America First?

The reelection of Donald Trump to the presidency has sent shockwaves around the world. And just hours after results came in, the ruling three-party German coalition government, which had been teetering for months, collapsed. The survival of dominant political coalitions in other G7 countries—including in France, Japan, and Canada—is now more uncertain than ever.

Amid speculation about how the second Trump term will play out, the question of trade measures is occupying headlines. It is expected that the quantum of tariffs will certainly increase under the incoming administration, and that they will be more assertively weaponized. The extent to which they will represent a break with the Biden era, however, is less clear. 

Biden in 2021: “Every single thing, from the deck of an aircraft carrier to the railing of a new building, is going to be built by an American company, American workers, American supply chain, so that we invest American tax dollars in American workers.” (Source: White House)

It’s well known that the Biden administration left the majority of Trump’s trade-war tariffs intact. In fact, revenue collected from tariffs grew under Biden’s watch—particularly on Chinese goods:

It is hard to predict how Trump will move ahead with his proposals, which include 60 percent tariffs on Chinese imports and 25 percent tariffs on goods from Canadian and Mexican imports. Appointments of people like Scott Bessent do suggest some strategic crafting of new and increased tariffs, but what will be their effects be, and how will they be managed? Many are expecting significant price hikes for consumers as well as retaliatory measures from trade partners. According to Michael Pettis, it will become even harder to navigate trade-offs with Trump’s desire to maintain dollar centrality.

Might the new tariffs be blocked, especially seeing as they will almost certainly contravene World Trade Organization rules? In light of the fact that Trump has already stymied nominations for the WTO panel that assesses claims, rendering it all but ineffective, it’s unlikely the multinational organization will play a significant role. It was the Obama administration that had set this ball rolling in 2011 when it blocked nominations to the Appellate, claiming that the WTO failed to protect American interests. For his part, Biden maintained a suspicious attitude toward the organization, citing broad grievances while offering little by way of solution. In 2022, it was Biden’s Deputy US Trade Representative María Pagán who declared, “The United States will not cede decision-making over its essential security to WTO panels.”

The high tariffs introduced under Biden were part and parcel of his administration’s “foreign policy for the middle class,” a doctrine created by senior Biden officials that sought to address the decline of various Democrat-leaning workforces and regions, as well as the domestic disillusionment with American interventionism and the forever wars. While it did help to underpin the resurgence of industrial policy under Biden, it also put blame for Democrats’ faltering base at the door of free trade, specifically Chinese imports. That blame elided the importance of domestic measures such as labor support and place-based interventions that might have alleviated the effects of China’s WTO accession. Instead, both sides of Congress opted for hawkishness toward China, insisting on  “decoupling” and “derisking” relations with the world’s second biggest economy. 

Sanctions

Another aggressive tool of the first Trump administration was sanctions. 

Source: How four US presidents unleashed Economic Warfare, Washington Post

The use of sanctions as an economic weapon goes back to World War I, and it was a significant feature of Obama’s time in office, too. The Biden administration largely maintained and increased the sanctions imposed under Trump, hitting historic highs.

Thanks to the dollar’s centrality in the global financial system, Washington is able to unilaterally impose sanctions via SWIFT on any institution participating in global dollar transactions. SWIFT, an inter-bank messaging system located in Brussels, provides the US real-time data on all transactions. Today over half the global economy is subject to some sort of US sanction.

Even when sanctions appear to only target specific entities or individuals, they affect targeted countries broadly. Despite humanitarian exemptions granted on paper, in practice aid organizations and those working to deliver support are unable to process payments or transactions related to sanctioned countries. The UN Special Rapporteur on sanctions documented how unilateral measures caused major delays in the ability to respond to the Covid-19 pandemic and ensure access to lifesaving medical supplies.

