Spaghetti Bowl Trade Deals May Alter the Global Balance of Power

A break from multilateral trade rules could result in power exertions that make smaller countries re-forge their foreign ties

- NIRANJAN RAJADHYAKSHA

The first salvo of the ongoing trade war was fired by US President Donald Trump on April 2. The office of the United States Trade Representative (USTR) subsequently released a small note to explain the basis on which reciprocal tariffs had been imposed on various trade partners. The formula used was severely criticized by trade economists for its lack of any basis in either theory or past empirical work. It is worth going back to that note two weeks later, over which Trump has shifted course after a sharp reaction in financial markets saw US bond yields rise while the dollar lost value.

There are two statements in the USTR note that make for interesting reading a fortnight later. First, it says that the US government has assumed that "offsetting exchange rate and general equilibrium effects are small enough to be ignored." This means that there would be no significant second-round effect of US tariff hikes, which is akin to saying that there would be no ripples after a rock is chucked into a pond. Ignoring general equilibrium effects in an interconnected global economy is not what the doctor—or textbooks—ordered.