Donald Trump campaigned last year promising to impose tariffs at levels the United States had not seen in more than a century. So his rollout this week of a massive tariff package that repudiates eighty years of U.S economic policy falls under the heading “Promises Made, Promises Kept.” That, however, is not necessarily a good thing. Here are five things to know about the Trump tariffs.
1. Trump’s announcement is a major shock to the global economy. Assuming Trump does not reverse course in the next few days or weeks, which is possible given his track record, U.S. tariff rates will be higher than at any time in the past century. Put differently, Trump’s tariff schedule is higher than the rates imposed by the infamous 1930 Smoot-Hawley Tariff Act. As you might recall from high school U.S. history class, Smoot-Hawley’s tariffs deepened the Great Depression. At the same time, tariffs are taxes paid by U.S. importers—not foreigners, as Trump repeatedly and wrongly claims. J.P. Morgan’s research team says that Trump’s tariff package constitutes the single largest federal tax hike since Lyndon Johnson was president. That will create headwinds for the U.S. economy and raise prices for consumers.
2. The first shoe has dropped, but not the last. The focus since Trump rolled out his tariff package has been on the stock market’s reaction. In a word, it has been ugly. U.S. stocks yesterday had their worst single day since 2020. The NASDAQ was down nearly 6 percent; the S&P 500 was down nearly 5 percent. But things could get much worse. Trump’s announcement is just the first step in what will be a multi-step drama. Major U.S. trading partners will certainly retaliate. Just this morning, China imposed a 34 percent tariff on all imports from the United States. This retaliation will intensify the market’s woes and could usher in a global recession—and possibly worse. The irony is that the United States built the global economic order that Trump is intent on tearing down in a bid to prevent the very turmoil that Trump’s beggar-thy-neighbor policies could produce. As the saying goes: “Those who do not learn from history….”
3. Trump’s tariffs are not reciprocal. Trump claims he is just doing to other countries what they have done to the United States. He isn’t. It’s easy to see why he beats the reciprocity drum. “My tariffs will match your tariffs” sounds fair. (Pure reciprocity actually makes it hard to negotiate trade deals and can leave you worse off than if you allow for asymmetric concessions. But that’s another matter.) Trump, however, did not match other countries tariff for tariff or trade barrier for trade barrier. Instead, his tariffs are based on a different, and crude, calculation: the size of the trade deficit the United States runs in goods with a country divided by the total imported goods from that country divided by two. That calculation is why Israel was hit with 17 percent tariffs even though it eliminated all tariffs on U.S. goods the day before Trump’s announcement. It is also why the European Union was hit with 20 percent tariffs even though its effective trade-weighted tariff on U.S. goods is less than three percent.
4. Trump’s goal in imposing tariffs remains unclear. Trump argued in his Rose Garden remarks that his tariffs would force firms to relocate production to the United States and create American jobs. That implies that the tariffs will stay in place. Indeed, White House officials stressed, and top trade adviser Peter Navarro put it: “This is not a negotiation.” Yet by late yesterday, Trump was saying the opposite: “The tariffs give us great power to negotiate. They always have.” He did not say what he would be asking for, or what lifting tariffs would mean for his promise to rebuild U.S. manufacturing.
5. The legal basis for Trump’s tariffs is questionable. You might recall from high school civics that the Constitution gives Congress the power to “regulate Commerce with foreign Nations.” Over the past ninety years, Congress has delegated some of that authority to the president. Congress has done so because it reasonably judged that presidents need flexibility to address unfair trade practices and to respond to national emergencies. In imposing tariffs this week, Trump leaned on the 1977 International Emergency Economic Powers Act (IEEPA). That act authorizes presidents to regulate imports during a national emergency. Congress’s intent in passing IEEPA was not to transfer its tariff power to the president. To the contrary, it was trying to rein in presidential discretion that it thought that President Richard Nixon had abused under a predecessor statute known as the Trading With the Enemies Act. A glaring weakness of IEEPA is that it does not define what constitutes a national emergency. If a national emergency is whatever a president says it is, then Congress unintentionally amended—and undercut—the constitutional structure. That, of course, is not something that a statute can, in theory, do. So expect some injured parties to challenge the constitutionality of Trump’s tariffs. The question is how the courts will react. They have a long—though not unbroken—tradition of deferring to presidents who invoke “national security” as their rationale for acting.
All in all, the best advice is to buckle up. Turbulence lies ahead. What Trump hailed as “Liberation Day” could easily turn out to be what The Economist called “Ruination Day” and investors called “Obliteration Day.”
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