A trade war—for what?
Liberation Day will liberate the United States from global supply chains while pushing everyone else closer together.
After engaging in a few months of minor skirmishes, President Donald Trump just declared a trade war on virtually every country with whom we trade. The New York Times correctly called them his “most expansive tariffs to date,” but I’d go a lot further. The tax rate on imports implied by these tariffs is higher than that of the Smoot-Hawley Act, which is widely believed to have prolonged the Great Depression. If these tariffs stick—if even half of them stick—they will have profound, negative consequences for U.S. families, whose incomes will fall; businesses, whose costs will rise; and our place in the world, as we are recognized for the totally unreliable partner we have become. They will invite damaging retaliation—they already have—and the benefits from the existing international trading system will erode, with no future gains to offset the present pains.
What has Trump wrought? Can one man, a man who doesn’t understand what he’s doing, who is driven by wrong numbers and a tariff formula with little grounding in reality, really break global trade?
No, he cannot.
True, the United States is a large and dominant country. And it is a relatively closed country, meaning we depend less on trade than most other countries. That means, as Trump has correctly argued, we can hurt them more than they can hurt us. He fails to give a coherent rationale for why we need to start a trade war with Cananda, Mexico, Japan, Europe, and other traditionally reliable trading partners. His nonsense about them ripping us off makes no more sense than the grocer ripping you off when you choose to buy milk.
But claims that “globalization is over” seem overwrought to me. We’ll see, and we should all be very humble about what happens next in these uncharted waters. But I don’t believe trading blocks will cease to exist and the ports will sit fallow.
Instead, I suspect our trading partners will correctly decide that they must live, if not without us, then a lot less with us, while Trump is in the White House. This will lead them to trade less with us and more with the rest of their trading partners. It also is a big gift to China, who will ramp up its already excessive mercantilism—export-driven growth—to take advantage of our mistakes.
Liberation Day, in other words, will liberate the United States from global supply chains while pushing everyone else closer together. As with a bully on the playground, the rest of the kids will recognize that the only way for them to have fun is to ignore him.
Nuances abound. And, of course, I don’t believe trade with the United States will cease.
First, though they’ve been explicitly cavalier about the pain they’re causing, higher inflation, slower growth, lower investment, falling stock prices—as of this moment, the Dow is down 1,200 points—and higher recession chances could force them to recant. But, at least so far, that may have been the way of Trump 1; it’s not the way of Trump 2.
Second, the so-called reciprocal tariffs, which by formula, set tariff rates on trading partners not according to their tariff rates on us but according to their trade surpluses with us, could be leveraged down if trade balances more between us and them. Even so, the new 10% across the board tariff would still stick.
Third, Congress could wake up and wrestle back control of trade policy from the executive, though I’m mentally uttering the same “fat chance” that you are. A real-time test will come today. I was here when the implosion of the housing bubble and the Lehman crash led the stock market (the Dow index) to fall 800 points in one day. Congress immediately passed emergency legislation to address the potential spreading shock to markets. As I write this, the Dow is down by 1,200 points. But I still doubt they will act, and, if I’m right, we’re seeing in real time the cost of their fecklessness and of allowing Trump to play king.
But if none of those contingencies come to pass, here’s what to expect.
Near-term, many U.S. business will raise costs. Inflation, which has been stalled at around 2.5%, will again start to rise. The costs of cars, food, homes, clothes, possibly energy (though there are some carve-outs there) will go up. And they will rise not by pennies, but by amounts you will recognize. The price tag of many new cars will rise by $5,000 or more. And this applies not only to foreign brands; domestic brands will also go up—for two reasons. One, more than half of them include foreign parts, and, two, higher tariff-induced prices of their foreign competitors will allow domestic sellers to raise prices (despite Trump’s telling them not to do so).
The trade war will slow the near-term economy. Michael Feroli, JP Morgan’s chief economist, forecast that the "hit to purchasing power could take real disposable personal income growth in 2Q-3Q into negative territory, and with it the risk that real consumer spending could also contract in those quarters. " He added, "This impact alone could take the economy perilously close to slipping into recession."
Taxes, more specifically sales taxes on imports, will significantly rise, and the increase will be especially sharp for middle- and low-income consumers, as they spend a larger share of their incomes on imports. If you believe, and you should not, the White House’s claim that the new tax will raise $600 billion per year, economist Justin Wolfers points out that comes to an extra $5,000 per household. Feroli, however, is not that far behind, at $400 billion, which he correctly notes would be largest tax increase in over 50 years.
Longer-term, it is possible that our trade deficit will come down somewhat, but the pain-now-gain-later question that this raises is to what end? Trump promises reindustrialization but as many have shown, advanced economies with even large trade surpluses have declining manufacturing employment shares.
The end game is, instead, about what you’d expect with such terrible leadership, aided by a Congress that refuses to mitigate the damage. The United States will become more globally isolated, the benefits of trade will fade with no surge in factory jobs to offset the tariffs’ impact, and working households will bear the brunt of the damage while Trump’s donor class gets a big tax cut.
Check that. There’s another, much more hopeful end game here. If I and the many others who share this view are correct, regardless of the Trump administration’s propaganda machine, it will be impossible for them to hide the damage they’ve done, and trust me when I tell you that I and others will be tracking and elevating that damage.
Their MAGA supporters might not be moved by that, but other voters will be. At that point, we will likely be having a pretty different retribution discussion.
Jared Bernstein was chair of President Joe Biden’s Council of Economic Advisers.
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I think all of this harkens back to the flawed theory that Trumps team has embraced. They view every other country with suspicion and contempt. They hate globalization because it embraces different cultures and views, and that is a threatening concept to these small minded people. They only want to increase the coffers of the rich, and they mean predominantly white wealthy people. They want to nullify education, history, civil rights, diversity, and basic services that our country put in place to help the middle class and the poor. They thrive on greed, power, and their ability to punish anyone who opposes their narrow minded and flawed ideology. They mirror the extremist groups in the middle east and the dictatorships in Europe, South America and other countries, and seem to have no problem with any of the fallout from their actions. A lot of people and countries are going to suffer because of the feckless actions of this President, who is insulated by his wealth and his spineless supporters in Congress. My only consolation is that when the tide finally turns, and the voters in this country denounce all of this, we can then start to build again, and hopefully prevent another such debacle from ever happening again by strengthening our laws and raising our standards for the Presidency in this country.
Remember that Trump does not want to leave office, and he's implementing a one-party rule, it's in progress and it might be too late, think?