US President Donald Trump, sadly, seems too arrogant to learn. He did not succeed with his tariff war on other countries during his first term. All reputable analyses showed that the cost of his tariffs on China was mainly shouldered by Americans. 

But he failed to learn. He thought that they were just not high enough to deliver what he wanted. His supporters simply parroted what their leader said. What is unfolding in the United States today is the sad story that the country has become increasingly authoritarian, and more and more like a centrally planned economy. Private enterprises are now at the behest of the all-powerful president.

I can now safely predict that the US will fall into recession this year. Quite apart from the negative wealth effect of crumbling stock prices hurting consumption and investment, there is another problem on the supply side. This is because even the manufacturing sector, which the tariffs are supposed to benefit, will be hurt badly. In today’s globalized world, virtually all America’s manufactured goods are jointly produced with other countries. The exorbitant tariffs imposed by the US will effectively shut out these imports. So production could come to a halt. Boeing cannot produce its planes without parts sourced from multiple countries that include Japan, China, Italy, Belgium, and Spain, among others. Similar predicaments are besetting car manufacturers. US Senator Ted Cruz estimated that the price of an average car from America’s top automakers could increase by $4,500 in June. The CHIPS and Science Act has spurred a lot of investment activity in the US semiconductor sector. But high costs, a shortage of skilled workers, and lower profits will adversely affect operations and innovation.

There is, of course, some logic to Trump’s calculations, even though it is flawed. The logic is that if producing elsewhere means having to pay high tariffs, then moving production lines to the US would be a good idea. The logic is flawed because production lines had gone elsewhere for a good reason: Wages in the US are too high. The comparative advantage of the US is not in downstream production but in research and development, financial services, and branding. Look at Apple Inc. Its brand is worth a lot. Consumers around the world favor Apple iPhones and other products, which the company keeps innovating and inventing. Although production may take place in China or elsewhere, the largest chunk of the value added goes to the US. This is the logic of globalization.

In 2023, the US exported $175.5 billion in financial services and $25 billion in insurance services. In 2023, total foreign direct investment in financial services reached $573.8 billion. As of mid-2024, the financial services and insurance sectors employ more than 6.7 million people. In 2022, FDI supported around 423,000 jobs in financial services. Investment in the US financial services industry offers significant advantages for financial firms. Many companies in the Fortune Global 500 have chosen to locate their headquarters in the US to take advantage of its creative, competitive, and comprehensive financial services sector. The industry offers the greatest array of financial instruments and products that allow consumers to manage risk, create wealth, and meet financial needs.

The US’ current account deficit is often significantly smaller than its trade deficit. In the fourth quarter of 2024, its exports of services increased $7.7 billion to $287.1 billion, reflecting increases in charges for the use of intellectual property, mostly licenses to use the outcomes of R&D, and in travel.

Notwithstanding these earnings, because the US consumes more than it produces, its current account is in deficit, and it needs to borrow from abroad. But this is not because other countries export “too much” to the US. China and other countries sell cheap products to the US, so Americans can maintain their standard of living.

Why are wages in China and the rest of the world much lower than those in the US, so that US’ manufacturing has left the country? This is because China does not have the US’ strengths in financial services and R&D.

The hollowing-out of manufacturing processes in the domestic economy is not at all peculiar to the US. Look at Hong Kong, which has often been ranked among the top three global financial centers. The city’s strength in financial services and professional services has lifted the cost of living in Hong Kong. Like the US, Hong Kong has a surplus of trade in services and a deficit of trade in goods. Unlike the US, however, Hong Kong does not impose any tariffs on any country. Hong Kong prefers to follow the market. At the same time, however, Hong Kong’s manufacturing is “moving upstream”: Hong Kong is investing in more and better R&D and trying to build a good brand name for Hong Kong products.

It has been speculated that Trump’s exorbitant tariffs are part of a strategy to negotiate longer-term agreements that favor the US. The problem is that if a US president could walk away from the treaties signed by his predecessors and if Washington’s policies keep changing, who can confidently work with the US?

Economics teaches that free trade benefits both the importing country and the exporting country if we follow the logic of the market according to our comparative advantages. One can only hope that one day Trump — and the US — will learn.

The author is a former director of the Pan Sutong Shanghai-Hong Kong Economic Policy Research Institute, Lingnan University, and an adjunct professor, Education University of Hong Kong.

The views do not necessarily reflect those of China Daily.