Even Scaled Down, Trump’s Tariffs Will Do a Lot of Damage
Earlier this week, U.S. President-elect Donald Trump promised to impose 25 percent tariffs on all products imported into the country from Canada and Mexico unless both countries stopped illegal drugs and undocumented migrants from crossing into the U.S. over their shared borders. The threat was in line with one of the most eyebrow-raising policy ideas that Trump has floated for his second term: his proposal to put blanket tariffs on all imports into the United States.
The precise details of the plan have varied, with Trump at different times floating levies of 10 percent and 20 percent on imports from most countries, and 60 percent to 100 percent on those from China. But regardless of the precise level at which the duties are set, and even if it is never fully implemented, the plan represents a dramatic departure from longstanding U.S. trade policy.
For decades, U.S. international economic policy has been based on the assumption that the gradual liberalization of trade between nations would create win-win benefits for all sides. Multilateral trade deals like the North America Free Trade Agreement, or NAFTA, and the Trans-Pacific Partnership, or TPP, were designed to allow each participating nation to specialize in what it does best, lowering costs and increasing productivity for all. With the overall size of the global economic pie growing, everybody’s slice of it would likewise continue getting bigger—and nobody would need to squabble over the crumbs.
Trump and his protectionist advisers think that this approach was misguided. They reject the idea that free trade is an overall boon for the U.S. economy and argue that, whatever its marginal benefits, a much more serious result has been the destruction of the U.S. manufacturing sector, imperiling both millions of jobs and the country’s national security. They are also disdainful of the notion that it is Washington’s job to spearhead large multilateral trade deals that benefit many parties, preferring to work in bilateral settings in which U.S. power and influence can be brought to bear in pursuit of concrete and immediate economic gains for the U.S. itself.
But what exactly are the gains that they hope to achieve? On this point, we currently have little clarity. Some officials involved in Trump’s presidential transition have suggested that the purpose of widespread tariffs would simply be to raise government revenue and hence allow the U.S. government to extend individual and corporate tax cuts that are due to expire next year. This, however, seems unlikely to be a sustainable long-term policy. The U.S. has not relied on tariffs as a major revenue source for over a century, primarily because they result in highly regressive price increases, while stunting growth and provoking economic retaliation from other countries.
A more likely scenario is that the tariffs are intended to be—or will end up being used as—leverage in bilateral negotiations aimed at rewiring global trading relationships in the United States’ favor. In other words, countries around the world would be coerced into making trade concessions to Washington to avoid the damaging effects of Trump’s tariffs. The precise concessions demanded would likely vary from country to country, but the overall goal of U.S. policy would be the same for all of them: Instead of win-win, it would be “we win, you lose.”
Even if pursued in a narrow form, Trump’s tariff policy will make it more difficult for the U.S. and its allies to coordinate and address pressing global economic problems.
However, Trump’s tariffs would have harmful economic impacts on the U.S. economy as well. Morgan Stanley has estimated that they would raise inflation by 2.5 percent and reduce growth by 0.5 percent over two years. U.S. trading partners targeted with them would therefore have a choice. They could choose to fight back, imposing retaliatory measures of their own to try to get Washington to reverse the tariffs. They might also try to band together in order to improve their negotiating leverage. For instance, policymakers in the U.K. are currently debating whether to seek closer ties with the European Union in order to create a formidable joint position in any negotiations with Washington.
On the other hand, countries could choose to save themselves the cost and trouble by cutting a deal with Washington fast, acquiescing in a new global trading order in which the U.S. uses its brute power to tip the scales in its own favor. This would be a world in which global markets would be fragmented and everyone—probably including the U.S.—would emerge poorer on the other side. It also risks being a classic example of what economists call a “beggar thy neighbor” situation, in which countries make decisions to advance their short-term interests by harming other nations. The result, however, is often a cycle of reciprocal reprisals leading to a long-term lowering of global growth for all.
But there are also some reasons for U.S. trading partners not to despair, or at least not too much. The tariff policy that Trump announced during his campaign is likely to be difficult to implement for legal, political and bureaucratic reasons. In the end, this might make it less sweeping and extreme than Trump has threatened.
First, it is unclear on what legal authority Trump could impose blanket tariffs on a single nation, let alone all of them. Under the U.S. Constitution, Congress has the power to enact tariffs, and the president can only do so under specific authorities that Congress has delegated to him. These authorities are designed to apply in specific situations, such as a national security emergencies, not to enable the president to upend the entire global economy. Unless they were approved by Congress, therefore, Trump’s sweeping tariffs would be likely to face legal challenges, and one way to avoid those would be to adopt a more targeted approach.
On the other hand, those legal challenges would likely take a long time to wend their way through the courts, so they may not prove decisive. In the meantime, although Congress has long afforded the president great leeway to apply the tariff authorities it has delegated to the executive branch, Trump could very well face political pushback not just from Democrats but also from many Republicans for his planned use of them in such a blanket manner. The higher prices and reduced growth that tariffs generate would be likely to anger voters, a risky move after an election in which inflation played a pivotal role. Broad tariffs would also cause turbulence in U.S. financial markets, the strength of which Trump saw as a key measure of his performance during his first term in office.
Finally, starting a trade war with the entire world would be likely to tax the bureaucratic capabilities of the U.S. government, including the Commerce Department and the Office of the U.S. Trade Representative, especially given Trump’s declared commitment to radically reducing the size of the federal bureaucracy. Generating the bureaucratic paper trail required to legally justify tariffs is time-consuming and negotiating new trade deals even more so. The attention and time of Cabinet-level officials is also finite, making it difficult to manage the economics and diplomacy of multiple high-level negotiations at once.
During his first term, Trump’s trade policy ended up being less aggressive than was advertised. There is reason to think that the same will be true this time around. Instead, it is possible that he will take a narrower approach, focusing on China and several other targets that the administration sees as either egregious economic offenders or soft targets. Mexico, India and the European Union seem to have particular reason to fear.
Yet even if pursued in this narrow form, Trump’s tariff policy will make it more difficult for the U.S. and its allies to coordinate and address pressing global economic problems such as climate change and China’s overproduction of goods for export. Instead, they’ll be caught up in trade wars and exchanges of hostile rhetoric, which is not a productive place to be, whether economically or politically.
Andrew Gawthorpe is an expert on U.S. foreign policy at Leiden University. He writes a newsletter called America Explained.