DESMOND LACHMAN: The 100 days that shook the world economy

In the aftermath of the October 1917 Russian Revolution, Vladimir Lenin is supposed to have said that there are decades when nothing happens and there are weeks when decades happen. He may have been speaking of the dramatic changes to the world economy that have occurred during the first 100 days of the current Trump administration.

While it might be too early to know precisely how those changes will end, it is not too early to say that the world economy is now entering a new era that may be much more challenging than the previous 80 years.

The clearest way that Donald Trump is changing the world economy is by his aggressive trade policy. With the purported intention of levelling the trade playing field, Trump has imposed punitive import tariffs on America’s friends and foes alike to secure more favourable trade deals.

Of great concern is that Trump has done so in a chaotic manner and in flagrant violation of America’s treaty obligations. These actions are creating considerable economic uncertainty and market turbulence that raise the risk of a US and world economic recession. They also represent a clear turning back from the US-led postwar rules-based and liberal international trade order that was a fundamental contributor to the golden age of postwar economic prosperity.

On the eve of taking office the average US import tariff level was a little more than 2%. It is now estimated that even after taking into account the various import tariff policy pauses, the US has an average effective tariff level of more than 25%. One has to go back more than 100 years to find America with as high a tariff wall as it has today.

Those tariffs now threaten to cause another spike in inflation and a marked economic slowing. In turn, that makes it difficult for the Federal Reserve to resume its interest rate cutting cycle soon.

Another way in which Trump has changed the world economy has been by declaring an international trade war on China, the world’s second-largest economy. Trump has done so by imposing a 145% import tariff on China that is stopping China’s exports to the US in their tracks.

For its part, China has imposed a 125% import tariff on the US, banned the export of rare earth metals critical to the US hi-tech industry, and stopped buying a range of US agricultural products.

This trade war between the world’s two largest economies is now casting a dark shadow over the world economy. Unless it is soon resolved, within the next two months it threatens to cause higher prices and empty shelves in the US. At the same time, it threatens to cause a marked slowdown in the Chinese economy, which is already struggling with the bursting of its housing and credit market bubble.

It has to be of major concern that neither the US nor China has an easy off-ramp from this trade war. Trump does not want to lose political face by backing down. For his part, Chinese President Xi Jinping seems to be of the view that China can withstand economic pain more readily than the US. In the meantime, both the US and the Chinese economies will soon experience real economic pain.

Trump’s erratic trade policy, coupled with his seeming unwillingness to correct the US’s large budget deficit, is tarnishing US economic policy credibility and now raising serious questions about the continued dominance of the dollar as the world’s international reserve currency. Underlining this point has been the unusual recent weakness of both the dollar and the US treasury bond market at a time of considerable global financial market turbulence.

At such times in the past investors would have rushed to the safe-haven of the US treasury market. This no longer seems to be the case. Instead of the dollar, gold now seems to have become the world’s safe investment haven. Only time will tell whether Trump’s damage to US economic policy credibility is reparable or whether this is the start of the sun setting on the dollar as the world’s dominant currency.

Difficult as it is to contemplate, there are 1,360 days still left for this Trump administration. We have to hope that they are characterised by more orderly and rational economic policies than we have seen in the first 100 days. If not, we should brace ourselves for some very rough international economic and financial market sledding.

• Lachman, a former deputy director in the IMF’s policy development & review department and chief emerging market economic strategist at Salomon Smith Barney, is a senior fellow of the American Enterprise Institute.