Trump’s tariffs will harm America but will hurt the global economy more
In Brief
The United States has changed, and so should US allies’ assumptions about how congruent their interests and values are with Washington as it falls into the grip of Trumpism. Trump is as committed to tariffs as he was in his first presidency, raising fears about their potential impact on the US and the global economy, including the highly trade-dependent economies of Asia. Key US allies will need to affirm their commitment to working together as partners in multilateral action on trade, climate and global economic governance.
One analytical trope that got a lot of airtime during the first Trump presidency was that of the supposed ‘adults in the room’ — the meant-to-be-reassuring idea that the president’s worst policy instincts would be checked and frustrated by the traditional conservatives left within the administration. Given some of the buffoons and extremists Trump continues to nominate to senior US cabinet positions, the scary prospect is that it might often be Trump who’s the only adult left in the room.
Most recently, in nominating Howard Lutnick as his appointee for secretary of commerce to lead ‘our Tariff and Trade agenda [sic]’, Trump has made the billionaire financier one of the world’s most significant economic policymakers.
Under the Trade Expansion Act, the commerce secretary has authority to levy so-called ‘Section 232’ tariffs to control imports on ‘national security’ grounds. Trump’s 2018 tariffs on steel and aluminium, which the Biden administration continued and unsuccessfully defended in a WTO challenge, were enacted under this provision. Trump’s announcement of Lutnick’s nomination noted that he would have ‘direct responsibility’ for the United States Trade Representative, though who will occupy that appointment is not yet clear.
Many would hope that Lutnick’s nomination might signal some wiggle room in Trump’s campaign promise of blanket tariffs. As a Trump campaign surrogate, he tried to reassure business that the tariffs would be primarily a negotiating tactic and applied selectively, though he adopted the more hawkish Trump line as the campaign progressed. Lutnick’s firms also have business ties in China, links that will undoubtedly burden the process of his nomination.
For his part, the president-elect has never given any indication that tariffs are a negotiating tactic, and it’s possible that on the specific issue of tariffs the tensions between Trump’s manic policy instincts and the relative pragmatism of some members of his administration will be a key feature of his second term as it was in his first.
As Ken Heydon says in this week’s lead article, even the tariffs levied during Trump’s first term were relatively modest compared to what he’s promising now, though ‘[t]he scale and range of US tariff measures [introduced] in 2018 were unprecedented — greater even than that of the infamous Smoot–Hawley tariffs of 1930 that heralded the Great Depression’. Those tariffs ‘are expected to reduce long-run US GDP by 0.22 per cent (US$55.7 billion), decrease wages by 0.14 per cent and eliminate 173,000 full-time equivalent jobs’, while not even achieving their aims of ‘fixing’ the US trade deficit because ‘tariffs on a country’s goods will reduce demand for those goods but also for the currency associated with them, effectively depreciating the foreign exporter’s currency and appreciating that of the country imposing the tariff’. US exports became less competitive as the dollar appreciated under Trump.
In part because the blanket tariff idea is so manifestly damaging to the US economy, there will be the age-old temptation to think that the bargaining-chip hypothesis is the one to go forward with. Matthew Goodman reports that some Japanese policymakers expect US partners will be extended lenience on tariffs based on how well they address other Trumpian economic and security concerns, from their defence spending to their purchases of US government debt.
As Heydon points out, Trump’s 1.0 tariffs have done and Trump’s 2.0 tariffs would do substantial damage to the US economy. But they will do much more damage to the global economy and international political stability, especially if other countries succumb to the political instinct to retaliate — a strategy that will shrink trade and the global economy further. The American economy, by virtue of its resource endowments and sheer scale, is relatively well placed to take the hit that Trump’s self-harming policies would deliver. But the highly trade dependent economies of Asia, including Australia, will be severely hit and political destabilisation within the region is an inevitable consequence.
Meanwhile, confronted with the fact that a capricious and protectionist US approach to trade undermines Australian national interests, hawkish commentators in Canberra and Tokyo are sticking to their usual script, advocating for a doubling down on the strategic alliance with the United States, and warning that efforts to shore up multilateral economic cooperation is a distraction from the more important goal of proving Australia’s bona fides as an alliance partner. The hymn book from which they chant also includes the implausible refrain that Chinese industrial subsidies are just cause for Trump’s tariff war, although a recent IMF study has mixed findings on that score but concludes that the evidence that Chinese industrial subsidies impact Chinese export prices is weak.
The United States has changed, and so should US allies’ assumptions about how congruent their interests and values are with Washington as it falls into the grip of Trumpism.
This does not argue for passivity, but for agency. On economics, there needs to be collective leadership from the region in defence of a regime of free and open trade and investment, rather than the disastrous strategy of cutting particularistic trade deals with the United States or China.
Pressure on key US treaty allies like Japan and Australia to prove their bona fides as allies to the White House shouldn’t preclude their cooperation to act as constructive partners in multilateral action on trade, climate and global economic governance.