Almost six months after “Liberation Day”, on 2 April 2025, when U.S. President Donald Trump announced his decision to impose varying levels of tariffs on imports to the U.S., uncertainty prevails. One uncertainty arises, for example, from the sudden increases and reversals of U.S. import tariffs imposed on different countries, which disrupts their role in global production chains. Another arises from the diverse set of supposed objectives the tariffs are expected to serve—varying from redressing trade and current account imbalances; imposing penalties on those ‘discriminating’ against U.S. firms; and bringing manufacturing back to the US; to generating revenues from trade taxes to reduce the fiscal deficit widened by tax cuts for the rich; and pursuing political motives such as forcing adherence to U.S.-declared global sanctions on Russia or dropping legal proceedings against, and indictments of, Trump’s conservative friends like former Brazil President Jair Bolsonaro. This diversity reduces the probability of an end to this weaponisation of tariffs by the current hegemon and leaves no country free of the fear of new imposts.
But there is one other uncertainty that is less discussed: the threat to global and national macroeconomic stability that these poorly rationalised tariffs pose. Trade and current account deficits of countries are likely to worsen due to the impact that the U.S. tariffs will have on their production and exports. So, there is a real danger that the tariff hike movement would go global as countries seek to protect their residual markets for national producers. Mexico has already announced that it would likely impose higher duties on imports from countries with which it does not have a trade treaty, and China has responded saying that would only invite retaliation. Diversifying exports away from the U.S., which is in any case difficult given its exceptional role as a dominant market for global exports, is unlikely to be a compensating option.
Workers at a hard disk factory in China. Electronics is a significant import of China to the U.S. Photo: Robert Scoble
If tariffs don’t reduce imports to significantly neutralise the fall in U.S. exports, quantitative restrictions on imports may be resorted to. An irrelevant World Trade Organization rendered toothless by the US can hardly be relied upon to stem this trend. If the U.S. does not rescind tariff hikes and return rates to what prevailed on 2 April, a protectionist wave to re-adjust production and the balance of trade is likely. This would have adverse macroeconomic implications at both national and global levels, worsening an environment that from the perspective of the Global South was already riven with obstacles to diversification and productivity increase, shaped by developed country monopolies, debilitating multilateral, plurilateral and bilateral treaties, and currency hierarchies.
Unrestricted Capital Movements Could Set Off a Debt Spiral
For these protectionist responses to work at national levels, countries must ensure balance of payments (BoP) correction and sustain production growth. The real problem on BoP results from the wave of liberalisation promoted and pushed by the IMF and the World Bank, that facilitated by the expansion of dollar liquidity flows to less developed countries following financial deregulation in the U.S. since the 1970s (see Observer Spring 2022). Liquidity inflows encouraged trade and capital account liberalisation and restructured less developed economies into import dependent locations looking to exports, rather than domestic demand, as drivers of growth. If exports are held back because of exogenous developments like the Trump tariffs, import requirements cannot automatically adjust. The trade deficit in such economies would widen.
This tendency could persist and prove destabilising for one important reason. While Trump’s Make America Great Again (MAGA) agenda restricts exports from these countries and discourages American investment in export-oriented production capacities in them, it leaves financial capital flows in the form of portfolio equity investments or investments in bond markets untouched. As a result, many countries would likely finance their widening current account deficits by borrowing abroad or increasing other forms of external financial liabilities. And since the IMF has been either ambiguous about, or antagonistic to, controls on capital account flows, there is no multilateral agency trying to restrict them at source or destination. In time, countries could end up borrowing more just to service their debt or cover their commitments on other external financial liabilities. The flow stops and reverses when foreign investors fearing default decide to withdraw, precipitating a debt or BoP crisis. As experience shows, at that point the IMF enters and imposes austerity as a prelude to debt or external financial restructuring (see Observer Summer 2022). While the adjustment is supposed to pave the way for continued inflows of foreign finance, its immediate objective is to restrict consumption and investment to squeeze out foreign exchange that can be used to pay back foreign lenders and financial investors.
The Breakdown of Bretton Woods and the Loss of Legitimacy
The role of the IMF (and the World Bank) is riven with internal contradictions that point to the real character of these institutions and the way they have evolved since their creation. In the ‘Bretton Woods’ regime of fixed exchange rates instituted after the Second World War, to avoid competitive devaluations the dollar’s value was fixed to gold and that of other currencies to the dollar. But given global inequality and the inadequate structural diversification of the less developed economies, that led to BoP deficits in the Global South and surpluses in the North. To prevent this from resulting in currency devaluations to restrict imports and spur exports, and correct those imbalances, the IMF was mandated to serve as lender of last resort to countries experiencing foreign exchange shortages, while the World Bank was mandated to undertake concessional and commercial lending in foreign exchange to facilitate development spending and sustain growth by financing foreign exchange needs. Combined with bilateral flows and foreign direct investment, this architecture was expected to recycle surpluses to deficit countries and reduce the income gap between the developed and underdeveloped. That was seen as feasible also because outside of foreign direct investment, North-South flows of capital were overwhelmingly discretionary, occurring through bilateral and multilateral channels controlled by governments.
Podium for Donald Trump during his campaign in Arizona, USA, with the slogan “Make America Great Again”. Photo: Gage Skidmore
There were two aspects of this agenda that were noteworthy. First, in the expectation that this system would work, countries were dissuaded from resorting to import controls and encouraged to allocate investments across sectors based on border price signals and facilitate foreign investments as ways of raising export revenues. Second, when BoP crises occurred, they were seen as being the result of foreign exchange profligacy to be curbed by resorting to fiscal contraction or austerity. In practice, most less developed countries were prone to facing BoP difficulties, as deficits exceeded inflows of capital, necessitating periodic bouts of deflation and defeating the growth objective.
