Trump is now the President-elect in the US. He has come on the plank - Make America Great Again (MAGA). It is a laudable, nationalistic, patriotic thing to say this about ones own country. There are several things that one can do to live this slogan - like curtailing wasteful government spending on a bloated bureaucracy, spending on unwanted wars, pare down US military presence ( US has over 800 bases globally! ), focus on capacity creation in USA and curtail spends on toppling regimes across the world, sharpen spending on welfare programs etc.

Even before he becomes the President of USA, Trump is ratcheting up the tensions through his statements on various matters. One such issue is the hot-button topic of dedollarisation.

He was so incensed by this that he threatened to apply a tarriff of 100% on the BRICS countries, which are trying to move away from the dollar. He also threatened Mexico and Canada, their neighbours to the South and North with 25% sanctions, for unbridled influx of immigrants across their border with the USA! An additional 10% tariff on Chinese imports is also on the cards. There are many more such pronouncements from Trump which are confounding people across the world.

What are the implications of this for the US and the other countries? This is a question on everyones lips now.

Let us understand the implications for the various countries and the US.

100% tariff on BRICS nations

US as a country is a huge importer of goods and services. A 100% tariff on the exporting countries would make it very difficult for these countries to export goods/ services to the USA. But, such tariff will also double the prices for the American consumer, while the government will collect the tariffs ( i.e. if someone is able to export to the US, inspite of such tariff !).

Trump had remarked that the tariffs so collected would help in bringing down the taxes for citizens. Apparently, 60% pay taxes in the US, and the rest don't. Even among them, those paying above 30% taxes is a small minority; most pay between 10-20% taxes.

Hence, if taxes are removed, the maximum savings would be 30% for a miniscule population and 10-20% for the rest of the taxpayers. Whereas, they will now be paying 100% more which means, they will pay a lot more overall.

For those who do not pay taxes, the burden of the tariff will fall on them fully. This means it will have a disproportionately adverse effect on the bottom 40% of the US population.

25% tariffs on Mexico & Canada

Trump is miffed at the massive influx of illegals coming from across the borders - hence the tariffs! Incidentally, both these countries are major trading partners and such high tariffs would impact US consumers.

These countries would not be taking things lying down. Mexico president has highlighted how the tariffs would affect lakhs of US jobs and adversely affect American companies in Mexico. She also hinted at retaliatory tariffs. Canada has also hinted at trade retaliation. Also, US companies have invested all over the globe. It is not very difficult for aggrieved governments to squeeze and prick these companies in retaliation.

Alienating allies

Incidentally, Canada is a close US ally, part of the so-called five eyes. That has not stopped Trump from humiliating Canada, asking them to become the 51st state and putting a meme showing US invading Canada! It is indeed ironic that POTUS is behaving like a street thug and using crass language and imagery.

Even Mexico is a friendly country and would be very useful when US wants friend-shoring of production. There is a problem of illegal immigration - but that problem was virtually overlooked and some would say, aided and abetted, by the previous administration. But that could have been tactfully handled instead of threatening everyone around with grave consequences.

During his first term, he had slapped sanctions on European Union as well as other allies. It looks like, the current version will be a lot worse.

Second-order effects on US

US cannot hope to ride roughshod over everyone and not face consequences. There will be consequences due to measures taken by the sanctioned / tariffed countries. There will also be inherent problems in the US due to sanctions.

Various countries would come up with retaliatory tariffs as also block access to US goods. It can also be denial of important raw materials. China had blocked exports of some rare earth metals to US and Russia has halted Uranium exports. Such retaliation will pose problems for the US.

US tariffs will increase the price for the consumers and will send Inflation soaring. Interest rates will have to go up due to that. That will push up yields on US Treasuries resulting in an unsustainable interest load as well as huge losses on the books of those who already have US Treasuries.

Loans and credit will become very costly. Major defaults in loan repayments on housing, credit cards, student loans etc. can occur. This reduces their ability to access fresh credit and limits their spending power. That would result in weak demand and adverse effect on corporates, which could result in loss of jobs and impact future hiring. These could ratchet up bad loans and could destabilise the banking system which could cause social unrest.

Hence, it is not going to be a bed of roses for the US, if it implements the tariffs Trump has threatened the world with.

DOGE Effect

Department of Government Efficiency (DOGE) is to be constituted to increase efficiency, trim the workforce in various government departments and save money. Elon Musk and Vivek Ramaswamy are the faces that will power DOGE. They claim they can save USD 2 trillion. That looks like a tall order, especially the part about firing Government workers.

If by chance they end up saving this amount, it may be prudent not to spend this saving, considering the loan burden and the deficits, the US has now. But sucking out such a massive amount would result in US economy shrinking to that extent!

Dedollarisation

Dedollarisation itself started in real earnest when US froze dollar assets and threw Russia from the SWIFT system. This was weaponisation of the dollar. Countries across the world have taken note.

More threats only reinforce the street-thug ethic of the US, alienate countries and push them away from the dollar. Lots of people tend to think that it is not possible to be without US dollar and another reserve currency cannot come in to replace it.

Another reserve currency is not needed. The world is moving to a multipolar system, which the west has failed to acknowledge. A mechanism to know the relative value of exports is what is needed and countries will transact in bilateral currencies. It is already happening in a small way.

The loss that countries suffer when they transact in dollars is out in the open. 6% plus is the transaction cost when the importing and exporting countries convert their currency into dollars and back. This is usurious and Shylock looks like Santa Claus by contrast! Clearly, the banks have made merry with a cosy system where money for jam could be had for virtually no work!

If they insist on continuing this system, dedollarisation will accelerate.

Conclusion

The world is a changed place today. US is yet to realise that its role as a superpower has waned a lot. Abrasive behaviour, unilateral sanctions/ tarrifs, interference in the internal affairs of countries and their extreme hypocrisy has made enemies and alienated friends.

There is a saying - Being an enemy of the US is tough; being their friend is tougher!

Sanctions have not had any adverse effect on Russia, though there are about 15,000 sanctions that the west have piled on Russia. In fact, Russian economy has grown by 3.6% in 2023 and is expected to grow by 3.9% this year. In the meanwhile, Europe is in doldrums. Germany is in recession with many in Europe growing by around 1%.

US itself is said to have managed the data to show that everything is fine! Smart money will start moving out of the US when it becomes apparent that the decline is well underway. Money will move to Global real estate, Global equity, Gold and Crypto Assets among others. In a sense, it has already started in a small way.

Nobody knows if Trump is going to follow through on the rhetoric. If he does, Trump could be that US president who may end up presiding over the dismantling of the US hegemony and dollar preeminence, while he is looking to Make America Great Again!