Last week, US President Donald Trump appeared to initiate a global trade war with aggressive, universal new tariffs. Even traditional partners such as Canada responded with outraged defiance. The latest twist in this roller coaster is his suspension of most “reciprocal tariffs” for 90 days, China excluded.
Is he backing down? No one knows.
The rules of the game, or even what he wants, seem incomprehensible. Confusion isn’t a bug but a feature, arguably the beating heart, of the new policy. Yet radical uncertainty undermines one of the onslaught’s key stated goals: attracting more investments to the US. Investing requires planning, but the indispensable predictability has been obliterated.
There’s little indication of due diligence, or careful consideration, analysis and planning. The sweeping nature of the tariffs, which apply even to uninhabited territories and countries such as Australia with a significant trade deficit with the US, suggest the contrary. The new policy is intended to look and function like a sledgehammer, not a scalpel. The global trading order has been thrown into a bucket and mashed with arbitrary standards.
These tariffs calculate only trading in goods, not services. That typically favours the US, which exports many services and imports many goods. So now trade is only in goods and not services? How convenient.
Why does the formula purport to identify each country’s trade deficit with the US, divide it by half, and then impose a tariff with a 10 per cent minimum, even if there’s an American trade surplus? Everyone must be smacked, apparently. It’s so arbitrary that changing the years, currently 2024-2025 – from which statistics are usually drawn – to, say, 2020-2025, would often significantly transform the outcome.
Leaving aside supporters of the domestic and international messages supposedly being sent, virtually everyone else is unanimous that none of this makes sense. It echoes former president Richard Nixon’s “madman theory” of diplomacy, making interlocutors believe they are facing an irrational, even insane, US president. Mr Trump might be trying to apply that approach to global trading arrangements, including with allies.
There’s widespread concern about a potential US recession signalled by a negative “bear” stock market. But the current atmosphere is arguably more reminiscent of the comedy/horror film Cocaine Bear, in which a monstrous animal goes on a drug-fuelled killing spree.
Mr Trump’s defenders insist he wants to revive US manufacturing and prevent anyone taking advantage of American generosity. But the imposition of tariffs on countries already running their own deficits with the US renders such claims incoherent.
If Mr Trump is positioning for negotiations, he should at least make his goals intelligible. He has explained that, “to me a deficit is a loss. We’re going to have surpluses or at least going to be breaking even”. But this, too, makes little sense. A trade deficit between states doesn’t necessarily constitute a loss – except from a particularly narrow-minded 17th-century perspective. It’s not a loss to spend for a purpose, such as to manufacture products. It’s just doing business.
Mr Trump keeps repeating that the new tariffs will repair the US budget deficit, with lots of money coming into the country from outside. He still appears convinced that someone other than Americans will pay these tariffs. No one seems to have successfully explained to him that tariffs are taxes on imported goods paid by US companies and consumers, so they can’t alter the amount of money coming into the US treasury from the outside.
Recently in these pages, I tried to outline what Mr Trump’s closest advisers envisioned. But the new tariffs bear little resemblance to what they suggested, so their musings provide little guidance.
Yet several things seem clear enough.
Global trade will never be the same and invaluable trust is, perhaps irreparably, shattered. After the Covid-19 pandemic, the economies of all advanced countries went into tailspins. Under former president Joe Biden, the US pulled off an apparently miraculous “soft landing”. When Mr Trump regained office, he inherited virtually full employment, inflation consistently below 3 per cent with a similar rate of growth in gross domestic product, and a thriving investment environment.
He has taken a sledgehammer to all that, and he concedes there may now be a recession. Indeed, Americans may even re-experience “stagflation”, as in the late 1970s: stagnated GDP growth coupling with soaring inflation. It’s the worst of both worlds, and it would be a man-made disaster and self-inflicted catastrophe of epic proportions.
The US national debt is certainly a significant problem that needs addressing. Much of the annual budget goes to servicing this debt, and, over the long run, that could threaten national solvency. But there are any number of rational, sensible approaches to this challenge.
Mr Trump’s supporters implausibly promise that, under his leadership, the US will grow its way out of debt. It is very hard to imagine that a global trade war will produce ballooning GDP growth.
Instead, even its supporters acknowledge that the tariffs will involve an unspecified period of constriction and pain before the “boom as never before”. American voters are already demonstrating some buyer’s remorse signalled by a stunning blowout in an otherwise relatively obscure Wisconsin Supreme Court election. The Democratic-backed candidate overwhelmingly defeated the Republican, despite more than $25 million in campaign money from Mr Trump’s attack dog against federal civil service workers, billionaire Elon Musk.
Mr Trump is either sprinting to the rescue or on a wild rampage, depending on who you ask, but either way he probably doesn’t have much time. The 2026 midterms may devastate the Republicans, given what everyone agrees is about to hit the US economy.
This is unquestionably one of the most audacious, and arguably reckless, gambles in modern history. Mr Trump inherited, to all appearances, a stable, relatively well-functioning US economy and global trading system. There wasn’t a hint of crisis. Yet he is risking the mother of all self-inflicted wounds.
His 90-day reprieve could be the first pivot in a long, slow turnaround, even on China. It had better be. Otherwise, Mr Trump could plunge the world – and especially his own country – into an abyss.
Either Mr Trump alone can see around corners into spectacular economic expressways that elude everyone else. Or he’s driving us all over a cliff because it’s gloriously thrilling and magnificent to throw the full, unfettered gears of US presidential power into overdrive, gun it, and see what happens.
