US tariffs based on flawed logic, will backfire with the US suffering most: former WTO chief Pascal Lamy

Pascal Lamy Photo: Courtesy of Pascal Lamy

Pascal Lamy, former Director General of the World Trade Organization (WTO) has warned that the US administration’s tariff policies are built on “completely mistaken” diagnosis of its domestic economy and will ultimately backfire – fueling domestic inflation and pushing interest rates higher instead.

In a recent exclusive interview with the Global Times, Lamy, current Vice President of the Paris Peace Forum, said that these measures will fail to achieve the US’ goal of bring manufacturing back home or cutting trade deficit. While potentially creating some global economic headwinds, he predicted that most international trade will “remain largely unaffected.”

Since taking office in January 2025, the new US administration has rolled out a series of tariff hikes targeting major trading partners like China, Canada, Mexico, and the EU, with threats of further escalations, which has sparked retaliatory measures from affected economies and heightening global trade tensions.

Flawed self-diagnosis

The sweeping tariff measures adopted by the US won’t work because they are built on a flawed assumption that the US economy is in bad shape, a key justification for the tariffs. But “that’s incorrect,” Lamy said, stressing that “It’s US society that’s struggling, which is a domestic issue with little connection to international trade.”

The persistent US trade deficit—hovering at 3 to 4 percent of GNP for three decades—fundamentally stems from a structural imbalance between high consumption and lower production in US economy itself, a gap easily financed by the dollar’s status as the world’s reserve currency, he explained. Similarly, he considers that the Chinese trade surplus is the result of an imbalance between high production and low consumption.

Lamy rejected the US framing of its major trade partners as culprits “exporting too much” and “stealing prosperity” from the US. “That doesn’t make sense,” he said. 

Globalization has sped up market openings and competition in many sectors, hitting the US society harder – not because the US deindustrialization has been worse than elsewhere, but because the country lacks a proper social security system to match its economic size and per-capita income, Lamy said. 

Limited global impact 

The White House confirmed on Tuesday that the reciprocal tariffs on its trading countries would take effect on Wednesday though it provided no details about the size and scope of trade barriers that have businesses, consumers and investors fretting about an intensifying global trade war, Reuters reported. A 25 percent tariff on auto imports will take effect on April 3, according to the report.  

The US has already imposed tariffs on aluminum and steel imports and has increased duties on goods from China under pretext of the fentanyl issue.

The former WTO chief downplayed the tariffs’ potential to reshape global trade, noting that the US accounts for just 15 percent of world imports. “The rest of the international trading system – 85 percent of global imports, involving trade between countries like China, India, Mexico, and Canada – can remain largely unaffected,” he said.

He cautioned that the US itself stands to suffer most. “If the US triggers a trade war, it will primarily hurt the US economy by raising prices, driving inflation, and likely pushing up interest rates,” Lamy said, adding that this fallout could also trigger pushback from US financial markets and the general public.

However, Lamy also pointed to the risk: If the world largest economy suffers, it could “drag down the world economy” due to the US dollar’s dominance and its financial markets, which have an outsized influence beyond their share of world trade. 

“The combination of potential interest rate hikes from these trade policies and high debt levels in many nations is a very dangerous mix,” he warned, pointing to the severe impact on heavily indebted countries in the world.

Shifting trade winds

The former WTO chief called on the involved parties to be open to balanced negotiations, but predicting “If that fails, affected economies like EU, China will retaliate to create a fair balance of power.

If the US persists with these measures, Lamy foresees a global trade shift. Countries and investors may redirect focus away from the US, seeking opportunities in other markets like Latin America and may be Africa in the future. 

The tariff disputes will delay investments, inevitably slowing the world economy. But overall, the global trend of looking to markets beyond the US will dominate, according to Lamy.

“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 the US levies on steel and aluminum imports, which the bloc considered “unjustified, disruptive to transatlantic trade, and harmful to businesses and consumers,” per a release on the European Commission’s official website.

Lamy stressed that if WTO members work together to shield the multilateral system from contamination and stick to their rule-based obligations, it could spark a collective response from the global community against the US, bringing them geo-economically closer.

In a world of rising uncertainty, Lamy called on the EU, China and others to lead in tackling global challenges. The priority is to avoid contamination of the multilateralism by the US protectionist stance, preferably together and without retreating into regional divides, he stressed. 

“Because the idea of protectionism spreading – not just to the US, but to the rest of the global system – would be terrible news for many developing countries,” he added.