Trump’s CEA head Stephen Miran: Tariffs won’t raise prices if the Fed simultaneously tightens money to strengthen the dollar.
Trump to Fed: Tariffs won’t reduce output if you simultaneously loosen money [which implies a weaker dollar].
Problem: The Fed can’t do both at once.
The result has been uncertainty, chaos, and immediate retaliation from some of the United States’ biggest trade partners. All this economic upheaval raises a central question: Why is Trump so focused on tariffs? They are a longtime obsession. When he declared in his second inaugural address that “we will tariff and tax foreign countries to enrich our citizens,” Trump was echoing, almost verbatim, comments from his first term. Trump’s view seems to be that tariffs can be used to fix anything. They can raise tax revenue from foreigners to replace domestic taxes, eliminate the trade deficit by rebalancing trade, ensure reciprocity so that other countries impose lower tariffs on U.S. exporters, reshore manufacturing jobs to the United States, protect national security and end dependence on adversarial suppliers, and punish countries for unrelated sins, such as failing to stop migration.
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Trump is correct in his assertion that tariffs raise government revenue. But they do so inefficiently compared with other taxes. Unlike tariffs, alternative forms of taxation collect large amounts of revenue and impose few economic distortions—particularly forms of taxation that apply low tax rates to a large tax base. There is no way that tariffs could replace them as a revenue source. For example, in the 2024 fiscal year, the U.S. federal government spent a total of $6.4 trillion. Yet in 2024, the United States imported only $3.3 trillion worth of goods. Even a 100 percent tariff on all imported goods would not be enough to finance the federal government, and any tariff on that level would also severely cut imports, dramatically reducing U.S. revenue and inflicting enormous costs on the economy.
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Trump wants reciprocity in tariffs: “If they charge us, we charge them,” he said in February; he has promised to release a plan for reciprocal tariffs in April. His February Reciprocal Trade and Tariffs Memorandum reflected the belief that other countries levy higher tariffs on U.S. exports than the United States levies on their goods. This is often true, but not nearly by the margin that he and most of his supporters believe. For example, the average tariff EU countries apply to U.S. products is just 5.0 percent, not far from the average U.S. tariff on products from Europe of 3.4 percent.
The tariffs that the United States and its trading partners impose are not identical because, historically, U.S. negotiators strove for reciprocity in the changes the United States and its trading partners made to their tariff levels—but not for the equalization of the tariffs themselves. From the 1940s to the 1990s, when the United States, European countries, and others agreed to cut the tariffs they applied to one another, the change in market access resulting from those cuts was balanced, but the final tariffs, on a product-by-product basis, were not.
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There are several problems with Trump’s hope thatimposing tariffs will create factory jobs. For any given industry, tariffs do act as a subsidy, but they subsidize domestic production, not employment. Today, manufacturing production is increasingly intensive in inputs such as machines, robots, and other technology, not human labor. A new semiconductor factory, for example, may cost $20 billion to construct but ultimately operates using few workers, aside from highly trained engineers. Tariffs may thus bring new plants, but not necessarily the jobs that might have once come with them.
Tariffs also act as a tax on consumption, raising prices on final products for households. And for tariffs on intermediate inputs such as steel, the effect is worse: they can actually work against the creation of manufacturing jobs by prioritizing workers in one industry at the expense of those in others. The economists Kadee Russ and Lydia Cox have estimated that for every new job created in a U.S. steel mill benefiting from tariff protection, 80 workers in downstream industries that use steel would be hurt. The industries that have to use more expensive steel as an input, such as automobiles, machinery, and farm equipment, would become less competitive compared with foreign rivals that can access cheaper steel. Thus, Trump’s first-term tariffs were found to have harmed overall U.S. manufacturing employment. And his current plans to impose tariffs on imported steel, aluminum, and automobile parts across North America will result in much higher costs for cars produced in the United States.
Maurice Obstfeld makes an important point:
Some analysts claim that the high saving of countries like China “forces” the United States to have a low saving rate. Apart from asset price effects that encourage US households to spend, these analysts maintain that US fiscal deficits are a response to foreign inflows that would otherwise cause unemployment. This story contradicts the facts. In 2000 under President Bill Clinton, for example, the United States achieved a federal budget surplus and an unemployment rate of around 4 percent despite a trade deficit that was 3.7 percent of GDP—higher than the 3.1 percent of GDP deficit in 2024.
Clark Packard of the Cato Institute warns of “the long-term reputational costs of Trumpian protectionism.” Three slices:
FTAs [free-trade agreements] help facilitate certainty in international commerce by establishing clear rules, eliminating tariffs, and providing neutral dispute resolution. Consumers, including firms, benefit from lower prices and expanded varieties. Likewise, predictable access to foreign markets reduces the risk for firms looking to build factories and other infrastructure, establish diversified supply chains, and hire workers. This relative certainty drives investment and enhances prosperity.
