the United States in an advantageous spot for his tariffs, a top Ivy League economist said.
In a New York Times op-ed on Friday, Eswar Prasad, senior professor of trade policy and professor of economics at Cornell University, argued that the United States is strong while the rest of the world is in “a deep economic funk,” allowing it to weather a tariff war better.
“No matter the virtues of these policies, they could end up hurting other countries a lot more than they hurt American consumers, making the United States look like a winner,” according to him.
Trump made tariffs a central theme of his reelection campaign. On the campaign trail, he promised to impose tariffs of up to 20% across the board, with China receiving tariffs of up to 60%.
After winning the election last month, he threatened that one of his first executive orders would impose a 25% tariff on Canada and Mexico if they did not reduce illegal immigration and drug trafficking, as well as an additional 10% tariff on China.
Top CEOs have already warned that tariffs would lead to price increases for consumers. Bond yields have risen as the prospect of higher inflation prevents the Federal Reserve from cutting rates faster.
However, Prasad pointed out that, unlike other major economies, the United States has demonstrated strong productivity growth, which, if sustained, could mitigate the impact of tariff-driven inflation.
Tariffs will also raise the dollar, making US exports less competitive and attracting more investment from around the world, he said. Furthermore, a stronger dollar lowers the cost of imports, mitigating the impact of rising foreign-goods prices.
Meanwhile, Prasad stated that China has weakened significantly since Trump’s first term and his initial round of tariffs.
As consumer demand remains low due to a real estate crash and debt problems, the world’s second-largest economy is becoming more reliant on exports, which would suffer from even higher US tariffs.
Elsewhere, Europe’s economy appears to be deteriorating, while Japan continues to grow slowly and India is cooling.
As a result, Beijing’s top trading partners are preparing to erect barriers that will prevent cheap Chinese exports from flooding their economies.
According to Prasad, Trump will likely seek to close loopholes that allow China to avoid tariffs, such as diverting exports to countries like Vietnam and Mexico before reaching the United States.
“The days of Chinese companies like Shein and Temu sending packages to the United States of small, individual purchases that are priced low enough to avoid being subject to tariffs are almost certainly numbered,” said Mr. Chen.
To be sure, China can retaliate, and it has already limited the United States’ access to rare earth metals, which are critical to the technology sector.
Meanwhile, some members of Trump’s economic team have signaled a less hard-line stance on tariffs, and “first buddy” Elon Musk has business ties with China, which is Tesla’s largest foreign market, Prasad said.
It is also unclear how far Trump will go, as he may declare mission accomplished without fully implementing his tariff threats. Regardless, the United States has leverage, and the rest of the world must adapt.
“The Trump tariffs will certainly force other countries to be creative in dealing with him,” Prasad told reporters. “Given their economic realities, they may have few other options.”
