DeepSeek’s R1: The New AI in Town
February 8, 2025
Introduction
President Trump’s concern about the rise of China and domestic employment has influenced his policies within his first few days in office. In his first week in the White House, he signed 53 executive orders that would impact a range of policy areas, from citizenship to trade. In an effort to increase employment and remedy the US-China trade deficit, he has implemented tariffs and bilateral trade agreements. These policies demonstrate the US, or at least Trump’s, aversive attitude towards the international order they have invested in for 70 years. Relinquishing responsibility in this global trading system will disrupt trade globally and possibly negatively impact the US economy.
A US Transition
President Trump’s inauguration on 20 January 2025 marked a groundbreaking moment for US trade policy. Concerned about the impact of US trade deficits on employment and GDP growth, Donald Trump proposed implementing tariffs and bilateral trade agreements. His priority is to address the US-China trade deficit and renegotiate the United States-Mexico-Canada (USMCA) trade agreement he signed in 2020. Although the aim is to tackle stalling GDP growth and unemployment rates, data up to 2020 indicates minimal impact on GDP growth and employment due to the US trade deficit. For instance, between 2020 and 2022, when net imports as a percentage of GDP increased by 1% (an indication of a trade deficit), unemployment decreased by 3%. If predictions were correct, you would expect an increase in unemployment or at least stable unemployment levels. However, more recent data suggests that reshoring initiatives have increased employment, bringing back 40% of manufacturing jobs lost since 2010. The reshoring initiative also reported impressive job growth statistics, generating 343,000 jobs in 2022 and 287,000 in 2023. Despite ongoing contention over how trade levels affect employment, Trump’s policies threaten domestic growth. Since the rise of China and other emerging industrial states, the US has become enmeshed in global trade. In seeking greater efficiency for higher profits, the US relied on imports produced at a far lower cost than they could be achieved domestically. Lower import prices meant that American companies could benefit more from higher value-added contributions across the modular trading network. Within a global division of labour, the South concentrated on production while the US focused on branding and marketing.
How Will the US Market Fare?
The likely immediate outcome is high inflation. Economically, it is challenging to go from low domestic to high domestic production without simultaneously increasing consumer prices. The cost of increasing domestic production will increase supply chain costs and make products more expensive for the consumer. Maintaining trade levels with Trump’s tariffs in place isn’t viable either since consumers will pay the price of extra taxes paid at customs. However, analysts suggest that differences in production costs between the US and China are only 5%. Figures are varied and are most likely a reflection of the form of production. While there is little difference between manufacturing household products, automobile production is far more expensive in the US. Most of these production cost differences can be attributed to labour costs. Differences in labour costs can be in surplus of $60,000 between Chinese and US manufacturing industries. However, data suggests this gap is closing, making imports less appealing. This, coupled with the benefit of having production closer to research and development sites, is beneficial to business owners. Even so, there is the challenge of filling vacancies in manufacturing plants. Since much of the world’s industrial processes were incorporated in China and Southeast Asia, manufacturing employment in the US has been challenged. Labour forces sought employment in alternative industries to ensure job security. Bringing the labour forces back into manufacturing industries will be challenging, but with ample investment, production in the US can recoup. Another issue is the lack of infrastructure in the US to re-shore production. Efficient supply chains require energy resources and complex transport networks. This was only fully addressed in 2021 with the Infrastructure Investment and Jobs Act, which invested trillions of dollars into refurbishing supply chain assets. With the act expiring in 2026, Trump has other plans to maintain a favourable landscape for domestic producers. He will have to deal with supply chain inflation issues, which include policies such as tax breaks, deregulation, and greater investment in infrastructure. Such an environment will ensure efficient production and competition that balances supply and demand.
Essentially, the US is creating an independent, insulated economy. While this is positive geopolitically, it goes against the grain of global trade economics since WWII. Geopolitically, the US will benefit from being independent of other states and potentially supersede other states in innovation and production. They will also make themselves less sensitive to global disasters and political challenges abroad. All this is good, but it’s unclear how it will benefit the US economy. While it’s true that domestic production will trump (pun intended) imports because of the tariffs in place, it is unclear whether this is better than continuing to integrate the US in global production networks as it has since the inception of the GATT (now the WTO). A study by the Tax Foundation estimates that a 10% tariff on all imports could reduce long-run GDP by 0.75% and eliminate 589,000 full-time-equivalent jobs.
How Will This Affect Global Trade?
The US is a major importer from both China and the EU. With current forecasts, Trump’s trade policies will negatively impact international business and the global economy. German and Mexican car exports are particularly affected since the US is their largest import market. The US accounted for $203bn of imports in the automotive industry in 2023 alone. Pharmaceuticals rank second among imported goods into the US, accounting for $203bn in 2023. However, the inelastic demand for pharmaceutical goods will likely maintain import levels even if Trump’s policies make domestic production more favourable. The electronics market will also certainly be affected. In the aggregate, this will influence the race between China and the US to generate the most efficient AI models. Trump has already banned the Taiwan Semiconductor Manufacturing Company (TSMC) from providing AI chips to China. The development of DeepSeek by a Chinese company, the most efficient large language model yet, has increased pressure on US AI production. Ashurst suggests that “an introduction of increased tariffs would lead to a rise of chip prices across the global supply chains and possible disruptions due to its generally tangled multinational, multi-layered nature”.
An LSE review suggests that GDP growth in the US, China, and the EU will be negatively affected. Forecasts suggest that US and Chinese GDP growth will shrink by 0.7%, while the EU’s may shrink by 0.1%. Furthermore, there will be disruption to global supply chains and even more price volatility as the world adjusts to trade policy changes in the largest economy. Besides this, countries are likely to reciprocate Trump’s tariffs with some of their own. Trump’s block on appointments to the WTO’s appellate body also means that dispute resolutions in a central trade organisation won’t remedy the trade climate.
Conclusion
The next four years of Trump’s administration will unravel years of an international order developed under US hegemony. The‘America First’ policy could be beneficial in theory but would cause an unprecedented decline in global trade. The US President’s trade policies are highly politicised, even if they are espoused to benefit the US, and could present economic challenges globally. An era of hyper-globalisation leading up to and through the 21st century has inextricably bound global economies. This means that changes to US trade policies will impact other countries dependent on US trade relations. Since the US is a key global player, accounting for over 20% of world trade, companies domestic to, trading with, or situated in America will have to strategise to deal with Trump’s trade and tariff consequences.
Sources
https://abcnews.go.com/Business/trumps-tariffs-send-stock-market-falling/story?id=118393309
https://www.ashurst.com/en/insights/the-return-of-the-trump-tariffs/
https://www.americanmanufacturing.org/blog/the-blueprint-for-2025-american-made-infrastructure/
https://taxfoundation.org/research/all/federal/trump-tariffs-trade-war/
https://www.ft.com/content/c734c79a-3d83-4f0a-824a-029808b8c9cd
https://www.cato.org/publications/trade-balance-winning-trade#empirical-evidence
https://www.ft.com/content/d5141418-6827-4027-92f2-138b43315e31
