The significant geopolitical development last week was the near failure of the vast $29 trillion market in US government debt, jeopardizing the stability of both the American and global financial systems, as well as the safe-haven status of dollar-denominated assets.
As the crisis unfolded, the US president boasted that world leaders were lining up to “kiss his arse.” Twelve hours later, he found himself in a similarly vulnerable position as former British Prime Minister Liz Truss did following her tax-cutting “mini-budget” in 2022. The markets had compelled him to suspend for 90 days the sweeping range of “reciprocal” tariffs that he declared on what he called “liberation day”; instead, he moderated all but the tariff on China to 10%.
The markets breathed a sigh of relief, but “liberation” had backfired. It was Trump who ended up in a difficult spot. He and his loyal followers claimed it was part of a grand strategy. Nonsense—he is being economically and politically undermined.
He cannot afford to reinstate the same tariffs when the “pause” concludes, without risking an even more severe US debt crisis. To make matters worse, he has diminished the likelihood of the global market purchasing the avalanche of new US government debt that will result from the significant tax cuts he plans to announce in the autumn. The US Federal Reserve has been compelled to offer reassurances to the still-fragile markets that it will do what is necessary to maintain stability—another indicator of how power is slipping from Trump’s grasp.
The EU, the UK, and other rule-of-law capitalist democracies now hold the upper hand. But they must recognize this shift and collaborate to leverage the opportunity, rather than each seeking the most favorable deal possible for their limited “national interest.”
This is a time when the national interest is best served by unity. The situation remains perilous. The average tariff in the US, including the steep 145% on Chinese imports, is at its highest in a century. China, armed with its technological and financial power, as well as leverage over vital raw materials, is maneuvering to position itself at the center of a new global order.
Democracies must establish a unified front over the next 90 days as a means of damage control, and then look beyond that to construct a new trade order from the remnants of the old—necessarily excluding the US. Additionally, they must be fully aware of China’s intentions. While engagement is essential, it is not a benevolent power but a key player in what Anne Applebaum has termed “Autocracy Inc,” a coalition of countries, including Russia, aimed at subverting rule-of-law democracies, human rights, and political diversity.
Britain’s Brexit supporters, equally oblivious to the damage caused and current realities as Donald Trump, will loudly protest, but the EU must be the driving force for Europe in the coming endeavors. Its current position serves as a strong starting point. Its objective is to eliminate all tariffs, and while it is willing to address genuine US trade complaints and increase its purchase of US gas, it stands ready to defend against extra-territorial American assertions regarding sovereignty, taxation, or regulation, calmly reserving the right to retaliate if necessary. It will surely uphold EU product standards across a wide range, from digital services to food. Additionally, it is open to forging a closer trade relationship with Canada.
However, the EU needs to use the 90-day “pause” to move beyond this and ambitiously assemble a willing coalition to establish a global pact against beggar-thy-neighbor trade policies, thereby laying the groundwork for a global customs union. This coalition could include members from the G20, extending invitations to Asia’s Trans-Pacific Partnership, the Gulf Cooperation Council, South America’s Mercosur, and the Southern African Customs Union. This could occur alongside the World Trade Organization (WTO) as a new Global Customs Union Council, ultimately aiming to extend any agreements to encompass common technical and safety standards, perhaps utilizing the WTO to enforce its rules and resolve disputes. China could be included if it adheres to the established rules.
Without EU membership, Britain cannot be the primary influencer in this initiative, but it must express its willingness to collaborate—and initiate actions where possible. Rachel Reeves, writing in the Observer this week, signals a first step in this direction.
To be effective, Britain should align itself with the EU in negotiations with Trump and pursue a far more comprehensive trade deal with the EU—including agreements on technical standards—than the timid one expected to be presented at the upcoming UK-EU summit in May. Suggesting Gordon Brown, respected internationally for his role during the debt crisis, as the lead negotiator could demonstrate its good faith and commitment to this effort.
Any uncertainties should be alleviated by the data. The draft terms for the UK-US trade deal are disheartening: the US offers minimal concessions while the UK is coerced into reducing its demands on food standards, product regulations, and digital services. The independent forecaster Frontier Economics estimates that US tariffs will decrease the UK’s GDP by 0.7%, while a more substantial deal with the EU could plausibly increase GDP by 1.5%, even in light of US tariffs.
So, what will it be? Assist a beleaguered Trump with a subpar trade deal that he will tout as a triumph for Britain? Or join forces with the EU to enhance our growth and shape a new global free-trade framework?
