Tariff wars: is there method in Trump’s madness?
Ahead of a special discussion in May for AoI associate and paid subscribers, Rob Lyons looks at the logic and impact of the White House’s new trade war.
Ever since Donald Trump finally announced his plan for tariffs – ‘Liberation Day’ - in the White House Rose Garden on 2 April, the news headlines have been dominated by the fallout. Stock markets around the world have plunged, global supply chains have been called into question and other world leaders have been sweating on how the hell to respond. News today that China is imposing an 84% tariff on US goods in response to America’s 104% tariff shows how this trade war is escalating.
Most mainstream economists are pulling their hair out over what is happening. Trade is good because we can sell things we are good at making in exchange for things that other people make. That is how markets work. We benefit from specialising and then exchange the money we make from that productive effort on the fruits of other people’s specialised productive effort – and that applies both domestically and internationally. The fewer barriers there are to making these exchanges, the better for increasing economic growth and our standard of living. Tariffs are simply taxes placed on trade with people outside our own country.
Given that the world economy has not been in the rudest of health since the financial crisis of 2008 and the Covid lockdowns, more trouble seems like a terrible idea. No wonder stock markets and bond markets have reacted negatively and growth forecasts have been downgraded.
But Trump doesn’t see trade as automatically beneficial. Rather, he believes that if any country runs a substantial trade surplus with America, the terms of that trade must be unfair – a war on American jobs. Even with countries that have tariff-free trade with America, if there is an imbalance, there must be something else going on, like non-tariff barriers (like Europe refusing to buy American chicken on health and welfare grounds), unfairly subsidised production or currency manipulation to keep the other country’s exports artificially cheap. Tariffs are a necessary evil to protect jobs.
The Institute of Economic Affairs (IEA) has criticised this ‘zero sum’ approach to trade. Even if a few jobs are reshored to America, that comes at an enormous price for every other consumer/worker:
‘An illustrative case study is the impact of Trump’s 2018 tariffs on washing machines. Research from the University of Chicago shows tariffs imposed by Trump on washing machines in 2018 raised $82 million for the United States Treasury while causing consumer prices to rise by $1.5 billion overall. Yes, foreign exporters affected by the tariffs lost out, but so did Americans. Trump’s tariffs didn’t redistribute from foreign producers to American producers, they just destroyed wealth… Even where there were some small benefits for some American workers, they came at a much higher cost for the wider population. 1,800 jobs reshored to the United States as a result of the 2018 tariffs cost an average of $817,000 each.’
And that doesn’t even take into account the tit-for-tat tariffs that inevitably follow. As the IEA notes: ‘During Trump’s 2018-19 trade war, American farmers lost export markets in Asia and the taxpayer ended up footing the $12 billion bill to bail them out. In this case, American consumers got hit by higher prices, foreign exporters and domestic producers suffered, and taxpayers were forced to support uncompetitive farmers. A lose-lose-lose-lose.’
But Trump is not alone in thinking that tariffs are a good idea. While we may have had more and more free trade, they argue, it hasn’t been fair trade. Countries with low wages (or even slave labour, in the case of China) have been destroying domestic industries and we’ve been all too happy to binge on the cheap goods that have resulted. At some point, we may need to pay more to protect production at home.
In the UK, the Social Democratic Party (SDP) has been at the forefront of arguing that tariffs have a place. As SDP leader William Clouston noted in the Spectator, ‘while international trade undoubtedly boosts total production and global welfare it’s a mistake to advocate total free trade at all times and in all places. Economic history shows that at certain times forms of industrial protectionism can benefit a nation.’
Clouston continues: ‘Trump is facing the fact that the United States has a massive trade problem which is making American citizens poorer and strategically weakening the country. The US runs colossal trade deficits year after year. In 2024 it was $1.2 trillion. Some economic liberals think it doesn’t matter. This is completely wrong. Americans – like any other nation – can pay for imports in three ways: by exporting things, by selling assets, or by issuing debt. Running a huge trade deficit means selling assets and raising debt. This isn’t a theory – it’s just mathematics. Debt-fuelled consumption is not prosperity. It’s the reverse, a form of instant gratification.’
Others who wish to explain Trump’s thinking point to geopolitical issues. On her Substack, economist Catherine McBride notes: ‘The US has a massive geostrategic problem – it is losing control of the means of production of everything from pharmaceutical ingredients to shipbuilding for transport and defence. As Sun Tzu advises: China is close to winning the battle before it has started. That is why Trump's first tariff increases during this administration were 25% tariffs on steel and aluminium, and many products made with them. These were not blanket tariffs as the apoplectic commentators like to imagine. If they took the time to go through the list of products subject to the tariffs by 10-digit tariff code, they would see an obvious pattern emerging. Most of these products are produced in and exported by China.’
McBride also notes that innovation comes from production. If you’re making things, you have an incentive to improve both the products themselves and how you make them. She argues that we desperately need to ‘on-shore’ production and to strike a trade deal with the US as soon as possible. If nothing else, they provide leverage for Trump to negotiate better terms of trade with Europe, Japan and many other countries.
Neither Clouston nor McBride are against trade – they recognise it is extremely valuable. In a recent debate organised by the SDP, McBride points to the mutual benefit we gain from textile production in Bangladesh. We get much more affordable clothes and Bangladeshis have been lifted out of extreme poverty.
It is true that having no domestic (or ‘friendly neighbour’) production of important goods can cause problems. Just look at the bunfight that occurred in the spring of 2020 when every country in the world suddenly needed a lot more personal protective equipment (PPE) for healthcare workers. With little domestic production, all eyes were on China to ramp up production. Supplies arrived eventually, but what there were to be a major conflict – could we rely on supplies of parts needed for weapons, for example?
But there are easier ways to protect selected industries than to impose tariffs. Indeed, just because imports become more expensive does not mean that domestic production will flourish. Tariffs may just make everyone poorer.
And there are many other things that could be done to boost production at home. A good starting point for the UK would be to tackle the high energy costs businesses face thanks to Net Zero policies – surely a significant factor in the seemingly imminent closure of the steel works at Scunthorpe. We could prioritise domestic production of oil and gas – rather than pouring concrete into potentially invaluable fracking wells. We should stop spending a fortune subsidising renewables. We could have a bonfire of domestic regulations to make it easier to produce everything in the UK.
Tariffs seem like a blunt instrument to achieve these goals and could exacerbate international tensions. Trump’s tariff blitz has already soured relations with supposed partners like the EU and Canada, while the relative ‘cold war’ between America and China is that bit closer to getting a lot hotter. On the other hand, this situation could also lead other countries remaking the case for free trade and actually doing something about it. Maybe the big question then is: what happens next?
The Academy of Ideas will be discussing the purpose and impact of tariffs at a special online event on Wednesday 28 May for our paid Substack subscribers and Academy of Ideas associates. It will be introduced by economist and author Phil Mullan, and will be a great opportunity to take stock and raise questions and comments. If you would like to take part and are not already a paid subscriber or an AoI associate, sign up as a paid subscriber to this Substack using the button below or become an Academy of Ideas associate here.
Well explained thank you.