Is Trump right on tariffs? Will he bring it off?

President Trump announced a 90 day pause on reciprocal tariffs last week for all countires except Chiina. Analysts were quick to construe it as a big defeat for Trump handed out by the bond market. A selloff of bonds and rising bond market yields at a time when equities were also being sold portended a major financial crisi, they say, causing Trump to back off.

Sorry, it doesn't mean a retreat from Trump's basic position on tariffs, namely, that tariffs are needed to protect the US economy from "unfair" trade where countries rig their currencies, have higher tariff barriers than the US, use non-tariff barriers in a variety of ways, provide massive subsidies to domestic companies, etc. Nor has Trump resiled from his position that America's chronic trade deficits are unsustainable.

Trump has a reasoned position on tariffs, one that reflects his convictions of several decades. He will not give up on them. He is likely to calibrate tariffs in a way that will not cause too much turmoil in the financial markets.

I explain some of the popular perceptions about the ongoing tariff war in my recent BS article, Trump tariffs: who will have the last laugh?

Trump tariffs: Who will have the last laugh?

T T Ram Mohan

Mr Trump may temper his approach from time to time, but to think that he will change his basic philosophy is delusional

US President Donald Trump’s tariff policy caused stock markets to tumble and sent shock waves through the world’s political capitals. Commentators warned of stagflation in the US and a collapse of global economic growth.  Mr Trump has since announced a 90-day pause on reciprocal tariffs on all countries except China, which faces a tariff of 125 per cent. 

However, the baseline tariff of 10 per cent remains. So do the tariffs of 25 per cent on aluminium and steel imports, and on the 25 per cent tariff on the automobile sector.  The relief over the pause on reciprocal tariffs is understandable. But there’s no getting away from the fact that the baseline tariff of 10 per cent is way above America’s earlier average tariff rate of 2.8 per cent.   

The period ahead promises an answer to a most fascinating question. In matters of economic policy, what matters more- the instinct of the charismatic politician or the theories of academics? Will Mr Trump prevail in his attempt to restore manufacturing to the US and reduce America’s chronic trade deficits? Or will he leave behind a legacy of economic ruin?

In addressing these questions, it’s useful to examine some of the propositions one hears in public discourse.

i.Mr Trump is just a crude, bullying politician who acts on impulse and not through rigorous reasoning. He understands little of economics. 

Crudity and bullying are hardly novelties in a President of the United States. The notion that Mr Trump is an uninformed person is ridiculous. You don’t become a billionaire and President of the United States twice –the first time without any experience in politics- by being a country bumpkin. 

Economists Arthur Laffer and Stephen Moore, who have been advisors to Mr Trump during his two presidential bids, have together authored a book, The Trump economic miracle and the plan to unleash prosperity again (2024). They write, “Trump is not the person the media has so unfairly portrayed. He is certainly not the villain, conniving and intellectually shallow man that his adversaries have portrayed him as since the day he first announced he was running for president back in 2015.” In another place, they remark, “Trump has what we call ‘Street Smart Economics’”. Mr Trump’s detractors will wince, but it’s good to know that some very bright people have a different view.

Mr Trump has an impressive economic team. His Treasury Secretary, Scott Bessent, is a legendary fund manager reputed  for his grasp of the macroeconomy- he was a member of the Soros team that betted against the pound in 1992. Peter Navarro, who advises Mr Trump on trade, is a Harvard PhD and a former professor at the University of California (Irvine). Stephen Miran, chairman of the Council of Economic Advisers, is also a Harvard PhD with experience in the financial markets. Mr Trump will not lack sound economic advice.

   ii.            Mr Trump’s tariffs go against the principle of free trade that has ushered in growth and prosperity, especially in the post-World War II  (WWII) world.

Mr Trump believes that free trade is something of a myth- and many economists would agree. The great economic powers of the 19th century, including the US and Britain, achieved growth, not through free trade, but behind protectionist walls. They pushed the idea of free trade when they needed to access the markets of other nations. 

The post-WWII world is not quite one when where firms compete on their own on a level playing field. What we have had is “industrial policy”, which includes support to domestic firms through subsidies and non-tariff barriers, not just tariffs. The US funds research at universities that leads on to breakthrough innovations, such as the Internet. American firms benefit at public cost. The East Asian Tigers grew on the back of targeted support to particular firms and sectors. China remains a leading exponent of industrial policy even today.  Free trade is not fair trade, as Mr Trump is fond of saying.  

iii.            If the version of free trade we have had in the past decades has brought prosperity to America, why disrupt it?  

Numbers such as the gross domestic product (GDP) growth rate or increase in per capita income can be deceptive. They don’t capture the fact that the benefits of so-called free trade are unevenly distributed. That is certainly true of the US. 

 Robert Lighthizer, who led the assault on free trade in Mr Trump’s first term, says that in the 16 years before China joined the World Trade Organization, real median household income in the United States (measured in 2019 dollars) rose from $53,337 in 1984 to $63,292 in 2000. Thereafter, real median household income fell below the 2000 level and remained it in every year until 2016, when Mr Trump first became President. Even in 2016, it only reached $63,683 (an increase of less than $400 in 16 years).  The US economy grew but the average person lost out. 

When Mr Trump stepped down in 2020, median real family income was up by 6.8 per cent. Economists ascribe the increase to Mr Trump’s notable initiatives such as tariffs on Chinese imports, the renegotiation of NAFTA and the tax cuts of 2017. Together, Mr Lighthizer says, Mr Trump’s initiatives caused thousands of manufacturing jobs to return in his first term. That is the source of Mr Trump’s appeal to the American middle class, and it explains his electoral triumphs in 2016 and 2024. 

iv.            The tariffs announced by Mr Trump are a negotiating tactic and will be rolled back once America’s partners enter into negotiations. 

Mr Trump has indicated that he is open to negotiating reciprocal tariffs with America’s trade partners. The 90-day pause is intended for that purpose. However, the baseline tariff of 10 per cent is a different matter altogether. Mr Trump thinks American needs manufacturing not just for creating jobs for ordinary Americans but for purposes of national security. It cannot afford to depend on imports of pharmaceuticals, ships, steel, aluminium, semiconductors. That’s why the baseline tariff and tariffs on aluminium, steel and automobiles stay. Tariffs on other products, such as pharmaceuticals, may well follow. 

 Mr Trump views tariffs as a means of raising revenues with which he can reduce taxes at home. All taxes are a form of inefficiency, but tariffs, some economists argue, are less harmful than taxes on corporations and individuals. Mr Trump sees tariffs as penalising other nations while relieving the burden on American taxpayers. 

 In sum, tariffs are integral to Mr Trump’s vision for the US economy. Mr Trump may temper his approach from time to time in response to convulsions in the financial markets. But to think that he will change his basic philosophy is delusional.