Donald Trump’s awful trade policy will outlast him
He thinks America is winning. It is not
With every passing day, America’s new trading order comes into sharper relief. In place of rules, stability and low tariffs is a system of imperial preference. Duties are not just higher, they are set by presidential whim. Canada and India have irritated Donald Trump, and so they could face tariffs of 35-50%. To ward off threats the eu, Japan and South Korea have all hurriedly made deals with America. Because Mr Trump regards deficits, bizarrely, as theft, he has imposed “reciprocal” tariffs ranging from 10% to 41% on tens of other trading partners, which went into effect on August 7th.
A seductive idea is settling in that because Mr Trump is calling the shots, America is winning. The world has not descended into all-out trade war; only a few countries, including China, have retaliated, while most others have caved, accepting higher duties, opening up their own markets and promising to invest vast sums in America. Even financial markets seem acquiescent; although they took a nasty dive after the president unveiled his “Liberation Day” levies in April, this time they have taken the duties in their stride. All the while, tariff revenues are rolling in. This thinking is deeply misguided, however. Mr Trump has started something from which America will lose, not win.
Consider first the idea that high tariffs punish not America, but its trading partners. According to the Yale Budget Lab, America’s effective tariff rate has risen to 18%, nearly eight times higher than it was in January and towards levels last seen in the Depression. The way maga paints it, this is a triumph, because America’s trading partners are eating higher tariffs, while US Customs rakes in nigh on $30bn a month.
This a fundamental misunderstanding of trade. When Mr Trump raises tariffs he is hurting his own compatriots by depriving them of choice at low prices. Years of experience show that tariffs do not harm the sellers of goods as much as they harm the buyers. Even though foreign suppliers are lowering their prices more steeply than after Mr Trump’s first-term duties, analysts at Goldman Sachs reckon that fully four-fifths of the tariffs have so far been borne by American consumers and firms. Just ask Ford or GM: the carmakers reckon they paid $800m and $1.1bn in tariff costs, respectively, in the second quarter of this year alone.
What of the muted market reaction? The S&P 500 remains around 10% higher than it was on Liberation Day; the dollar, though down, has strengthened in recent weeks. But markets are being buoyed by America’s extraordinary artificial-intelligence boom, which is pushing up expected earnings for its biggest tech firms. Investors may hope, too, that companies will divert their supply chains so as to reduce tariff costs. Details of the trade deals remain fuzzy. And an uncomfortable dynamic may be at play: markets might expect the president to chicken out as the pain of tariffs becomes clear, but the lack of reaction might be emboldening him to press ahead.
America will pay the price. Its long expansion is already under strain: in the first half of 2025 growth underwhelmed and inflation was disappointingly high. Lately, job creation is slowing, and a survey of bosses suggests service-sector activity may be close to stalling. But the full toll of tariffs will be felt over the long term. Mr Trump is discarding a predictable multilateral system that applied the same tariff rate on most products, regardless of their origin, for a bilateral system where rates vary depending on where goods come from, and are subject to ceaseless bargaining. The president will consider exemptions when he is next flattered, and threaten duties when he is next displeased.
Whereas once American shoppers were spoilt for choice, as domestic and foreign producers competed to sell to them, now firms that succeed will do so not only because they are the most innovative, but also because they are cleverest at playing the system. Fortunes will be spent on lobbying. Companies will face needless uncertainty. Shoppers will lose out on innovation and choice. But because the counterfactual world where trade flowed unchecked cannot be observed, voters may not realise what is hurting them.
That is one reason why the Trumpian system will be hard to dislodge. If future presidents want to cut tariffs, they will be met by furious lobbying from American firms that got used to sheltering behind them and have thereby become globally uncompetitive. Few consumers will clamour for change, if they do not know how much more choice they could have enjoyed. Lawmakers, too, might be reluctant to lower trade barriers if it means giving up tax revenues today for broader prosperity tomorrow. The new system is not just harmful. It could last long after Mr Trump retires to play more golf. ■