I have yet to see any comment in the media about one vital dimension to the new tariffs that Trump is imposing on many countries in the global south, including India, Bangladesh, Vietnam, South Africa, Lesotho and others.
A common feature of almost every country in the global south is that their debt is denominated in US dollars. This is partly because commercial banks impose this upon them. It is also because the World Bank has done so as well. The result is that these countries have to heavily promote their export activities to earn the dollars to make repayment of their loans, and the interest due on them. It is, as a consequence, inevitable that they must run trade deficits with the USA. Given the way in which Trump‘s backroom idiots have constructed their tariff charges, it follows that some of these countries are going to suffer some of the highest tariff rates as a consequence.
There are two ways of looking at the issues arising from this. Firstly, it is almost inevitable that US interest rates are going to rise, partly as a consequence of the collapse in the value of the dollar that is now being seen, and more certainly because of the increase in US inflation that is going to be evident very soon, to which I expect the Federal Reserve to react by increasing interest rates. This will, almost inevitably, have a severe impact on these countries that owe their debts in dollars, with interest often being charged at a variable rate.
Secondly, and at least as importantly, if these countries can no longer export to the USA, the chance of them earning dollar income to find the currency that they need to make settlement of their loan obligations is dramatically reduced. They may, as a consequence, have little choice but to default on their debt obligations, whether to commercial banks or the World Bank.
The result will be catastrophic for the credit rating of the countries in question, which will get even worse than they already are.
As a result their costs of borrowing will rise.
Their access to credit might also be removed.
They will then encounter even more difficulties than they do at present in securing the funds that they require to make the investments that their population so desperately need.
In combination with the withdrawal of funding for many of them by USAid, they are likely to head into crisis, with the possibility of debt rescheduling being on the agenda. When there is no formal arrangement for international insolvency, the likelihood is that vulture funds, who buy up the debts of these countries very cheaply and then enforce full repayment against the countries in question through court action, will also escalate enormously.
By universal economic consent, Trump is an idiot. He may, however, be much worse than that. He is at the very least a very dangerous idiot, and the consequence of his idiocy is that there may be hundreds of millions, if not billions, of people in this world who will face the risk of deeper poverty as a consequence of his actions and the denial to their states of the credit which they need.
I can, and do, worry about the impact of tariffs on the UK.
I can, and do, worry about the likely incompetence that our politicians will display in response to those tariffs, and the chance that they will make terrible decisions with regard to our future international relationships.
We are, however, a wealthy country, even if the benefits of that wealth are grossly distorted as to their distribution. That is why I worry even more about the consequences of what Trump is doing for countries in the global south, who are going to suffer to a much greater degree than we are as a consequence of what Trump is doing.
I have already mentioned that I think there is a need for many of the trading nations in the world to react to what Trump is up to by creating a new form of world trade organisation which embraces an entirely new approach to trade.
At the same time we might need to do something else, which is to reimagine the roles of the World Bank and the International Money Fund, and how they might provide necessary debt relief for the countries who are going to be severely impacted by Trump, his tariffs, and their ability to repay their debts. They might need to have active involvement in purchasing their debt, and then cancelling it, or at the very least deferring obligations arising upon it. These actions are absolutely vital if these countries are going to have any chance of surviving the impact of Trump.
I look forward to David Lammy talking about thess issues, but I very much doubt that he will do so. Unfortunately, it does not, at present, appear that our politicians have the imagination to take the lead on these issues just at the time that they should.
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After a quick look at the data, my best guess—though it’s far from certain—is that these countries could be at risk of default thanks to debt pressures and the new Trump tariffs: Argentina, South Africa, Colombia, Pakistan, and Kenya.
P.S. Probably best not to place any bets on it.
My understanding is that the World Bank and IMF deal in dollars.
Well, let us see if the EU can set up equivalents in Euros?
Although the dollar debts will have to be settled in dollars unless the EU buys them up and settles. But I cannot see the ECB doing something like that, far too heterodox.
However, more favourable terms for these countries through Europe would be beneficial in lots of ways in terms of trade.
