Trump is winning his trade war. What will that mean for the economy?

Observer

6 days ago

WASHINGTON — Over the last six months, the United States has left behind the global trade order that persisted for decades in favor of something drastically different and largely untested.
Formidable economies such as the European Union and Japan have abruptly made peace with higher tariffs on their exports, acquiescing to President Donald Trump's demands in order to avoid damaging trade wars and to coax even steeper U.S. duties down just a little bit.
As major economies fall in line to sign agreements that include the highest tariffs in modern history, the president's vision for global trade is rapidly being realized. That new normal uses the U.S. economy as leverage, with other countries accepting tariffs of 15% to 20% to do business with the United States. Even higher rates will be imposed on exports of critical products, including steel, or on certain adversarial countries, such as China.
The outcome has seemingly proved Trump right that his tariff threats are a powerful bargaining tool. And the muted market reaction to 15% tariffs on Japan and the EU suggests that the panic many expected from his earlier, more extreme levies may not materialize.
Nigel Green, the CEO of deVere Group, a global financial advisory, called the EU deal 'a reset, not a resolution.'
'A year ago, markets would have recoiled,' he said. 'Today, they're simply grateful it wasn't worse.'
While the president's plan for global trade now looks like a political victory, whether it will be an economic success remains much more debatable. The Trump administration has essentially embarked on a vast economic experiment, with tariff levels not seen in the United States since the early 20th century. The rates Trump is asking other countries to agree to are typically used by poor economies trying to protect nascent industries, not by industrial powerhouses like the United States.
Trump and his supporters argue that higher tariffs will encourage many more companies to produce in the United States, creating U.S. factory jobs while having minimal impact on businesses and consumers. The president also insists that foreign governments, not U.S. businesses or consumers, will pay the tariffs, despite long-standing research that shows Americans ultimately bear the brunt.
Clyde Prestowitz, a former U.S. government official and the founder of the Economic Strategy Institute, said Trump's America had 'a lot of similarities' with the United States before 1946 and other countries, such as China, that built their economies with so-called mercantilist policies, using protectionism to try to amass trade surpluses and wealth.
'It worked for England, the U.S., France, Benelux, Germany, Japan, Korea and all others who became rich,' Prestowitz said.
But many economists continue to predict that Trump's tariffs will result in higher prices both for businesses that import products and for the consumers who buy them. They expect that to slow the economy and backfire, at least somewhat, on the president's efforts to rev up manufacturing.
In recent weeks, automakers such as General Motors and Volkswagen have reported hits of more than $1 billion from tariffs.
'What's lost in translation is even as these deals are being cut, the eventual tariff rate is likely to peak around 20%, which is up a lot from below 3,' said Diane Swonk, the chief economist at KPMG.
While people expected the economic effect of tariffs to be 'instantaneous,' Swonk said, their rollout has been uneven, with many stops and starts, and it is taking time for the impact to work through supply chains. Economic research suggests that it takes six to 18 months for the full effects of tariffs to show up, she said, and that Trump's first-term trade war with China, which began in 2018, did not lead to weakness in manufacturing until the next year.
Brad Setser, an economist at the Council on Foreign Relations, said he believed the tariffs were 'big enough that they're going to slow the economy' and 'a meaningful change in policy, one that I think most Americans will feel.'
But he cautioned that the tariffs were probably not significant enough to push the U.S. economy into a recession, and that price increases for consumers would be 'big enough to be noticeable but not a giant shock.' Buyers of small appliances, clothing and toys are likely to see an impact by this fall, given the tariffs of 20% to 30% on many Asian countries that make those goods, Setser said.
'It's a policy that in most models would slow the economy, not stop the economy from growing,' he said.
Some analysts argued that recent deal announcements have been positive because they have averted, at least for now, the likelihood of trade wars with major trading partners, but some say the agreements have limited economic benefits beyond that.
Stephen Olson, a former U.S. trade negotiator, called the U.S.-EU deal 'both highly protectionist and unapologetically mercantilist' and said the EU had 'played a bad hand about as well as it could have.'
'The EU sees value in healthy, robust, and open North Atlantic trade relations. President Trump does not,' said Olson, a senior visiting fellow at the ISEAS–Yusof Ishak Institute, a research institution in Singapore. He added, 'In assessing what we know about the agreement, it is fair to say that it could have been worse, but that is hardly a ringing endorsement.'
Trump's efforts to redraw the global trade map are not yet done. His administration has yet to clarify what tariff rates will apply to dozens of countries as of Friday, its deadline for reaching deals. According to tracking by Goldman Sachs, trading partners accounting for 56% of U.S. imports — including Canada, Mexico, South Korea, Brazil, and India — have not yet signed preliminary agreements.
Analysts said it was also possible that the deals Trump has struck could unravel quickly, given his penchant for making new tariff threats and renegotiating agreements that even he has signed. U.S. officials have signaled that they expect to issue new tariffs on semiconductors and pharmaceuticals in the next two to three weeks, which could further reroute trade and anger some trading partners.
As a large and diverse economy, the United States is generally less dependent on trade than other countries. Trade generates about a quarter of U.S. economic activity, compared with more than two-thirds in Mexico and Canada. In Canada, analysts say, U.S. tariffs may trigger a recession that could last through 2025 unless a deal with the United States is reached.
But the effects of tariffs still spill through the U.S. economy, raising costs for businesses and consumers. That gives businesses less money to spend on hiring, expansion, and innovation, and slows consumer spending, the economy's real driver.
Economists also have doubts that these trade deals will accomplish one of Trump's most important goals: reducing the nation's trade deficit, which he sees as evidence that the United States is being ripped off.
Setser said tariffs could shrink or increase trade deficits with individual countries, but that he expected tariffs to have little impact on the U.S. trade deficit overall, unless they hurt the economy and shrink consumer spending.
Maurice Obstfeld, a senior fellow at the Peterson Institute for International Economics who has argued that trade deficits are determined more by factors like saving rates and government spending, also said he expected tariffs to have little impact on the overall U.S. trade deficit.
'I doubt these deals will materially reduce the U.S. trade deficit, especially with the Trump administration having passed a fiscal bill that sharply increases the federal budget deficit in the near term,' he said.
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