The Exorbitant Price of Trump's Tariffs

On the one hand, there will be economic pain. On the other hand, there will also be geopolitical pain.

Photo by Teng Yuhong on Unsplash

This week the Trump administration is scheduled to announce yet more tariffs. The president has characterized this as “Liberation Day” for the United States.¹ But the economic price of these tariffs has become visible. The stock market just experienced its worst quarter in three years “as the Trump administration’s evolving trade policies rattle Wall Street,” according to the Washington Post.

But surely the tariffs will yield some economic gains, right? Well… the Economist is, shall we say, skeptical about how this will play out.

Whatever the details of Mr Trump’s grand strategy, America’s economic growth will slow. Although countries that rely on trade with America—notably Canada and Mexico—will suffer more, Uncle Sam is not immune to disrupted trade. Goldman Sachs at first thought the hit to America’s year-on-year growth rate from Mr Trump’s tariffs would peak at 0.3 percentage points. Yet with the president’s increasing aggression, the bank’s analysts now think it will peak at 0.8 percentage points, and could reach 1.3 percentage points if he continues to escalate.

Inflation will rise, too, especially in the short run. Deutsche Bank reckons that, if Mr Trump goes for maximal levies, he could add 1.2 percentage points to the inflation rate, pushing it above 3% in year-on-year terms. Surveys show that consumers think inflation may run as high as 5% in the next year. That is almost certainly over the top: tariffs are a one-off shock, lifting the price level but not producing continuously rising prices. Nevertheless, with the Federal Reserve still struggling to bring down inflation to its pre-pandemic norm, higher import costs will complicate matters, making policymakers wary of cutting interest rates despite slowing growth.

And then there are the distributional consequences. A bigger share of low-income workers’ paycheques goes on consumption, and more of their spending is on basic goods such as clothes and food that are vulnerable to tariffs. The Yale Budget Lab, a research group, estimates that households near the bottom of the income ladder will see disposable income fall by about 2.5% because of the first wave of tariffs on China, Mexico and Canada, compared with a 0.9% decline for the most well-off households. As Mr Trump piles on tariffs, the hit becomes still more severe.

Look, call me crazy, but when the media is rife with reports about the return of stagflation, that seems like an excessive amount of short-term economic pain.

According to the New York Times’ Alan Rappeport, however, the Trump administration, however, is sticking to its guns and trying to sell Americans that there are more important values at play:

Mr. Trump and his advisers are betting that they can sell an inflation-weary public on a provocative idea: Cheap stuff is not the American dream.

“I couldn’t care less if they raise prices, because people are going to start buying American-made cars,” Mr. Trump said on NBC’s Meet the Press show on Sunday in response to fears of foreign car prices spiking.

The notion that there is more to life than low-cost imports is an acknowledgment that tariffs could impose additional costs on Americans. It is also a pitch that the burden will be worth it. Mr. Trump’s ability to convince consumers that it is acceptable to pay more to support domestic manufacturing and adhere to his “America First” agenda could determine whether the president’s second term is a success or a calamity….

The haphazard rollout of the tariffs and the fact that any changes to the tax code will not occur until later this year have left economists, trade experts and analysts wondering about the viability of Mr. Trump’s strategy and doubtful that his administration can convince consumers that they are better off with higher prices.

The hard-working staff here at Drezner’s World has already discussed why the Trump administration’s “short-term pain for long-term pain” narrative is complete bullshit. For this newsletter, however, it is worth taking a beat from the MAGA crowd and look beyond short-term economics. What are the foreign policy implications of all these tariffs?

Spoiler alert: the tariffs don’t just cause short-term and long-term pain for the U.S. economy — they also cause problems for American foreign policy.

For one example, consider how the tariffs are causing more U.S. allies to cozy up to China — which, by comparison, now seems like the more reliable trading partner. Because of Trump’s capricious behavior, however, China can employ both cooperation and coercion. The New York Times’ David Pierson, Martin Fackler, and Hisako Ueno noted this problem last week:

On the one hand, as Mr. Trump alienates allies of the United States, including by imposing tariffs and, in Japan’s case, questioning the fairness of a defense treaty, China sees an opportunity to court those countries.