Interesting times – and worrying too.
Good idea
I’m sure China is already making plans to offer generous loans in Yuan.
We and the French were the two largest colonial powers
May I suggest an Anglo French initiative in this possibly joined by the rest of the EU aimed at addressing the issues that this creates for the developed world or am I asking too much?
You’re not asking too much.
But don’t hold your breath.
Could that be Trump’s endgame. Force vulnerable countries into default and then wade in to buy up assets/minerals etc.?
Shock Doctrine capitalism without the attaching wars/political coups?
Quite possibly.
We in the UK can’t tell other countries what to do but we can embrace free trade with Bangladesh, India, Vietnam etc. There is I’m afraid only one way to do this without being racist and having separate rules for countries with lots of white people and groups of countries with lots of brown people. And that way is the Robert Peel way of course.
I despair that our neoliberal business secretary and Prime Minister are going to spend the next month meeting industry representatives, and ignoring consumers, and trying to micromanage which sectors of the economy get extra protections or god forbid subsidies. It’s a complete waste of a month and frankly they would be better spending their time doing anything but this.
The US has about 4% of the world population and about 25% of world GDP. It is one of the richest countries in the world, in absolute terms and per capita. Per capita it is about 50% higher than the UK, although not evenly distributed in either country.
And yet somehow the US is jealous of any economic success of poor counties like Vietnam Laos and Cambodia. It makes no sense. Trump really does not seem to understand that trade is not a zero sum game.
See my latest post for an explanation.
“And yet somehow the US is jealous of any economic success of poor counties like Vietnam Laos and Cambodia.”
The USA is not “jealous” of countries like Vietnam Laos and Cambodia. To understand this, one must go back to the 19060s & 1970s when the geographical ‘South” (but not Florida) had a very healthy textile manufacturing (cloth, yarn, socks, shirts, Table linens bath linens, bed linens, underwear,…etc..etc. See Wikipedia entry for Cannon Mills & Fieldcrest Corporations ) sector. 95% of the textile manufacturing moved to Vietnam, Laos and Cambodia. The offshoring of this textile manufacturing sector to Vietnam, Laos and Cambodia caused the loss of entry jobs (and the benefits that went with them) for those people of limited education (High School diploma only) and limited skills (no post High School VoTech training). There are many people who believe that the tariffs will bring back these textile jobs to the USA from Vietnam, Laos and Cambodia.
I had lunch yesterday with two people who have very successful businesses who are smart, above average in intelligence but are poorly educated both formally and informally. They both believe that a possible recession or short term recession is worth if the tariffs cause companies to on-shore these jobs back to the USA. Their thinking is simplistic in the least besupplier they do not understand how, for better or worse, global trade works.
I do not think they will seek to educate themselves then see light until the increased price of building materials and supplies hits them with a punch to their bottom line. They do not understand the Canada will not be paying the tariff(s) on their needed roofing materials but their supplier who takes possession of the imported materials will be paying the tariff(s) and passing the increased cost on to them. Thereby causing the price of their estimates (their work) to substantially increase and clients passing on engaging on new projects all together.
I spent two hours trying to explain this to my two lunch partners and they just did not get it. When I explained that the price for new services vehicles would dramatically increase, their response was that they would just by used service vehicles and overhaul them.
These people voted for Trump to get what they believed were non-tax paying illegal immigrants out of the country (also out of the healthcare system and their children out of the schools ) and deal with the “Woke” issues they do not want thrown in their face. They seem to have no problem with “Woke” per say, as long as it is not in the street and frightening the horses (this quote was actually used at the luncheon).
I swear on my favorite leather jacket, great-grandmother’s legacy set of fine china and my husband’s rust-bucket vintage Corvette:
I AN NOT MAKING ANY OF THE ABOVE UP – IT ACTUALLY TOOK PLACE
Thanks
I have the same problem here with people who think Reform have all the answers
I hear what you say. The hope is that manufacturing jobs may return to the US. I think that is a pipe dream. Many of the jobs were offshored by US companies behaving as good capitalists by seeking lower labour costs and lighter regulation. If US citizens are willing to pay (to pluck a figure from the air) $50 for a T-shirt then some of the jobs to process raw cotton into yarn, make fabrics, and manufacture garments, may return to the US. The products won’t be any better made. And I expect the production will be heavily mechanised so there will be many fewer jobs than expected, paying minimum wage. These low paid workers will not be buying the T-shirts. Meanwhile the workers in Vietnam etc will be making cheap products for other markets.
