Trump's tariff madness has no method
LONDON – Is there any logic to the tariff frenzy unleashed by US President Donald Trump on April 2? No one can answer this question with certainty, because Trump is a politician who has made unpredictability a central part of his identity. However, it is imperative to answer it, so here is a list of possible reasons why Trump started the trade equivalent of World War III.
Let's start with the obvious: Trump effectively believes tariffs will bring manufacturing jobs back to the United States and make the American economy great again. This idea was unlikely at best. But if Trump thought April 2nd would be America's "Liberation Day," what has happened since then should have changed his mind. The New York Stock Exchange has plummeted, analysts are close to predicting a recession, and the Federal Reserve is beginning to feel pressure to cut interest rates and fix the mess.
Economics textbooks suggest that tariffs should cause the dollar to appreciate because if Americans import less, they also sell fewer dollars in the foreign exchange market. However, the magnitude and scale of the "reciprocal" tariffs was such that the dollar depreciated against the world's major currencies. This can only mean that traders anticipate a decline in economic activity in the United States.
So let's look for another reason: maybe Trump doesn't care about the US economy as a whole, but he does want to reward the Midwestern workers who voted for him. But this theory doesn't work either. Tariffs on final products, like cars made abroad, provide some protection to American companies and workers, but tariffs on imported auto parts have the opposite effect: they make domestic auto manufacturing less profitable.
The devil is in the details, and there's still much we don't know, but it's entirely possible that Trump's tariff boom will reduce the effective protections afforded to the US industrial sector, thereby destroying existing manufacturing jobs rather than creating new ones.
What is certain is that the price of cars (both domestic and foreign) and other consumer goods will rise. This is not something those who voted for Donald Trump will celebrate.
From a slightly more conspiratorial perspective, let's suppose Trump doesn't give a damn about the future of American workers and wants to help tech oligarchs like Elon Musk get even richer. This sounds plausible, but the economic logic doesn't add up either. The tech industry is largely export-led, and the United States still leads the world (yes, China is quickly catching up, but I'm writing this column using a Microsoft product anyway, and you're likely reading it on a device designed in the United States).
Protecting the domestic market from imports isn't something that keeps tech moguls awake at night, and protection through tariffs isn't on their list of what they want from the government. On the contrary, Trump's tariffs could cost them dearly because if the affected countries want to retaliate, the wisest course of action would be to focus on services (including technology), a sector in which the United States has a significant trade surplus.
Do you live outside the United States and use American programs for work and play? Well, next time you might have to pay a lot more for this privilege.
Given all of the above, why does Donald Trump insist on tariffs? Still searching for a scholarly answer, I turned to a classic source: Albert Hirschman's book, "National Power and the Structure of Foreign Trade."
In 1945, Hirschman single-handedly invented geoeconomics, a field now very much in vogue. He distinguished between the supply-side effect (trade enriches a country and therefore strengthens it politically and militarily) and the leverage effect (a large, wealthy country can exert political power by restricting other countries' access to its market).
So, it would seem that Trump is appealing to the leverage effect. He's deploying his political power by making it more expensive for his foreign competitors to sell goods in the United States. So far, so good.
But Hirschman's analysis doesn't end there. He advises that to consolidate political power through trade, a nation should focus on countries that pose an economic and political threat; that depend heavily on trade for their prosperity; and that are unlikely to divert their trade to third parties.
Does anyone believe that Trump's henchmen conducted such an analysis to decide on whom to impose tariffs? Consider some of the victims. Canada certainly depends on trade with the United States, but in what sense does it represent a threat? Many East Asian countries trade actively, but the United States is not typically their largest trading partner, and they are likely to redirect at least some of the exports that will now not reach a U.S. trading center to other countries. Jordan (which will be hit with a 20% tariff) is an obvious U.S. ally, not a country that should be subjected to trade sanctions to gain leverage. Furthermore, if Hirschman's logic has been applied, why impose tariffs of nearly 50% on Lesotho, a small, poor, Mediterranean African country that only exports clothing and diamonds?
Hirschman, in fact, highlights something ominous: the country that effectively used trade threats to gain political power, especially in Central and Eastern Europe after 1933, was Nazi Germany. Let's hope this isn't Trump's model.
Ultimately, the only explanation for Trump's tariffs lies in the answer to the age-old question of why babies suck their big toes: because they can. The United States and the rest of the world will pay dearly for this childish behavior.
The author
Andrés Velasco, former Minister of Finance of Chile, is Dean of the School of Public Policy at the London School of Economics and Political Science.
Translation by Ana María Velasco
Copyright: Project Syndicate, 1995 - 2025
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