Thoughts on End of Bretton Woods Systems
Early April '25 Rose Garden presentation by Trump will go down in history as the end of the Bretton Woods system of US-led organisations (IMF, World Bank, WTO) that set the rules for global trade.
Below 13 key points to understand:
Exemptions, reversals, deals to come. It’s already happened with semi-conductors (exempted), Canada (USMCA) and Mexico (USMCA). Moreover, Trump has invited revised terms with his Rose Garden speech predicting “foreign presidents, prime ministers, kings, queens, ambassadors and everyone else who will soon be calling to ask for exemptions from these tariffs."
Trump’s tariff calculation not linked to actual tariff rates. Previously, most US trade partners had similar tariff rates as what the US charged them. Before the announcement, the US previously charged an average trade-weighted 2.2% tariff on (most favoured nation) imports, the European Union charged 2.7% and Vietnam charged 5.1%. Yet in its revised tariff rates, the US has used a formula linked to bringing bilateral trade surpluses with the US down to zero rather than using other countries’ tariff rates. Leaving aside the accuracy of the formula, it used incorrect elasticities, it has resulted in a 20% tariff on the EU and 46% tariff on Vietnam.
Ending US trade deficit will be painful. If the aim, then, is to bring the US trade balance from deficit to zero, then other countries cannot just offer to lower tariffs, but they have to strengthen currencies, stimulate domestic demand to enable them to buy more US goods and export much less. The flip side is that the US will need to import less and have a weaker currency. Historically, the fastest way to do this is a US recession. This begs the question of whether a trade partner needs to get rid of tariffs or the much harder task of bringing their trade surplus with the US to zero. Indeed, the last major US current account reversals were the GFC crisis of 2008 and the US recession of 1990-91.
New personality-led rather than rules-based trading system. The invitation to negotiate and poor methodology invites an emerging market style system of economic policy. Decisions could be made more on short-term political grounds rather than economic factors. For example, domestic sectors could get exemptions if they make political donations, promise to freeze prices (price controls!) or exit their DEI policies. Trading partners may get a deal if they shift their political biases. This invites a spoils system like the 1800s or modern corporate capture.
Trade uncertainty rather than tariffs leads to recession. While the scale of the tariffs is unprecedented in modern times, the US economy could likely manage it, rather it’s the unpredictability of future changes that could paralyse investment and consumer purchases. This uncertainty could lead to a recession, at the very least in manufacturing.
Trading arbitrage galore. Ireland has a 20% tariff, while Northern Ireland has a 10% tariff. China has a fully loaded additional 54% tariff, while trading ally Brazil has 10%. France has a 20% tariff, while its Caribbean outpost Guadeloupe has a 10% tariff. There is much scope of trade arbs.
Incentive for other countries to escalate. The aggressive tactics of Canada in response to earlier tariff threats and subsequent softening of US tariffs suggest tougher retaliation works. China has already fired that salvo with its aggressive actions on Friday. Trump has already showed signs of compromise by delaying its TikTok decision. Germany and France want to do the same and have discussed accelerating their investigation into X (possible $1bn fine) and imposing tariffs on US services.
US was winning in previous trading system. Despite the latest rhetoric, the US had created the world trading system to its advantage. The US had forced other countries to open up to US capital and trade. And despite, not running current account surpluses like Germany or Japan, the US has had higher productivity and higher living standards than both. Indeed, in 2000, US GDP per capita (PPP) was $55,000, Germany’s was $51,000 and Japan’s was $39,000. Today, US GDP per capita is $77,500, Germany’s is $63,000 and Japan’s is $47,500. The US has been the winner. If there have been weaknesses in the US order, it has been US income equality and the dramatic rise China and its associated over-production.
Tariffs are big tax hike on the poor. On income equality, tariffs hit the poor the most, they consume more of their income with tariffed products. In effect, the US has hiked taxes on the poor.
China could still gain. Most countries would have joined the US in trying to contain China’s insatiable production machine. In fact, Trump 1.0 re-framed US’s relationship with China and led to rare bipartisan support for containing China. Back then, Trump initiated China and sector tariffs, and then Biden continued them and added a domestic industrialisation component (CHIPs Act). Now, Trump has ripped this up. The administration has ended the bipartisan policy and by targeting all countries, the US has thrown a lifeline to China in it being able to form new trade alliances against the US.
Reindustrialisation won’t happen. One of the biggest supposed reasons for the tariffs is rebuilding US manufacturing. This is loosely modelled on the Asia experience where countries from China to Korea to Japan have used tariffs to build up their manufacturing bases. But these came with a long-term vision, strong bureaucracies (Japan’s MITI), a subordination of the banking system to manufacturing and a focus on competitive export markets. The US has not laid a vision with any of these. Instead, it is following the South American model of populist import substitution much like Peron (rather than Milei) in Argentina.
Everyone missing the long-term costs of AI boom. Much has been made about how previous administrations were too beholden to free trade that cost US workers their jobs. The driving force of this in the 1990s were US businesses that wanted to out-source to lower costs. Then we had the financial sector lobbying for de-regulation which helped spurred the housing bubble. In both cases, it was left to the government to deal with the costs (lost jobs and banking crises). Today the new shock is AI, and while the US administration is focusing on fall-out from earlier shocks, it is missing the potential societal costs of the AI shock. Indeed, recent submissions by tech companies demanded the US help invest in energy and data centres. There was no mention on how to internalise the costs of future job losses.
The real culprit is free capital. All the attention has been on trade flows, yet financial flows are massive and since the 1970s have dominated. The post-war boom of the US was an environment of constrained financial and capital flows. Today, unfettered capital flows create as many imbalances as trade flows do. Indeed, the track record of corporate tax cuts shows as much with corporates more incentivised to do stock buybacks rather than capex. The real disruptive policy move would be to constrain financial and capital flows and align them with long-term investment.