When looking for FTA partners, countries seek stable, predictable trading partners with large consumer markets. For nearly 70 years following World War II, the United States fit the bill. Policymakers leveraged the country’s outsized position in the post-war global economy to create rules and institutions that allowed international trade and investment to thrive, benefiting much of the world and the United States in particular.
Yet for nearly a decade, Washington has engaged in increasingly reckless international economic behavior. It impulsively withdrew from the Trans-Pacific Partnership (renamed the Comprehensive and Progressive Agreement for Trans-Pacific Partnership or “CPTPP”), a promising trade pact with Pacific Rim nations designed to establish high-quality economic rules in the Asia Pacific region while offsetting China’s gravitational pull; it levied ridiculous “national security” tariffs on steel and aluminum imports from longstanding allies; and it unilaterally crippled the World Trade Organization’s (WTO) dispute resolution system.
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The erratic and unfounded tariff announcements shatter the certainty FTAs are designed to facilitate. And the Trump administration isn’t done.
US talk of “reciprocal” tariffs on each country with which it trades is pushing trade policy uncertainty to new extreme highs (Figure 1). If Washington is willing to tear up binding trade agreements with close allies and longstanding trading partners on exceedingly weak grounds, it’s doubtful many countries will be lining up anytime soon to negotiate new FTAs with the United States. The reluctance will likely linger well after the Trump administration is gone.
Simply put, the United States is no longer a reliable trading partner.
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There are also longer-term costs to Washington’s retreat from trade liberalization and ignorant protectionism that must be considered.
Higher prices for American consumers are one obvious starting place. Likewise, US trade protectionism will put downward pressure on real wages since increased trade tends to promote specialization and enhance productivity. Meanwhile, American exporters face higher barriers than competitors in countries that participate in free trade deals. Higher barriers to trade will also mean a less innovative and dynamic ecosystem for existing firms, which are increasingly shielded from foreign competition.
In less concrete terms but arguably just as important, the US is incinerating a vital tool of soft power to set standards around the world in emerging areas vital to the 21st-century economy. The vacuum being created will surely be filled by others. The European Union increasingly sets heavy-handed regulatory standards that many global firms follow, a phenomenon known as the Brussels Effect. China and others will continue to fill the void as the United States retreats inward.
In short, the US is forfeiting the power and prestige it earned for cultivating today’s successful trading system while alienating close allies along the way.
Maybe you aren’t counting the days until April 2, which Donald Trump calls “Liberation Day.” But the rest of the world nervously awaits the date the president has set to begin erecting “reciprocal” tariff barriers against all foreign nations.
To many mainstream economists, this looks more like restriction than liberation. The Federal Reserve predicted this week that tariffs and the uncertainty surrounding them will boost U.S. inflation, lower growth and increase unemployment — a triple whammy. The European Central Bank foresees a similar downdraft there.
“The dumbest trade war in history” is how the Wall Street Journal described Trump’s initial tariff forays against Canada and Mexico. Later, after Canada began to retaliate, the Journal’s editorial board said it was “being kind” in that earlier, dumbest-ever description.
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As Trump turns on allies and partners, these countries are beginning to examine the fundamentals of their relationship with the U.S. If they can’t depend on Washington for mature economic leadership, what else is at risk?
Yet there’s less than meets the eye to all of these purported sources of good news. A large portion of that fixed-asset investment growth is underpinned by Beijing’s subsidies for manufacturers to upgrade their equipment. It’s an industrial-scale “cash for clunkers”—the Obama-era program in the U.S. that subsidized trade-ins of old cars. This forced upgrading solves the riddle of how manufacturing investment could rise at a rate of 9% year-on-year the first two months of this year, up from 8.3% growth in December despite a looming global trade war.
Beijing is pulling off the same trick with retail sales. This measure of household consumption increased 4% year-over-year in the January-February period, compared with 3.7% year-on-year growth in December. But most of this consumption is driven by a similar cash-for-clunkers program, known as the trade-in scheme. Purchases of household appliances, home-renovation supplies, furniture and other goods covered by the program all far exceeded the average rate of retail sales growth, which means by definition that many other unsubsidized categories grew more slowly.
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Take all this as an admission that Beijing’s official GDP growth target of “about 5%” is unobtainable via the organic workings of the quasi-market economy. That leaves President Xi Jinping to pay households to consume in ways that will create Potemkin GDP growth without any obvious or consistent productivity growth.
The causes of this economic-growth crisis are well-rehearsed. Mr. Xi’s smartest decision was his 2020 move to prick China’s real-estate balloon, the monumental inflation of property prices that left China reliant for economic growth on an unsustainable credit expansion. His worst economic failure has been not creating a viable alternative to the old property economy.
As the property credit bubble deflated, China needed a spurt of productive private investment and entrepreneurship. Instead the country got Mr. Xi’s serial crackdowns on private enterprise and consolidation of economic control in the hands of an increasingly paranoid party-state apparatus.
Jacob Sullum argues that Trump’s reading of the Alien Enemies Act is strained.
