By Michael Roberts
Over the weekend President Donald Trump announced a batch of tariff increases on US imports of goods from the closest partners of US trade, Canada and Mexico. He proposed a 25% rise in tariffs (with a lower rate for oil imports from Canada). Then he announced a 10% rise in tariffs on all Chinese imports. Thus Trump started his new trade war.
And yet as soon as he started it, he stepped back. Trump announced that he was postponing the tariff increases with Canada and Mexico for a month because their governments had agreed to do something about the smuggling of fentanyl drugs into the US, which he claimed was killing 200,000 Americans every year. This figure is nonsense, of course, because under 100,000 Americans die from drug overdoses from all chemicals each year. As it is, the smuggling of fentanyl over the US-Canadian border is miniscule – certainly compared to the drug cartel operations on the Mexican border. Moreover, as Mexican President Sheinbaum pointed out to Trump, the cartels are able to operate their violent methods because of gun running operated by Americans in the US.
The Canadian and Mexican governments rushed to do a deal with Trump, promising batches of troops on the borders to stop trafficking and more joint anti-drug forces with the US etc. This seems to be enough for Trump to postpone his tariff move, although the tariffs on China will go ahead (no drugs there?). Also small package imports that have been free of import tax up to now will be brought into the customs system – and that will hit internet online purchases made by Americans for goods from abroad.
Is there a coherent policy in the tariffs?
So what are we to learn from these shenanigans? Are the threatened tariff increases merely being used to browbeat other countries into concessions to Trump? Or is there a coherent economy policy in all this?
There is method in this madness. On the external front, Trump aims to make America ‘great again’ by raising the cost of importing foreign goods for American companies and households and so reduce demand and the huge trade deficit that the US currently runs with the rest of the world. He wants to reduce that and force foreign companies to invest and operate within the US rather than export to it.
He reckons this will boost incomes and jobs for Americans. And with the extra tariff revenues, the government will have sufficient funds to cut income taxes and corporate profit taxes to the bone (indeed, Trump says he wants to abolish income tax altogether). If this is the plan, then the tariffs will eventually be applied fully, with China probably getting an even bigger increase.
The impact on the US economy
If Trump follows through with his protectionist tariff measures, what will be the impact on trade and the US economy? The current planned tariffs would affect $1.3trn worth of US trade, with 43% of all US imports affected.
The accumulated increases in tariffs since Trump first launched them in his 2016-20 term would reach levels not seen since 1969, just before the international tariff reductions of GATT and the WTO during the ‘globalisation’ decades of the end of the 20th century.
In effect, tariffs are a tax on imported goods, which the US treasury can pocket. A 25% tariff on Canada and Mexico would raise costs for US automakers. This tariff is set to add up to $3,000 to the price of some of the 16 million cars sold in the US each year. Food costs would rise as well, with Mexico supplying over 60% of fresh produce to the US.
Declaration of tariffs has already triggered retaliation
The precise impact will depend on how long the tariffs stay in place and if other countries retaliate. Already China has announced a series of counter-measures. China’s commerce ministry said the country would impose export controls on tungsten, tellurium, ruthenium, molybdenum and ruthenium-related items; essential components in tech products. China is also planning a 15% levy on liquefied natural gas.
Within the US, if the tariff increases are followed through, domestic prices will rise and there will be upward pressure on inflation. There is a counteracting factor. If the US dollar increases in strength against other trading currencies, then the dollar cost of imports will be lower, reducing the price impact of the import tariffs. But most likely, the US inflation rate will head upwards. Inflation is already starting to rise again. Tariff increases will send the rate above 3% in 2025.
Forecasts of contraction in the economy
A US ‘think-tank’, the Tax Policy Center, estimates that the average American household’s after-tax income will fall 1%, or $930, by 2026 if the tariffs are fully implemented. That’s because consumer prices would rise by 0.7% and real GDP would lose 0.4%. The Peterson Institute for International Economics estimates tariffs will leave the US economy about 0.25% smaller next year and 0.1% in the long run. “The policies he’s pursuing have a high risk of inflation,” said Adam Posen, director of the Peterson Institute for International Economics think-tank. “It seems that promoting manufacturing and beating up US trade partners are goals that, for Trump, are a higher priority than the purchasing power of the working class.”
Trump claims that the extra revenue from tariffs would be used to cut taxes and this supposedly would help household incomes. But estimates of any extra revenue from tariffs are put at just $150bn a year. And income tax cuts will mainly benefit the higher income earners, while rising inflation will hit the lower income groups.
