President Donald Trump’s tariff policy has been called the “most disruptive policy shock in trade history.” The direct negative effects of the tariffs on consumption and production have been well-established. However, the erratic manner of introducing tariffs has broader adverse effects. Adding and subtracting tariffs adds to uncertainty, reduces credibility, and is possibly unconstitutional. The policy is unpredictable because Trump has two contradictory goals. He supports one goal on certain days and the second goal on other days. Consequently, no one knows which goal will be supported in the future, including Trump.
The Economist has identified Mr. Trump’s impulsive and erratic tariff policy as the “most disruptive policy shock in trade history.” The tariffs have well-recognized negative effects on the economy. They raise the prices of imported goods and American-produced goods that are close substitutes. The costs and prices of American goods that use imported components also rise. Foreign retaliation reduces the volume of U.S. exports. They also harm trade partners, as both sides lose from a trade war.
However, Trump’s primitive method of alternately adding and subtracting tariffs has broader adverse economic effects beyond trade. Policy reversals increase uncertainty for all decision-makers whose costs and benefits are spread over time. His frequent reneging on initial executive decrees reduces his credibility to near zero. By ignoring the role of Congress in setting taxes, the constitutionality of his executive decrees is being widely challenged.
Why does he carry out these economically destructive policies? He lacks a coherent economic model and thinks of trade deals as a game with one winner and one loser. He misses the crucial point that both sides lose in a trade war. Instead, he substitutes ad hoc goals lacking economic merit that are mutually contradictory. What are the contradictory goals that Trump stated as his preferred trade policy goals?
His first goal is to restore the American industrial base. This goal is sometimes stated as re-industrializing, re-shoring, or “producing stuff again.” It requires permanent tariff protection with no pauses, reversals, or exemptions for countries or products. If his promises were credible and durable, and successors were expected to continue protection, some domestic and foreign investors would have an incentive to make potentially profitable long-term investments in U.S. production.
A second goal is to rebalance trade by punishing foreign governments that have treated Americans unfairly. The goal is to persuade or bully trade partners, especially China, to import more and export less to the U.S. However, to persuade partners to comply, the U.S. must offer them a quid pro quo in the form of trade concessions. But the expectation that a deal might include initial U.S. tariffs being partly or completely reversed would remove the incentive to invest in U.S. import-competing industries. Thus, the first goal, which requires permanent tariffs, completely contradicts the second goal, which permits temporary tariffs only.
One possible outcome of deal-making is free trade. Trump has promoted his idea of reciprocal tariffs, and if a negotiating partner offered zero tariffs, would Trump reciprocate with zero U.S. tariffs? Vietnam has made such an offer. If so, the ironic outcome would be less protection for U.S. manufacturing as a result of the trade war.
Trump has not consistently followed either goal, and he has some advisers who favor each goal. Peter Navarro is the long-run protectionist. Scott Bessent seems to prefer temporary tariffs and negotiation that will return to lower U.S. and foreign trade barriers. Trump alternates between the two contradictory goals, and no one can predict which goal he will support on a given day. The unpredictability of the policy outcome is understandable because it appears that Trump himself does not know which goal he will pursue on a given day or even within a day.
The unpredictability of Trump’s tariff policy has generated unprecedented uncertainty for the U.S. and global economies. However, other aspects of his policy have been very predictable. He consistently seeks maximum personal power by weakening traditional restrictions from Congress, the courts, and international agreements.
He has attempted to limit domestic opposition by restricting freedom of speech and freedom of the press. He has tried to bully Jerome Powell on the Fed’s interest rate policy. He would like to control private financial markets, but so far, he has been unable to prevent stock market prices from misbehaving by falling in response to higher tariffs and rising after lower tariffs. The Trump Administration has also been unable to prevent Moody’s Ratings from lowering the credit rating of U.S. government bonds on May 16, in response to Trump’s fiscal policy.
Will Trump’s trade policy be forever changing or will there be a final outcome of either durable protectionism or negotiated freer trade? No one knows, not even Mr. Trump.
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