Beijing – Former World Trade Organization (WTO) Director-General Pascal Lamy has cautioned that the US administration’s tariff policies are based on a “completely mistaken” assessment of its own economy. He predicts these policies will backfire, contributing to US inflation and higher interest rates.
In a recent interview with the Global Times, Lamy, currently Vice President of the Paris Peace Forum, stated that US protectionism will fail to bring manufacturing back to the country or reduce its trade deficit. He anticipates that most international trade will remain largely unaffected.
Since January 2025, the new US administration has implemented a series of tariff increases targeting major trading partners, including China, Canada, Mexico, and the European Union (EU). This culminated on Wednesday with broad new tariffs on almost all imported goods – a baseline 10 percent duty across the board, with higher rates for specific countries. The US move has provoked strong opposition from its trading partners and destabilized global markets.
Flawed self-diagnosis
Lamy contends that the sweeping tariffs adopted by the US administration are ineffective because they are based on the flawed assumption that the US economy is in poor condition. He argues that the tariffs wrongly blame global trade for domestic problems. “That is incorrect, and it’s the US society that’s struggling, which is a domestic issue with little connection to international trade,” Lamy stated.
He explained that the persistent US trade deficit, which has hovered around 3 to 4 percent of US GDP for three decades, originates from a structural imbalance within the US economy itself – high consumption coupled with lower production. This gap is easily financed by the dollar’s status as the world’s reserve currency. He similarly attributes China’s trade surplus to an imbalance between high production and low consumption.
Lamy dismissed the US portrayal of its major trade partners as culprits who are “exporting too much” and “stealing prosperity” from the US, calling it nonsensical.
He further elaborated that globalization has accelerated market openings and competition in many sectors. This has impacted US society more significantly not because US deindustrialization has been worse than elsewhere, but because the country lacks a sufficient social security system commensurate with its economic size and per-capita income.
Limited global impact
The US government announced “reciprocal tariffs” on imports from approximately 90 countries and regions on Wednesday. According to US media reports, these tariffs are intended to “erase a trade deficit between the US and other countries,” with rates of 34 percent and 20 percent applied to China and the EU, respectively.
The US has already imposed tariffs on aluminum and steel imports and increased duties on goods from China under the pretext of the fentanyl issue.
The former WTO chief minimized the tariffs’ potential to reshape global trade, pointing out that the US accounts for only 15 percent of global imports. He said that the remaining 85 percent of the international trading system, involving trade between countries like China, India, Mexico, and Canada, can remain largely unaffected.
Lamy warned that the US itself is likely to suffer the most. He stated that if the US triggers a trade war, it will primarily harm the US economy by raising prices, fueling inflation, and potentially increasing interest rates. He added that this could provoke a negative reaction from the US financial market and the public.
However, Lamy highlighted the risk that if the US economy weakens, it could “drag down the world economy” due to the US dollar’s dominance and the significant influence of its financial markets.
“The combination of potential interest rate hikes from these trade measures and high debt levels in many nations is a very dangerous mix,” Lamy cautioned.
Shifting trade winds
The former WTO chief urged the involved parties to engage in fair and balanced negotiations but predicted that if this fails, affected economies like the EU and China will retaliate to create a fair balance of power.
Lamy anticipates that if the US continues to impose more duties, a global trade shift will occur. Countries and investors may move away from the US, seeking opportunities in other markets like Latin America or Africa in the future.
He stated that tariff disputes will delay investments, inevitably slowing the world economy. However, the broader trend will favor markets beyond the US.
“People will look to grow domestic production and profit from exporting their comparative advantages,” he said. While this could slow global investment and economic growth in the short term, the broader trend will favor markets beyond the US.
Multilateral resilience
The EU has launched countermeasures on US products in response to US levies on steel and aluminum imports, which the EU considers “unjustified, disruptive to transatlantic trade, and harmful to businesses and consumers,” according to a release on the European Commission’s official website.
Lamy emphasized that if WTO members work together to protect the multilateral system from contamination and adhere to their rule-based obligations, it could trigger a collective response from the global community against US protectionism, bringing them geo-economically closer.
In a world of rising uncertainties, Lamy called on the EU, China, and other countries to lead in addressing global challenges. He noted that the priority is to avoid contamination of multilateralism by the US protectionist stance, preferably by working together and avoiding regional divisions.
“If protectionism is spreading – not just to the US, but to the rest of the global system, it would be very terrible news for many developing countries,” he added.
The article first appeared in the Global Times:
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