May 13, 2025
On April 2 President Donald Trump declared "Liberation Day," announcing a new tariff strategy aimed at allegedly correcting trade imbalances and protecting U.S. workers and industries.
It was the wrong medicine for misdiagnosed illness. Internal U.S. economic problems are caused by legal incentives for financial speculation and disincentives to produce goods people need. Tariffs won't solve that problem.
The tariff rates Trump introduced were ignoring economic realities. The whole economic concept behind was based on some advisors weird theory. It was obvious that the whole Trump strategy implemented through tariffs would fail.
China and other pushed back against U.S. tariffs by introducing some on their own. The markets reacted appropriately. The values of the U.S. dollar, U.S. stock markets and U.S. treasuries decreased.
By April 9 Trump was forced to pull back. He paused the tariffs for most countries for 90 days but increased tariffs on China.
China responded in kind.
Three days later Trump announced another retreat. Smartphones and computers were excluded from the previously introduced tariffs.
Speculators may well have liked the uncertainty Trump's irresponsible tariff tactics introduced into financial markets. But for markets of real goods uncertainty is a venom that blocks all activities. It soon became obvious that the tariffs would cause huge problems for the U.S. economy.
Trump tried to press China to concede to U.S. terms in some new trade deal. But China rejected all talks until tariffs were reestablished at the previous levels.
That concession was made. Talks over the weekend in Geneva saw the U.S., again, pulling back.
The editors of the Wall Street Journal don't hold back in their comment:
Rarely has an economic policy been repudiated as soundly, and as quickly, as President Trump’s Liberation Day tariffs—and by Mr. Trump’s own hand. Witness the agreement Monday morning to scale back his punitive tariffs on China—his second major retreat in less than a week. This is a win for economic reality, and for American prosperity.Make that a partial win for reality. The Administration agreed to scrap most of the 145% tariff Mr. Trump imposed on Chinese goods on April 2 and later. What remains is his new 10% global base-line tariff, plus the separate 20% levy putatively tied to China’s role in the fentanyl trade, for a total rate of 30%. In exchange, Beijing will reduce its retaliatory tariff to 10% from 125%. The deal is good for 90 days to start, as negotiations continue.
And therein, I believe, still lies the big problem.
The editors conclude:
The 30% tariff is still exceptionally high for a major trading partner, but the 90-day rollback spares both sides from what looked like an impending economic crackup. U.S. consumers were facing widespread shortages, while China feared growing unemployment.
For now, nothing will change with those symptoms.
It is not only the very high 30% tariff (for mostly products with very low profit margins) that will prevent Chinese factories from resuming production and U.S. retailers from restocking their shelves.
The poison that still paralyses everything is the uncertainty and insecurity that comes with the 90 days limit of the deal and with no perspective of what might follow. Who will post orders for, let's say return-to-school items, if it is unknown what price will have to be paid for them?
Paul Krugman agrees:
The prohibitive tariff has been paused, not canceled. Nobody knows what will happen in 90 days. I’ve long argued that the uncertainty created by Trump’s arbitrary, ever-changing tariffs is at least as important as the level of those tariffs. Well, the uncertainty level has arguably gone up rather than down.This retreat probably hasn’t come soon enough to avoid high prices and empty shelves. Even if shipments from Shanghai to Los Angeles — which had come to a virtual halt — were to resume tomorrow, stuff wouldn’t arrive in time to avoid exhaustion of current inventories.
I guess it’s good news that Trump slammed on the brakes before driving completely off the cliff. But if you think that rationality has returned to the policy process, that the days of government by ignorant whim are now behind us, you’ll be sorely disappointed.
I agree with that take.
Posted by b on May 13, 2025 at 16:26 UTC | Permalink