US President Donald Trump’s second administration coincides with a period of rapid structural and technological change, driven by three trends. First, shocks from the pandemic, new wars, climate change, and geopolitical tensions continue to reverberate through the global economy. Second, broader secular trends continue to inhibit growth and create new inflationary pressures. And third, scientific and technological breakthroughs are transforming a wide range of sectors, from digital services and biotech to energy.The responses to these trends are dramatically changing the global business and policy environment. Resilience and national security have become top priorities. Supply networks are evolving rapidly. Inflation has become a major issue for the first time in three decades. And all of this was happening before Trump’s return to the White House.Although Trump’s blizzard of executive orders looks chaotic, the administration may well be pursuing a larger strategy, designed to dilute and weaken potential opposition. Trump and others in his administration have repeatedly argued that bilateral trade deficits are signals that something is wrong – that the United States is being taken advantage of, to the detriment of some industries and national security.Among the top US trading partners with the largest bilateral surpluses (based on 2023 data) are China ($279bn), the European Union ($209bn), Mexico ($152bn), Vietnam ($104bn), Japan ($71bn), and Canada ($64bn, owing entirely to US energy imports). The four of these targeted by Trump’s initial tariffs – Canada, Mexico, the EU, and China – account for 66% of the overall 2023 US trade deficit ($1.06tn). If you add in Japan and Vietnam, that figure grows to 83%.The “Liberation Day” tariffs are broadly consistent with the targeting of large deficit trading partners. Since then the new tariff rates (raised further) for China, the EU, Vietnam, and Japan are 125%, 25%, 46%, and 24%, respectively, and Canada and Mexico will remain on a separate track for now, with high tariffs on autos, steel, and aluminium.But the April 2 and after tariffs go far beyond targeting trading partners with which the US runs large deficits. Instead, the administration is applying a 10% rate across the board, including to countries with which the US has a trade surplus. Moreover, the Trump administration imposed additional tariffs above 10% on a wide range of small economies that have minimal effects on the US trade balance, though the main Latin American economies (apart from Mexico) were exempted.The financial market reaction was immediate. In the two trading days after Liberation Day, the S&P 500 declined by $5tn, or roughly 10%. Business and consumer confidence continued their downward trends, and markets outside the US also declined, reflecting the dominance of the US financial system. China responded with its own 84% tariff on US imports, and others are considering retaliatory measures. With market and economic uncertainty deepening, expectations of a recession have grown.That said, the impacts are likely to be largest in the US and in those trading partners with the greatest exposure to US demand. Since the US economy accounts for about 26% of nominal global GDP, or 15-16% with purchasing-power-parity adjustments, ringfencing it will give a large shock to the entire system. While every country except the US will face tariffs on exports going to the US, there will be varying degrees of exposure: China’s is medium, Vietnam’s is fairly high, and Mexico and Canada’s is very high. Fortunately, other countries still have the rest of the world to sell to, and the rest of the world is not small.By contrast, US consumers and companies will face inbound tariffs on everything from every other country in the world. Companies will likely also face higher “reciprocal” tariffs when they try to access external markets, and major countries may restrict outbound foreign direct investment (FDI) to the US, partially defeating one of the US administration’s stated purposes for US tariffs.In other words, while the damage will be widespread and variable across countries and regions, the largest impact is likely to be on the US economy, owing to its growing isolation from the rest of the global economy.It is not clear whether the administration believes that tariffs will lead to a rebalancing of trade, or whether they are designed to impel trading partners and businesses to shift production and jobs to the US. Trump himself supports FDI as a way to support his agenda on deficits and employment, and tariffs presumably add another incentive.Whatever one thinks of the administration’s diagnosis and prescribed treatment, its goal is clear: to shift the structure of global trade and FDI in favour of domestic US investment and employment. But this agenda faces a powerful headwind, owing to the global attractiveness of US debt and equities, and the status of the dollar as an international reserve currency. Unless the US intentionally diminishes the attractiveness of dollar-denominated assets, which would require a partial closure of the capital account, the dollar’s reserve-currency status is unlikely to change.After all, there is no plausible alternative to the current system. A growing global economy needs an expanding monetary base to function. Rather than reducing its $1tn trade deficit, the US is more likely to redistribute it across countries, which probably would not lead to the kind of domestic restructuring that Trump envisions.China, with its large domestic economy, can withstand tariff shocks. It already needs to boost its domestic aggregate demand, and it will surely see the Trump administration’s defunding of basic science and technology research at US universities as a windfall, given the damage that it will do to US long-term competitiveness.Technology is a major variable here. Scholars have long shown that previous rounds of digital technology adoption put downward pressure on middle-class “routine” jobs and incomes. Whether this will be a feature of the adoption of AI in the economy is at this point an open question. While no one yet has a detailed roadmap for how this will play out, it is reasonable to expect that the effects could be as large or larger than those associated with the new global patterns of trade and investment.If the Trump administration has a strategy for managing this challenge, it has not revealed what it is. Yet it would be a mistake to assume that restructuring international trade and investment will be sufficient to benefit US workers. There are other forces in play, and policymakers ignore them at their peril. — Project Syndicate Michael Spence, a Nobel laureate in economics, is Emeritus Professor of Economics and a former dean of the Graduate School of Business at Stanford University and a co-author (with Mohamed A El-Erian, Gordon Brown, and Reid Lidow) of Permacrisis: A Plan to Fix a Fractured World.