If the impact of the tariff increases were to reduce economic growth, then the so-called relative success of the US economy compared to other major economies would be in jeopardy. US real GDP growth has already slowed at the end of 2024 to a 2.3% annualised pace. The tariff measures would take that growth rate lower this year and next.
So as Trump imposes tariffs, US inflation is picking up and output growth is slowing down.
The impact of the tariffs on Canada and Mexico
Those countries subject to Trump’s tariff increases will be hit hard. The Peterson Institute reckons that “for the duration of the second Trump administration, US GDP would be around $200 billion lower than it would have been without the tariffs. Canada would lose $100 billion off a much smaller economy, and at its peak, the tariff would reduce the size of the Mexican economy by 2 percent relative to its baseline forecast.” Indeed, JP Morgan economists reckon these measures could push both Canada (already weak) and Mexico into an outright recession.
The impact of the tariffs on China
The impact on China will depend of the size of the tariff increases. At the moment, it’s only 10% but Trump has said it will eventually be 60%. If the US imposed an additional 10 percent tariff on China and China responded in kind, US GDP would be $55 billion less over the four years of the second Trump administration, and $128 billion less in China. Inflation would increase 20 basis points in the US, and after an initial dip, 30 basis points in China.
These estimates assume that the tariff measures will be implemented. So far, Trump has postponed their implementation as he continues his ‘bargaining’ tactics with his trading ‘partners’. But remember, he also plans to raise tariffs for all EU imports – and that is still to come.
Recent recovery in world trade growth will be stalled
Overall, increased tariffs and other protectionist measures by all sides in retaliation will weaken world trade and economic growth. World trade growth showed some recovery in 2024 after contracting in 2023. Trump’s tariffs will stop that recovery in its tracks.
US protectionism in the 1930s
In the 1930s, the attempt of the US to ‘protect’ its industrial base with the Smoot-Hawley tariffs only led to a further contraction in output as part of the Great Depression that enveloped North America, Europe and Japan. Big business and their economists condemned the Smoot-Hawley measures and campaigned vociferously against them being implemented. Henry Ford tried to convince the then President Hoover to veto the measures calling them “an economic stupidity”. Similar words are now coming from the voice of big business and finance, the Wall Street journal, which called Trump’s tariffs “the dumbest trade war in history.”
The Great Depression of the 1930s was not caused by the protectionist trade war that the US provoked in 1930, but the tariffs then only added force to the global contraction, as it became ‘every country for itself’. Between the years 1929 and 1934, global trade fell by approximately 66% as countries worldwide implemented retaliatory trade measures.
Trump implementing neo-liberal policies for the domestic economy
While Trump has broken with the neo-liberal policies of ‘globalisation’ and free trade in order to ‘make America great again’ at the expense of the rest of the world, he has not dropped neo-liberal policies for the domestic economy. Taxes will be cut for big business and the rich, but also the aim will be to reduce the federal government debt and cut public spending (except for arms, of course). This year, the US budget deficit will be almost $2 trillion, of which more than half is net interest – about as much as America spends on its military. Total government debt outstanding now stands at $30.2 trillion or 99 per cent of GDP. America’s debt as a percentage of GDP will soon exceed the second World War peak. The Congressional Budget Office estimates that by 2034, US governmental debt will exceed $50 trillion – 122.4 per cent of GDP. The US will be spending $1.7 trillion a year on interest alone.
Trump has let Elon Musk loose to massacre federal government spending, close down departments (possibly closing the Department of Education) and sack thousands of public employees to ‘reduce wastage’. The problem for Musk is that most of the ‘wastage’ and spending is on ‘defense’, but no doubt he will plough on reducing civilian services and even ‘entitlement programs’ like Medicare.
Trump aims to ‘privatise’ as much of government as he can. “We encourage you to find a job in the private sector as soon as you would like to do so,” the Trump administration’s Office of Personnel Management’s said. As Trump sees it, the public sector is unproductive, but not the finance sector, of course. “The way to greater American prosperity is encouraging people to move from lower productivity jobs in the public sector to higher productivity jobs in the private sector.” – these great jobs were not identified. Moreover, if the private sector stops growing as the trade war intensifies, those higher productivity jobs may not materialise anyway.
From the blog of Michael Roberts. The original, with all charts and hyperlinks, can be found here.
The image at the top of the article shows President Donald Trump signing post-inaugural documents on 20 January 2025. The image is in the public domain from the facebook account of the Office of the Speaker, Mike Johnson and is available on wikipedia commons.