Matters, however, changed from the 1980s onwards. Financial deregulation, excess dollar spending by the U.S. government based on the exorbitant privilege that the reserve currency status of the dollar provided, and a turn to easy monetary policies during the Great Moderation of the 1980s to the 2000s with low inflation, all combined to hugely increase liquidity in the international financial system centred on the United States. The result was an excess liquidity-induced, supply-side push of capital into global markets, including to risky “emerging markets” initially, and even riskier “frontier markets” subsequently.
This meant that the less developed countries were now able to sustain larger deficits on their external current accounts, which could be financed with borrowing from private as opposed to official markets. In times of difficulty, they did not always need to turn to the IMF and accept its harsh conditions. Meanwhile, this excess dollar liquidity made it impossible to sustain the link of the dollar and to a fixed quantum of gold, based on the premise that every dollar could in principle be converted to gold on demand. With the break of that convertibility in 1971, the world entered an age of floating as opposed to fixed exchange rates.
These shifts meant that the IMF (and by association the World Bank) lost its previous raison d’être with less developed countries (excepting the poorest) not requiring its support when in need of foreign exchange and it having lost its role as a lender mandated to manage the fixed exchange system. As noted earlier, borrowing by deficit countries was stopped when private financiers decided that they were no longer safe destinations and withdrew. It was in those moments of delayed crises that the IMF found its new role. In the 1980s, it increasingly entered the debt restructuring debate and ensured that these countries adopted adjustments that kept trade and foreign investment flows free, but contracted their economies so as to extract the foreign exchange needed to pay off their creditors and cover their foreign exchange liabilities. The Bank and Fund justified their intervention by arguing that accepting their conditions restored investor confidence and gave foreign exchange-strapped countries the certificate needed to revive private flows into their economies.
M AGA and the IMF—a Deepening Crisis of Legitimacy
In this context, Trump’s tariff aggression and overall MAGA agenda create a new crisis for the IMF. The country that controls the IMF and exercises veto power over its key governance decisions, because of the unjustified and unremedied structure of the institution’s quota and vote distribution (see Observer Autumn 2023), has declared that trade cannot be free as it leads to an unsustainable deficit for the U.S., and that foreign investment can be detrimental to its interests, necessitating measures to bring investors back. The only element of cross-border transactions that is still unregulated are financial flows, though arguments may be advanced for retaining even finance capital at home (to support, for example, crypto-currency markets that Trump has embraced and he and his family are betting on). So, while the IMF can still have a role as police person for the world’s financial wealth-holders, it may not be in a position to implement the neoliberal ideology that finance capital favours and benefits from.
Money changer in a bazaar in Afghanistan, showing U.S. dollar notes together with other currencies. Photo: IMTFI
Outside of the IMF terrain, among the uncertainties that dog the world economy is the impact that Trump’s actions would have at home. Using tariffs to keep imports out, in the hope of raising demand for domestic producers, and preventing U.S. firms from producing abroad, to enhance domestic production and supply, could backfire. The disruption of supply chains in an integrated production system will possibly curtail output, employment and demand, while raising costs and spurring inflation. This uncertainty is making monetary policy decisions a challenge for a Federal Reserve under attack from Trump. A slackening economy in its perspective warrants an interest rate cut. But inflation in that perspective calls for hikes in rates. Therein lies the dilemma facing a beleaguered Fed.
Meanwhile, Trump seems to have stretched his space for fiscal manoeuvre to the maximum. Tax cuts have contributed to a larger deficit in his Budget bill. And expectations that revenues from tariffs would significantly reduce that deficit seem completely unwarranted not merely on conceptual grounds but based on early trends. This creates a new source of illegitimacy for the IMF, which can no longer divert attention from a record of failure with adjustment strategies across less developed countries. As it sticks with its counter-productive conditionalities involving further liberalisation and damaging austerity, it must confront the fact that the government that overwhelmingly controls it not only runs large deficits, but uses measures that restrict trade to even partially neutralise them. The U.S. that runs the IMF does not practice what the IMF preaches, as has been the norm. And since the IMF does not have even the limited ‘independence’ the Fed has, it can only turn a blind eye, riding on the ‘benefit’ that the U.S. does not need its support. But that its legitimacy is being further challenged is a reality it cannot wish away.
There are four significant implications, among others, flowing from these developments. First, neoliberal ideology that favours metropolitan capital, especially finance, and which had lost credibility following the Global Financial Crisis in 2008-09, is now completely delegitimised, because the U.S. government, which has been the source and driver of that ideology since the time of Ronald Reagan, has forsaken it by fundamentally opposing its three basic tenets: liberalised trade and foreign investment rules, a so-called ‘prudent’ fiscal stance, and independence of the central bank. Second, as a consequence of this and its waning ability to mobilise foreign exchange support for countries facing BoP difficulties, the IMF has once again lost its mooring. This time around its role as the gendarme of global finance is unlikely to help it regain legitimacy. Third, a world economy that was still stuck in a low-growth and unsustainable inequality trap does not seem to have an escape route at hand to ensure a ‘soft landing’ and subsequent recovery. Rather it is caught in a whirlpool of speculation driven by a tech and AI-based, dotcom-style boom that must unwind. Finally, less developed countries are likely to be left with a legacy of debt and foreign financial dependence with dwindling foreign earnings to service those liabilities and considerably reduced access to private financial flows that is not easily resolved without hurting finance.
That’s the macroeconomic bind that the Trump administration has pushed the world and itself into.
This article was originally published in the Bretton Woods Project on 8 October 2025