The northwest of England used to be one of the great fabric and garment manufacturing centres of the world (and there is a story to tell about why cotton was being processed there and not for example in the US or India). For much the same reasons, those mills and factories died by the 1980s and no longer exist. Or rather the surviving building lie empty or are being used for other purposes.
The new ‘jobs’ will all be for robots
Our reduction in aid to developing/poor nations seems even more cruel now.
Perhaps the biggest result of this will be an increase in Chinese influence in the global south, as it becomes the only possible source of development aid.
Agreed
This one is testing my understanding of foreign debt, but:
Doesn’t China hold US dollars? Can China buy up the debt of the hardest-hit countries? In return for “a stake in the country”, of course?
It could…
Well, the answer to your question is none if I am to believe the MMT Richard who has said a nation with sovereign currency cannot go bankrupt. Or maybe my understanding of how MMT works between countries is too limited.
I am of a mind that this tarrifs business is a kind of homeopathic medicine: where the medicine aggravates the symptom which is arising as a result of the body healing itself.
We built international trade on the Ricardian notion of comparative advantage. Ricardo was a trader who didn’t realise you can’t just convert factories overnight to making other stuff, yet here we are with economlsts telling us we must specialise and compete with other nations. This is the illness, and increasing tarrifs just magnifies how sick the idea is, as Richard and others have pointed out.
The earth is full. Not just of people but man-made stuff that itself has an insatiable appetite for more of the resources that a just aren’t available.
So we need each nation to become more resilient, to be able to degrow, ensure the provision of the basics at local level and basically redesign economics.
Trump is forcing us to abandon liberal economics, take on MMT and go full on sustainable.
We had to do this sooner or later, we are very late already. I see it as a wonderful opportunity to promulgate the alternatives.
We have nothing to lose except our growth dependent, fossil guzzling, non-resilient, dysfunctional way of life.
But most countries do not have their debts denominated in their sovereign currencies, as I made clear in the piece.
I am niot sure your benign outlook is the pathway Trump wants us to follow.
Ah OK! What would the MMT response be to a debt in another currency? Does MMT have ways around it liberal neoclassicals don’t.
And just because Trump expects a certain response doesn’t mean we have to deliver it. This is surely the art of the deal, the master chess game, the beautiful game of football with negotiating, moves and counter moves going on.
I am sure there are alternatives out there lurking, waiting to come centre stage, that will seem more attractive than that being forced on us by the socialists turned political slave masters of a Labour government.
MMT says dont borrow in other currencies. You may go bankrupt if you do. It could not be more clear.
https://prospect.org/economy/2025-04-03-theyre-not-tariffs-theyre-sanctions/
Thanks
For those hoping that industries will come back to the US, they are forgetting that the wage in the US is much higher than it is in Vietnam, Laos etc.. so stuff will be a lot more expensive. It seems that the tariff rate was calculated (if that’s the right word)on the difference between exports and imports, nothing more. There’s even a couple of uninhabited islands included on the list. So the US is just picking on poor countries who cannot afford to buy as much from the US as the US does from them. The US does a lot of economic damage and has done for years with sanctions on countries it doesn’t like and then complains when the victims arrive at its border out of desperation. There were no border immigration problems until “free trade “NAFTA allowed subsidized US agriculture over the border, Haiti a long time ago was self sufficient until subsidised US rice was forced in by treaty. If you remember the enormous protests against the WTO and its free trade regime back in the early 2000s, the participants forecast exactly what would happen; jobs would flow to the cheapest place. Of course it was denied, and we have gradually adapted but now due to Trump the poor will once again be hit hard.