Tariffs and Tribulations

Short-term wins from tariff diplomacy may cost Washington the very influence it seeks to preserve.

America’s trade diplomacy is on a tear. In recent weeks, Washington has stitched together deals with Indonesia and the European Union that slash tariffs on American goods and fend off looming levies on European exports. Indonesia will scrap duties on 99 percent of industrial, food and agricultural imports from the United States. The pact also dangles promises of future acquisitions of American products, sweetening the pot for US exporters. The EU deal, meanwhile, averts threatened 30 percent tariffs, though it leaves several European leaders bristling.

Poland’s prime minister warned of a $2bn hit to his economy; France’s called the accord a “submission” and a “dark day for Europe.”

While these agreements are sold as triumphs of American dealmaking, they risk unsettling the very global trade order that Washington once championed.

Indonesia already has trade agreements with China, Australia and the EU. Granting Washington near-total tariff-free access will almost certainly prompt those partners to demand matching treatment. In Europe, the relief over avoided tariffs is tempered by resentment that the United States has again wielded its economic heft to extract last-minute concessions.

From the end of the second world war, America was the anchor of the liberal economic order. It underwrote NATO’s defence, stationed troops far from home and fought hot wars to keep countries from sliding into the Soviet orbit. That posture was expensive, but it bought Washington strategic dominance and a central place in global trade. The dollar became the world’s reserve currency; American manufacturers - from Detroit’s car plants to California’s electronics factories - were unchallenged abroad.

But decades of outsourcing eroded that industrial supremacy. Seeking cheaper labour, US firms shifted production to Asia, above all to China. The results were double-edged. While profits soared, the country grew dependent on a strategic rival. Meanwhile, rising powers - from India to Brazil - acquired technical expertise, narrowing the gap with their once-unassailable American competitors.

The post-Cold War settlement, in which the US provided security guarantees and market access in exchange for loyalty, has been fraying for years. Donald Trump has now accelerated the rupture. His ‘America First’ doctrine reframed allies not as partners but as clients who should pay for the privilege of protection. Japan, South Korea and Taiwan were told there would be no more freebies. Canada, the EU and Japan were subjected to tariff threats to wrest concessions. Even India, a long-time supporter of US global policies, has been hit with a 50 percent tariff on its exports.

India’s response has been pragmatic this far. It is pursuing alternative markets, sealing a free-trade agreement with Britain and negotiating with China despite border tensions. This diversification reflects a broader trend of countries hedging against overreliance on the American market.

That is where the risk to Washington lies. In the short term, tariff diplomacy can deliver quick wins: jobs for American workers, higher export revenues, reduced spending on foreign defence commitments. But in the long run, such ‘transactionalism’ corrodes trust. Allies begin to question whether the US is a reliable partner. Adversaries begin deepening ties with disaffected states.

Already, blocs like BRICS and ASEAN are exploring ‘de-dollarisation,’ settling trade in currencies other than the greenback. America’s ability to borrow cheaply and project power abroad depends on the dollar’s reserve status. If enough countries chip away at that dominance, Washington’s capacity to dictate terms will diminish.

The Indonesian deal could accelerate that process. By singling out the US for privileged access, Jakarta may strain relations with Beijing, Canberra and Brussels. Retaliation could follow, perhaps not immediately but in the form of demands for reciprocal concessions, new tariffs, or subtle regulatory barriers. Trade spats between the US and EU have a way of escalating, and the language from European leaders suggests grudges are already forming.

The EU agreement is no less fraught. It has spared European exporters from a punishing tariff hike, but at the cost of reinforcing the perception that Washington plays hardball with friends as well as foes.

Even the US’s technological ambitions are entangled in this web. The country’s new cryptocurrency regulations are partly designed to bolster the dollar’s role as a safe-haven currency in an era of digital finance. Its push for artificial intelligence supremacy depends on collaboration with allies who control key resources and research hubs.

In a multipolar world, power is less about coercion and more about coalition-building. China understands this, investing heavily in infrastructure projects from Africa to Southeast Asia. The US risks undermining its own coalitions by treating trade policy as a series of zero-sum skirmishes.

If Washington continues to treat its allies as bargaining chips, it will find itself with fewer allies to bargain with.