He really means it. Until a week or two ago, President Donald Trump’s conflicting statements left open a strong possibility that the leader of the free world was threatening sweeping tariffs as a cudgel to extract better terms from exporters, as well as succeed in pushing Canada and Mexico to curb the smuggling of lethal drugs across our borders, and that he wouldn’t unleash a trade war if he got all or even part of what he wanted. Now, it’s becoming increasingly clear that the president is determined to do exactly what friendly governments and consumers and businesses from Paris to Sydney, not to US folks and funds, feared but didn’t really believe could happen in this day and age: reverse decades of global free trade, and build another “wall,” not the barrier along the Mexican border, but a protectionist barricade around America that repels even our closest allies and trading partners. That realization has sent stocks skidding. Following a peak of Trumpian euphoria reached in mid-February, the S&P 500 has tumbled 11% into correction territory as of market close on March 13, while the Nasdaq Composite has tumbled 16%.
Trump’s stated plan all along: impose tariffs of never-before-witnessed weight, mostly at 25%, on most if not virtually all imports from our four largest trading partners, China, the EU, Mexico, and Canada. It’s been a start-stop-reverse process. But now, Trump’s actions are matching his fiery rhetoric. Trump got going in early March by doubling import duties on China from 10% to 20%. In early March, he hit a broad range of products from Canada and Mexico with 25% tariffs. At the same time, he partially retreated by granting a one-month reprieve on one-third of exports from the Great White North and one-half from our southern neighbor covered by the USMCA free trade agreement he himself had negotiated in late 2018. A call to the Oval Office placed by CEOs of the Big Three automakers won them a comparable 30-day reprieve for cars and parts from Canada and Mexico. Now he’s targeting global steel and aluminum, EU textiles, apparel, and agricultural products, and sundry other categories for future tariffs.
Trump’s targets are already firing back. So far, the EU, Canada, and China have announced $100 billion in new tariffs on U.S. imports to counter Trump’s offensive. Mexican President Claudia Sheinbaum blasted the steel and aluminum levies as “offensive, defamatory, and without support” and vowed to unveil tough countermeasures shortly. Asked by reporters if he’d reconsider the tariff wave planned for April 2, Trump responded, “We’re not going to bend at all.”
Since World War II, America’s never remotely hit this many countries with tariffs this high. The experiment is all so new that even approximating the impact on things like GDP and employment is difficult. But according to the world’s past experience with even much more modest protectionist measures, the overall course is predictable—and amounts to a radical wrong turn.
Tariffs explained—and why Trump loves them
To grasp why Trump’s the first postwar president to embrace big tariffs at all, let alone as a central economic strategy, it’s critical to understand his worldview. For this self-proclaimed master of the deal, the overriding force restraining U.S. prosperity is the imbalance between the goods we make and consume stateside or send oversees, and everything else we buy from abroad. Put simply, Trump is haunted by our “trade deficit” for goods.
In Trump’s telling, our trading partners rig the system to maximize sales in their home markets for products made within their borders, and minimize competition from our exports. In the contest, we’re like tennis players forced to start every game down love-30. Meanwhile, says Trump, past leaders have left the U.S. naively open territory to the inflow of goods produced in Shanghai, Ontario, or Monterrey that grab sales from the cars and steel produced in Michigan, Wisconsin, and Pennsylvania. Trump regards the gulf between the dollars we’re dispensing for imports, and the lesser euros, yuan, and pesos we’re collecting on exports, as a deadweight that severely restrains GDP growth, shutters plants, and kills jobs.
His solution for shrinking that gap: the big tariffs that render goods from abroad much more expensive within our borders, digging a protective moat that encourages the stateside construction of factories for the likes of chips and autos—industries where U.S.-based players now struggle in outdueling cheaper versions made in China or Canada. Trump seeks to build a new paradigm where the U.S. manufactures a huge share of the products we now import, right in the U.S.A., notably across the industrial heartland. That way, our consumers and businesses would be sending hundreds of billions less of our dollars abroad to buy foreign-made goods, and spending the greenbacks here at home, sparking a boom in factory-building and a renaissance in American manufacturing. That dynamic would lower or eliminate that chasm between the immense dollars flowing out and the relatively piddling foreign currency coming in that so favors commercial counterparts and for Trump, represents America’s overriding economic problem. For the president, fixing that shortfall in trade represents the nation’s biggest opportunity for revival.