At the same time, sanctions often fail to achieve their stated objectives. The US and its G7 partners expected their sanctions against Russia to severely weaken that economy and hinder Putin’s ability to wage war. This, of course, hasn’t occurred. Crude oil from Russia is still sold on world markets and the implementation of oil price caps has only effected a small discount on Russian barrels of oil, relative to the Brent benchmark. Russia still maintains a current account surplus and in spite of its costly campaign against Ukraine, the Russian economy is amongst the fastest growing in the world.

As more states get excluded from the dollar system, the incentives to build alternatives get stronger. However challenging setting up an alternative to the world’s premier reserve currency is—and Trump has threatened BRICS members to desist from developing alternatives—it is ever more appealing for countries alarmed by US sanctions.

While more than unlikely to threaten dollar centrality in the short term, such alternatives would hamper the ability of the US to apply sanctions where it sees fit.

Multilateralism

The first Trump administration was openly antagonistic toward multilateral bodies, rapidly quitting the Paris Agreement and appointing David Malpass, a former Reagan and Bush advisor, to head up the World Bank. It withdrew from the UN Human Rights Council and sanctioned International Criminal Court officials.

When he came to power, Biden changed tack, promising to work with “our allies and partners,” thereby “renewing our role in international institutions, and reclaiming our credibility and moral authority, much of which has been lost.”

Beyond forming new military alliances, and bolstering existing ones, Biden’s contribution to multilateralism was thin. His administration did nothing to compel commercial creditors to participate in even the mildest deferrals for debt-stricken countries, nor did it help to make Covid vaccines available quickly to developing countries.

On climate, there was some progress under Biden; the reversal of Trump’s 2017 withdrawal from the Paris Agreement was followed by the cleverly crafted Inflation Reduction Act, which went some way towards improving the US contribution towards global climate action (although it is still far from being a leader). When it came to international trade and finance, he largely maintained what had been put in place by Trump.

Perhaps the only really significant action the Biden administration can point to is using its decisive voting share in the IMF to support a new distribution of Special Drawing Rights. SDRs are a type of asset issued by the IMF that can be swapped for dollars, euros, yen, pounds, and yuan. The 2021 allocation of about $650 billion worth of SDRs  was the largest ever—just below the threshold that required approval from Congress. It provided access to hard currency badly needed by indebted countries struggling with Covid’s hit to their revenues. The allocation turned out to provide the largest non-debt support for developing countries, many of which used their new SDRs to pay down their debts:

The new allocation was far from adequate, however, and calls for more were refused. The demand for governance reform at Bretton Woods institutions and for measures to provide Southern countries with more fiscal space were also ignored.

What proposals were put forward on these issues lacked substance, and focused mainly on instruments that emphasized conditionality for recipients. Expansions of World Bank lending capacity progressed at a snail’s pace. A G7-led reform roadmap for the Bank proposed more climate finance but upheld that it should continue to be led by those countries most responsible for historical emissions; no additional funding was suggested. At the IMF, a new facility offered long-term affordable loans to build resilience on climate and health issues—yet accessing these loans required having a traditional IMF program, where conditions impose harsh austerity measures and promote policies that contradict climate and development goals. 

America, left out

For decades, the US has served as the leader of what it has come to term the rules-based international order. The legitimacy of this order has been under threat at least since the global financial crisis; with the destruction of Gaza—met, in galling contrast to the invasion of Ukraine, with insouciance from the G7—that legitimacy is beyond repair. Failure to deliver on climate finance and development assistance has not helped to improve the image of a US that, even under Democratic administration, refuses to deliver meaningful international to countries around the world.

Global South nations, lacking representation at the IMF and World Bank, brought their calls for reform of the international financial architecture to the UN. Led by the G-77 and China, the process was set in motion for a Financing for Development conference where these matters could be discussed. Alongside this process, the G-77 is also leading efforts to negotiate an international tax at the UN to deal with profit-shifting and tax avoidance tactics of multinational corporations. The US and its close allies have opposed these processes and have refused to engage productively in negotiations, confirming that their support for multilateralism is limited to those places where they can still call the shots. Little wonder, then, that Beijing is viewed more favourably than Washington in the global South.

Source: Global Public Opinion on China, Asia Society