Spectacle or stability: America's trade at a crossroads

Hindustan Times

26-05-2025

In the wake of President Trump's threat to slap a 50% tariff on all European Union imports (he has delayed it till July 9) alongside his promise of punitive levies on tech giants, America stands at a crossroads between political posturing and economic prudence. What may play well on the campaign trail risks opening the Pandora's box in boardrooms from Detroit to Dublin. As the Federal Reserve adopts a wait-and-see stance amid sticky price pressures, the real test will be whether policymakers choose spectacle over stability, or whether common sense prevails in preserving the world's most dynamic economy.
It is an old adage that 'empty barrels make the most noise,' and in Trump's tariff theatre, the loudest clamour often comes at the expense of nuanced economic argument. Instead of negotiating mutual reductions, the administration resorts to unilateral threats that risk a spiral of retaliation. As European leaders contemplate their next move, the warning is clear: If you live by tariffs, you may also die by them, hurting consumers and producers on both sides of the Atlantic. Behind the headlines lurks a more sober concern — the risk of stagflation. With consumer-price inflation still running above the Fed's two per cent target and wage growth edging higher, central bankers find themselves between Scylla and Charybdis. As JPMorgan's Jamie Dimon has warned, the confluence of fiscal deficits, geopolitical fragmentation, and services-driven price stickiness could slow growth even as prices stubbornly rise.
The Federal Reserve's wait-and-see posture is not a retreat into dovishness but rather an exercise in disciplined restraint recognising that an ill-timed rate cut amid tariff-induced uncertainty could fan the flames of inflation. Yet patience wears thin when households confront rising housing and health care costs, and businesses postpone investment decisions in an environment of shifting trade winds. In short, America may find itself stuck in a growth-sapping quagmire if policy missteps escalate.
Parallel to Europe, US policy towards China underscores another illusion: the myth of decoupling. Political rhetoric promises a clean break, yet real-world supply chains remain intertwined from semiconductors to rare-earth minerals. As one commentator quipped, 'you can't change horses midstream,' and the world's factories and financial markets have too many co-dependencies to sever without self-inflicted wounds. Moreover, capital markets continue to operate under commercial logic unless explicitly curtailed by sanctions. JPMorgan's underwriting of bonds for CATL, China's battery champion, reinforces that markets will fill any void left by politics. This pragmatism runs through corporate boardrooms and portfolio strategies worldwide: Firms seek opportunity, not political blame games.
If Trump's tariff theatre embodies the art of the deal on steroids, then the path forward must be guided by the art of the possible. First, Washington and Brussels should revive a 'zero-for-zero' roadmap — under which the US lifts existing 25% duties on autos, steel, and aluminium in exchange for reciprocal EU cuts on a broader basket of industrial goods. This will re-establish trust and avert escalation.
Second, policymakers must recognise that trade deficits are neither inherently villainous nor indicative of exploitation. Economies trade because they gain from specialisation — the very principle that powered US growth in the 20th century and underpins today's global value chains. A 'common sense and economic sense' approach, as one market observer put it, would accept that deficits in goods can be offset by surpluses in high-value services such as software, finance, and entertainment.
Finally, the Federal Reserve should maintain its disciplined stance, ready to act if inflation expectations become unanchored but cautious about cutting rates before the fog of tariffs lifts. A clear, jointly communicated roadmap on trade policy would reduce uncertainty and allow the Fed to calibrate policy without the overhang of political theatrics.
In politics, as in economics, words without action are like 'bells without tongues' — loud but hollow. The real test for US leadership will be to balance the electoral allure of tough talk with the needs of an open, efficient economy. The world is watching: Will Washington choose spectacle, or will it choose stability?
Shruti Punia is fellow, Helsinki Geoeconomics. The views expressed are personal