President Trump’s ‘liberation day’ tariffs were both bigger and broader than many observers expected. It is now time to understand that the moves – the largest single imposition of tariffs in at least 70 years – are not a one-off or a negotiating tactic.
Beyond the chaos, Trump’s key advisers have a set of theories that they believe will transform politics and economics at home, as well as the foundations of US power abroad. In their telling, a mix of tariffs and negotiations can help the US dramatically increase manufacturing employment, cover a significant fraction of government spending, and reserve security alliances for countries that balance trade and exchange rates with Washington.
Although this worldview has thus far failed to convince everyone in Trump’s administration – and many mainstream economists – its seductive promise that the US can have both power and freedom of action, at home and abroad, likely means that it is here to stay.
The intellectual underpinnings of MAGA economics
Trumpian economics is grounded in two critiques of the existing global trade system that sound sensible to non-experts while driving trade wonks to madness. Trump used both to great effect in his remarks launching the new policies.
The first critique is that trading partners’ practices are unfair. Trump argues that US businesses, workers and security all suffer because foreign countries are breaking international rules or taking advantage of lax rules negotiated by his predecessors.
The result, according to Trump, is that businesses and workers cannot compete and industries essential to US security are threatened. Notably, here Trump is pushing on a strong view among Republicans, and an increasingly close divide among Democrats, that increased trade has cost Americans more than it has gained them.
His unfairness case has two sub-arguments. First, that the policies of the Chinese government, from extensive subsidies for exporting industries to intellectual property theft, pose a unique and existential threat to the US economy, security, workers and way of life. This view of Beijing as fundamentally undercutting the rules of the game is now broadly held across Washington.
The second is that US allies owe the US balanced trade in exchange for security guarantees such as NATO membership. ‘In many cases, the friend is worse than the foe’, Trump said as he announced the new tariffs. This added pressure on allies completely overturns a standard tool in the US security toolbox – offering access to the US market in exchange for countries making closer security arrangements.
It is also utterly antithetical to the letter and spirit of existing trade rules, which foresaw the global economy as a place where different systems could meet on equal footing – and assumed that liberal democracies would win out economically. Members of Trump’s team are now saying those assumptions were wrong or just irrelevant, and countries that eliminate their trade surpluses should be closer allies than those that do not.
The second critique is that trade deficits are bad in themselves. This argument has not figured in US policy circles in decades. Mainstream economists argue that persistent US trade deficits are closely linked to the US dollar’s position as the global reserve currency – or even beneficial as they are mirrored by massive global purchases of dollars and investments in the US.
Leading figures around Trump, however, believe differently. Robert Lighthizer, who served as US trade representative in Trump’s first term, argues that the deficits have transferred ‘some $20 trillion of our wealth (in the form of equity in our companies, debt and real estate) to the governments and citizens of the exploiting countries’ over the past 20 years. He further argues that the decline of manufacturing jobs – specifically for men – must be reversed to improve the national character. In an electorate sharply divided by gender, arguments about male dignity are falling on receptive ears, economic theories notwithstanding.
The longer-term vision
The sheer number of tariff possibilities thrown around by Trump, and his penchant for modifying, delaying or removing them, has led many observers to argue that there is no larger plan behind them – or that the negotiating leverage is the point, rather than any particular outcome. However, this misses the extent to which key members of his team spent recent years gaming out longer-term scenarios in which US tariffs reshape the domestic economy, the federal budget and global economic architecture.
Trump has promised his voters that he will bring manufacturing jobs and industries back to the US. He sees tariffs helping him achieve this in two ways: supporting US manufacturers by making imports more expensive and encouraging foreign manufacturers to set up shop in the US.
But this objective is somewhat in tension with his pledge that tariffs will cover the costs of corporate tax cuts, reduce the federal budget deficit and eventually replace the income tax. If domestic manufacturing replaces imports that means tariffs are no longer being paid on imports and thus that revenue will not materialize. Likewise, if the dollar falls against other currencies (another goal of the administration that is shared by important bipartisan constituencies), imports become more expensive and tariffs raise less revenue.
