Trump tariffs could bring global economic downturn
10% tariffs on most countries, higher tariffs on 60 countries, tariffs on penguins & trillions of dollars in financial holdings wiped out in a few hours, as Congress seeks to curb tariff authority.
Since Donald Trump announced an extraordinary increase in U.S. tariffs yesterday, financial markets around the world—across stocks, commodities, and futures—went deep into the red, incurring losses adding up to trillions of dollars in lost wealth and credit. By 11:00 am this morning, more than $2 trillion had been erased from the S&P 500. Only 11 countries generate more in annual economic output than some U.S. investors lost in a few hours.
The U.S. Dollar lost value against the British Pound and the Euro, adding to the extra cost Americans will pay for nearly everything they buy—not only goods but also services, which increasingy rely on global supply chains as well. Many of the stresses that will now proliferate through the everyday economy will hit most Americans harder than those who can afford to lose millions or billions to carry off a deliberate policy shock.
Several examples demonstrate the general lack of concern for human wellbeing or strategic economic influence at work in these tariffs:
A 47% tariff on all goods imported from Madagascar;
A 31% tariff on Moldova (which could weaken its economy and make it more vulnerable to Kremlin-backed destabilization);
A 32% tariff on imports from Switzerland (Does this include financial services?);
A 32% tariff on all goods from Taiwan (which will push up the price of electronics across all categories);
Incredibly, Trump announced across-the-board tariffs on the Heard and McDonald Islands, which are uninhabited. There are no people or industries there, so the tariffs are theoretically imposed on penguins and other wildlife.
If we are charitable, it seems President Donald Trump has several mistaken ideas about tariffs, which are driving his thinking:
He thinks removal of tariffs triggered the Great Depression, though it is widely understood the Great Depression was triggered by a combination of the 1929 stock market crash and post-war economic breakdown in Germany, then deepened and consolidated globally by the Smoot-Hawley tariffs, which triggered a global trade war, and by the environmental catastrophe of the Dust Bowl.
He thinks “other countries” pay tariffs, when in fact they are paid directly by American businesses and consumers.
He thinks bullying tactics are a necessary part of any negotiation, though history shows bullying tariffs will lead to catastrophic economic waste and destruction around the world.
He thinks as President he is entitled to enact any policy he wishes at any time, regardless of what anyone else wants, when in fact the Constitution grants sole tariff authority to Congress, and Congress has partially delegated only a narrow tariff authority to the President.
There is also a lot of speculation about how Trump came to the unfounded claims about tariffs he claims other countries impose on the U.S. One of the suspected explanations is that Trump (or a key advisor) appears to believe cheaper labor costs amount to an “effective tariff rate” or an anti-competitive practice, when they are usually the result of a less affluent macroeconomy.
To impose tariffs on Canada, with which he himself signed a free trade agreement during his first term, Trump declared a national security emergency, and has sought to treat Canada not as an ally an close trading partner but as a potential rival and threat to national security. The move is clearly an illicit maneuver to get around Constitutional constraints on his tariff authority.
This is why last night, the Senate voted to dissolve that emergency declaration and void his tariffs on Canada. Four Republicans—Sen. Lisa Murkowski of Alaska, Sen. Susan Collins of Maine, and Sen. Rand Paul and Sen. Mitch McConnell, both of Kentucky—joined all Democratic and Independent senators to pass the resolution. For it to take effect, it would have to pass the House of Representatives as well and be signed by the President into law. If Trump were to refuse to sign, or veto, Congress could override his veto with a two-thirds majority vote.
Some consider this unlikely, but there are vital questions about the Constitution’s separation of powers and about potential long-lasting, history-altering economic devastation. Today, two senior Senators introduced bipartisan legislation requiring Congressional approval for all new tariff measures. The coming weeks will see increasing pressure on the Congress to strip Trump of tariff authority altogether, as prices spike for everyday goods and services, and as local economies, new investment, and hiring slow.
Mike Pence, the former Vice President during Trump’s first term, wrote on social media that:
The Trump Tariff Tax is the largest peacetime tax hike in U.S. history. These Tariffs are nearly 10x the size of those imposed during the Trump-Pence Administration and will cost American families over $3,500 per year.
Bloomberg is reporting:
If implemented as announced, the new tariffs will increase the average US rate by triple the 5% change the Smoot-Hawley duties of 1930 did, pushing them above 20%, according to Bloomberg Economics. Making the impact even more powerful: imports are now worth almost three times as much as a share of the US economy as back then.
Those 1930s tariffs, imposed as a reaction to the onset of the Great Depression, set off a trade war that led to longer and deeper economic shocks around the world and deepened the political turmoil of the era.
The Conversation published an analysis in February detailing why tariffs will not boost American manufacturing and exports as Trump imagines. For instance:
Paradoxically, tariffs could also decrease the competitiveness of American production, at least when it comes to sales in third markets. Cost pressures caused by more expensive components will affect US manufacturers, but not rival manufacturers in, say, China or Europe – at least until they have responded with a trade war.
More clear-eyed conservative criticism of President Trump’s tariffs are emerging. Matthew Rooney, Managing Director of the Bush Institute-SMU Economic Growth Initiative, writes, in a detailed essay:
The fact is that tariff barriers weaken the middle class. In the short term, they raise consumer prices. In the medium term, they weaken the nation’s manufacturing competitiveness and undermine middle-class jobs. In the long term, they inhibit innovation and the emergence of the next generation of middle-class jobs, weakening our children’s toe-hold in the middle class and sapping the nation’s prosperity over time.
Investing is an inherently cooperative endeavor; one or more investors decide to commit resources to a shared project, in hopes that enough value will be created, to expand overall opportunity and generate returns on investment. Trade is a way for countries to work together to draw more investment into their economies. At the moment, there does not appear to be any policy in the works that will replace that dynamic, as Trump’s tariffs spark retaliation and a broader shift away from U.S.-driven cooperation.
The results are sure to be costly for everyone.
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