STEPPING OFF THE CLIFF

Is our economic policy reinforcing authoritarianism globally?

BOTTOM LINE UP FRONT

Welcome to the 40th edition of the Dekleptocracy Report! In this issue, we look at the global and domestic impact of the Trump administration’s tariff policies. A global trade policy built on tariffs – a throwback to the trade wars of the, erm, 1920s – became doctrine in the second Trump administration, to redress allegedly deep-seated discrimination against US goods. Of course, tariffs also provide another tool in the president’s kit for potentially manipulating markets in favor of his associates. As we explore in this newsletter, beyond their immediate impact on markets, tariffs represent a potent political weapon around the world, providing parties of resentment like Germany’s Alternative for Germany party or Romanian presidential frontrunner George Simion with an instrument of economic shock to foment unhappiness with incumbents. The question is now whether the disappearance of Chinese goods from the American supply chain and a lack of any meaningful negotiations to stop the trade war with one of our largest trading partners will cause unhappiness or worse at home. In other words, can a policy seemingly developed on the hoof help the president and his international allies entrench an authoritarian, kleptocratic system at home and abroad, or, ironically, be the cause of its undoing?

Since the wide-scale introduction of tariffs on April 2, a slot on the calendar President Donald Trump has dubbed henceforth as “Liberation Day,” it is fair to say that the world has not yet ground to a halt. It is true that virtually all economists loathe tariffs, with Paul Krugman calling the president “stupid, erratic and weak” for adopting them. Unbowed, the Trump White House has argued that these are really reciprocal measures aimed at countering “the absence of reciprocity in our trade relationships and other harmful policies like currency manipulation and exorbitant value-added taxes (VAT) perpetuated by other countries.” But there are signs that most people in America and the world may be vastly underestimating the impact of last month’s measures. A steep decline in port traffic is signaling that a supply chain crisis may be just weeks away, upending American consumers. Internationally, falling growth and stagnation in key economies could be the latest shot in the arm for Europe’s populist parties – a fillip for the Trump White House – and reinforce Xi Jinping’s control over the Chinese economy. In short, the world appears to be sleepwalking into a wide-ranging crisis with numerous outcomes that could tilt the world in favor of the kleptocrats. The question is whether these are the externalities of an ill-thought-out economic policy or a deliberate blow against global institutions.

On paper, it’s too soon to understand the full economic impact of tariffs. The International Monetary Fund (IMF) wrote in late April that it was reducing its global growth forecast for 2025 to 2.8% and 3% for 2026, a cumulative downgrade of around 0.8 percentage points compared to its January 2025 measure, reflecting the impact of tariffs. In the US, the world’s largest economy, a Commerce Department measure of the first three months of the year – all ahead of the widespread introduction of tariffs – saw the American economy shrink, a reversal of three years of solid growth as America had shrugged off previous global economic worries. President Donald Trump said, simply: “That’s Biden.” For the full year, forecasters have been getting progressively more pessimistic, with the IMF slashing its prior full-year 2025 forecast annual growth rate from 2.7% to 1.8%.

Meanwhile, China claimed to beat forecasts in the first quarter of 2025, posting 5.4% GDP growth. Beijing has set a target for this year of around 5% growth, defying sanctions. Needless to say, we take China’s official economic data and forecasts with a grain of salt, but the figures are at least indicative. Bank UBS was more cautious, forecasting 3.4% growth for 2025 and Goldman Sachs called it at 4.0%. In Europe, Germany, the world’s third-largest economy, is forecast to have its third consecutive year without meaningful growth, making it the most sluggish economy in the G7. In response to the looming trade war, France trimmed its official growth forecast for 2025 from 0.9% to 0.7%. The UK, which had defied a grumpy public (see our previous issue), grew at a faster-than-expected rate in February, at 0.5% year-on-year, according to the Office for National Statistics. Looking forward to the full-year, EY’s Club Spring Forecast, the most recent consensus figure, estimates 0.8% annual growth in 2025, down from the Bank of England’s previous forecast of 1%. Again, forecasters blame tariffs for acting as a brake on the economy.

Simmering resentments

If you’re looking for evidence of a trade policy that fuels resentment, look no further than Europe. While we previously wrote about the rise of Reform UK, a right-wing, anti-immigration party, that political threat won’t really emerge until the next general election in 2029, early on in the first term for the next US leader (or President Trump’s possible third term, as he recently mused). Still, the extension of their winning ways into last week’s local elections underlines the tendency. With figures like Musk embracing Reform, the Labour government theoretically needs a post-Brexit trade deal from the US but dreads what the current administration will offer. In the meantime, measures like a mooted 100% tariff on non-US movies could all but wipe out what has been a resilient industry for Britain, which is still reeling from Brexit.