Trump doesn’t actually use the words “U.S. trade deficit” in his speeches or interviews. This macro, wonky term mainly appears in his policy papers, where his economic team vilifies the overall “trade deficit” and extolls the necessity of shrinking it. Instead, the president keeps pounding on how our import-export gaps with individual nations are victimizing the U.S. Those numbers prove that all our major trading partners are fleecing us, Trump insists. As he told Fox Business’s Maria Bartiromo on March 9, the U.S. “has been ripped off from every nation in the world, every company outside in the world.”
To hammer home that point, Trump cites highly exaggerated numbers for the deficits with the four giants we do the most business with, again suggesting that these overstated gorges represent losses for the U.S. and bounty for the invaders. At the World Economic Forum in January, Trump declared that the U.S. has a “$200 billion or $250 billion” deficit with Canada, and that our northern cousin “wouldn’t be a viable country” benefiting from their surplus achieved at our expense. “We have a deficit with Mexico of $350 billion,” he declared in February on Fox News. At a cabinet meeting on Feb. 27, Trump told reporters, “The EU has really taken advantage of us … We have about a $300 billion deficit with the EU.” Also last month, he alleged on Fox News Radio that the U.S. faces a canyon in China’s favor “like we’ve never seen before” of “over $1 trillion.” Add it all up, and Trump is maintaining that the U.S. is suffering big-time from a $2 trillion trade deficit with the Big Four alone.
Those numbers aren’t even close. The true figures for Canada and Mexico are roughly one-third and half of what Trump claims, and his total for those four leading exporters to the U.S. is actually $709 billion, around one-third of Trump’s “rip-off” sum. (Our total deficit in goods was $971 billion, less than half what Trump claims for the Big Four alone.) The deficit with China hasn’t reached new highs at all, and is in fact going the other way: It’s shrunk by 40% in the past six years. Nevertheless, our divergence between imports and exports is huge and growing. The shortfall in goods expanded from $846 billion in 2019 to $1.2 trillion last year, and in January broke an all-time monthly record, vaulting to $156 billion.
The real issue is whether these deficits represent the near-crisis, and opportunity for repair so rich it merits “disruption,” that Trump’s advertising, or that the willingness of foreigners to finance our lavish government and consumer spending may be a good thing.
Why economists by and large despise tariffs
In the opinion of all the noted economists I interviewed for this story, and the extensive studies dedicated to the past impact of tariffs—the Trump 2018–19 version provides an informative case study—the president’s template will do nothing to achieve its goal of narrowing the distance between America’s imports and exports. “It’s not clear why a trade deficit’s a problem in the first place, because nations are reinvesting the dollars we send them right back in the U.S.,” says economist John Cochrane of Stanford’s Hoover Institution. “Canada and Mexico have placed big bets on integrating with the U.S. It’s not great economic policy to hit them with tariffs and insult them at the same time we’re trying to convince them to cut imports from China.”
Adds Andrew K. Rose, former professor at UC Berkeley’s Haas School of Business and now dean of the NUS Business School in Singapore, as well as coauthor of a detailed study on tariffs: “Overall, Trump’s tariff policy is a disaster. Just look at the uncertainty alone. No one benefits from that, it just delays investment, and that’s unambiguously bad.” In seeking to enrich this nation, notes Rose, it’s the worst of trades “to go after your top allies in trade.”
Perhaps the best summary comes from Steve Hanke of Johns Hopkins University. “You can’t win a trade war,” he says. “Starting one, as Trump is doing, only ensures that both sides lose.”
It’s hard to estimate the potential damage to the U.S. economy for two basic reasons. First, though Trump’s stance is hardening, it’s impossible to predict how much of his current plan he’ll scuttle if he wins big concessions on trade, or if the impact is so crushing and the public and business backlash so strong that he decides to switch course. Second, we have absolutely no precedent for tariffs the size that Trump’s proposing. Still, studies suggest that even if Trump enacts portions of his agenda, the blow to U.S. prosperity will prove severe.
The mind-spinning part is that we’ve never seen an increase this big, in almost 100 years of U.S. history. The Smoot-Hawley tariff program of 1930, widely branded as a major force in deepening and perpetuating the Great Depression, hiked the levies on U.S. imports much less than the breathtaking wallop promised under the Trump plan. That law lifted rates just over five points, from 13.5% to 19.5%. Trump’s crusade would beat Smoot-Hawley twofold.
In the Middle Ages, cartographers tagged untamed, treacherous, unexplored territory by the slogan, “Here lie dragons.” Donald Trump will be dueling dragons soon, and his best move would be one he’s good at, declare victory, lower his broadsword, and retreat.