On the other hand, China seems to have concluded that Mr. Trump’s abrasive foreign policy gives it leverage to advance its interests when so many U.S. allies are feeling vulnerable and questioning America’s reliability.

“China sees Trump’s alienation of U.S. allies as providing an opportunity, but that doesn’t mean that Beijing will refrain from signaling their dissatisfaction when China’s core interests are being threatened,” Ms. Glaser said….

“Beijing may be trying to see what it can get away with,” hoping to establish a new norm for its operations in the region, said Ja Ian Chong, an associate professor of political science at the National University of Singapore. “I suppose one calculation is that if the United States is ineffective or paralyzed, the other actors are unable to do much on their own.”

Reuters reports that despite China’s bellicosity, the threat of Trump’s tariffs are pushing U.S. allies in Northeast Asia closer to Beijing: “South Korea, China and Japan held their first economic dialogue in five years on Sunday, seeking to facilitate regional trade as the three Asian export powers brace from U.S. President Donald Trump's tariffs. The countries' three trade ministers agreed to ‘closely cooperate for a comprehensive and high-level’ talks on a South Korea-Japan-China free trade agreement deal to promote ‘regional and global trade’, according to a statement released after the meeting.”

Pro tip: any U.S. foreign policy that can push China, Japan, and South Korea into greater consultation and policy coordination is probably a dumbass policy.

This is just one example of a larger turn against the United States by treaty allies. The New York Times’ Damien Cave reports that even allies not directly targeted yet by Trump’s tariffs are rethinking their foreign policies. The result is the destruction of one of America’s comparative advantages in foreign policy — trust:

Even nations not yet directly affected can see where things are heading, as Mr. Trump threatens allies’ economies, their defense partnerships and even their sovereignty.

For now, they are negotiating to minimize the pain from blow after blow, including a broad round of tariffs expected in April. But at the same time, they are pulling back. Preparing for intimidation to be a lasting feature of U.S. relations, they are trying to go their own way….

Few forces have such a powerful, long-lasting impact on geopolitics as distrust, according to social scientists who study international relations. It has repeatedly poisoned negotiations in the Palestinian-Israeli conflict. It kept Cold War tensions between the United States and the Soviet Union burning for decades.

So-called realists — who see international relations as an amoral contest between self-interested states — argue that trust should always be assessed with skepticism, because believing in good intentions is risky.

But Mr. Trump has sparked more than cautious suspicion. His own distrust of allies, evident in his zero-sum belief that gains for others are losses for America, has been reciprocated. What it’s created is familiar — a distrust spiral. If you think the other person (or country) is not trustworthy, you’re more likely to break rules and contracts without shame, studies show, reinforcing a partner’s own distrust, leading to more aggression or reduced interaction….

For now, distrust is spreading. Experts said it would take years and a slew of costly trust-building efforts to bring America together with allies, new or old, for anything long-term.

“Trust is difficult to create and easy to lose,” said Deborah Welch Larson, a political scientist at the University of California, Los Angeles who wrote a book about mistrust’s Cold War role. She added, “Mistrust of the United States’ intentions and motives is growing day by day.”

Cave’s story is worth reading in its entirety. It underscores the massive foreign policy own-goals that this administration seems determined to pursue regardless of the costs. Or just listen to new Canadian prime minister Mark Carney, who says, “The old relationship we had with the United States based on deepening integration of our economies and tight security and military cooperation is over.” The foreign policy chill is also likely to feed back and harm the U.S. economy more as foreign tourism stalls out and international student enrollment risks collapsing.

Dear readers, I need to apologize. Last month I argued that Trump’s economic policies would cause short-term and long-term economic pain. But it turns out that formulation understates the real damage of Trump’s protectionism. It’s not just about short-term and long-term economic pain — it’s also about short-term and long-term geopolitical pain.

I may just be a small-town international relations scholar, but this seems like a really shitty way to run American foreign policy.

1. Trump has also said that he wants to impose “secondary tariffs” as well, so the tariff hikes this week will not be the last.