The threat in other parts of Europe is more immediate. In February, Alternative for Germany (Elon Musk and JD Vance have recently restated their support for the party, currently under surveillance as an extremist organization) doubled its support to 20.8% in federal parliamentary elections in late February as outgoing Chancellor Olaf Scholz's SPD delivered a measly 16.4% share, a historic low for the center left. In France, governments remain hamstrung by the outcome of Emmaneul Macron’s snap election last year, giving the far right and far left the ability to play kingmaker or throw out the government, a threat in the air after the recent conviction of rightwing leader Marine Le Pen on embezzlement charges. Macron may now call fresh elections as early as this fall in another risky bid to shore up the centrists who have formed repeated shaky governments.

Further East, an ultranationalist who calls himself “Trump’s natural ally,” won by far the largest share in the first round of Romania’s presidential elections this week. He faces a run-off against the mayor of Bucharest in polls that are themselves a redo after massive Russian interference in elections late last year. In Czechia, populist Andrej Babiš, the head of the Association of Dissatisfied Citizens (the acronym ‘ANO’ ironically means ‘YES’ in Czech) leads in the polls and has mused, among other things, about taking direct control of state media, borrowing from neighboring Slovakia and its authoritarian-leaning prime minister, Robert Fico. And this is just Europe. The list could go on in South America, Asia and Africa. The tariffs represent a global poll tax that hurts the poorest and undermines the liberal economic agenda of more ideologically traditional incumbent parties. They fuel the arguments of insurgent parties of resentment and promote autarky, spitting in the face of decades of comparative advantage and just-in-time logistics.

The coming crisis at Walmart

In considering whether Trump’s tariff policies represent a global plan to strengthen the hand of the next wave of insurgent Orbans, Putins, and, yes, Trumps, we must look at the results at home. The Republican Party does not have to face the polls, outside of a handful of races this year, until November 2026. As Trump has already sought to do, the unexpected slump in the first quarter may be blamed on President Biden. For voters, the more important question is whether prices will once again go up, one reason they voted for him and the GOP last November. The president recently said there is “no inflation,” while consumer prices rose 2.3% in February, down both month-on-month and year-on-year. Even the stock market posted impressive recent gains following a tariff-driven rout in April. One way of reading that data is that things can probably only get worse for consumers from this point.

Indeed, the other proverbial shoe has yet to drop. “Don’t look at stock markets, look at the ports,” the Atlantic warned recently. The article reported that disruption already felt in the shipping sector, and soon to be felt further down the supply chain in trucking, due to companies canceling or delaying orders, primarily but not exclusively from China, could take months to work out, even if a trade deal is achieved tomorrow. Cargo traffic from China to the US fell by 60% last month, with JP Morgan forecasting an 80% decline later this year. Notably, China has been stockpiling essential imported commodities – not specifically goods from the US – increasing its overall resilience in a crisis. After a surreal back-and-forth of competing claims, it appeared that the two countries have not even begun negotiating a way out of this trade war. And any trade deal has to accompany dozens of other trade deals with upwards of 90 countries supposedly at some stage of development, making the US Trade Representative, Jamieson Greer, perhaps the most oversubscribed political appointee on earth.

Even as tariff-induced disruption will broadly strengthen the president’s ideological allies abroad, will it lead to chaos at home? Certainly, it will look different from toilet paper and disinfectant shortages of the early COVID-19 era, as consumer goods from China include goods like furniture, auto parts, clothing, plastics and footwear. And there are finished goods that require Chinese components. Some producers have shifted to third countries, like Mexico, Vietnam and Thailand, so they are not subject to 245% tariffs. And many US importers have been stockpiling, some since before Trump’s election. And there are carve-outs. But no amount of planning will avert some form of crisis, ranging from price spikes to shortages of certain goods. While the CEOs of Walmart and Target “shared their insights” with the president and his team and issued suitably deferential statements, they have also warned of “gaps” on store shelves. A loophole for lower-cost packages used by Temu and others has also recently expired, adding levies to millions of additional packages. It is impossible to say how things will look for American consumers in six to eight weeks. Will Trump be able to deflect blame or try that hardest of tasks for an American politician, namely, asking the public to endure a period of self-sacrifice for the greater good? Not least, America is almost wholly reliant on China for fireworks, raising the real and symbolic cost of July 4. Whether Walmarts become the scenes of long lines, soaring prices and even unrest will indicate whether the tariff policy’s global wins for Trump and his backers are worth it domestically or set the scene for a political defeat in 2026. For a policy direction allegedly cooked up by a man, Peter Navarro, who was in prison last year, tariffs have proved remarkably consequential.