2 days ago
Commentary: Trump's tariffs are likely to outlast him
WASHINGTON: Effective opposition to US President Donald Trump's trade policies has yet to pop its head above the parapet. Old-school pro-trade types are sidelined – consoling themselves, perhaps, that the protectionist turn will reverse once the costs are clearer. Be patient, we tell ourselves: This, too, shall pass.
Will it? I don't doubt that the policies will fail. By itself, however, that won't restore the pre-Trump era.
The reason is not, or not only, our diminishing capacity for good government. I'm also not assuming that MAGA economics will endure because Democrats will keep on losing elections. Depending on what happens in the mid-terms, and in 2028, the new economic order might be modified, but it's unlikely to be abandoned.
Now that Republicans are converted to the cause, the post-neoliberal core of MAGA economics – use trade barriers to reshape the economy – commands a broad US consensus. The White House has encountered setbacks in the courts, and critics rightly say the execution has been a shambles, but it has many levers to pull on tariffs, and the purpose is widely endorsed.
Support for the liberal trading order founded after 1945 has evaporated. When the costs of the new protectionism become more visible, the quarrel will be between Trump-style trade warriors and opponents who aim to do the same, but more skilfully.
TRADE POLICY REDEFINED
The president has redefined normal trade policy. Talk of TACO (Trump Always Chickens Out) is misleading. True, the administration has veered back and forth on tariffs, one day threatening extraordinarily high barriers, the next, after financial-market blowback, lowering or pausing them while it negotiates.
Yes, by the standards of his most audacious threats, today's average effective tariff of roughly 15 per cent looks timid. But measured against pre-Trump, it's still transformative, and so is the thinking that underpins it.
The presumption in favour of low or zero tariffs is gone. So is the idea that trade is positive-sum, and that a multilateral rule-based system is the best way to realise the gains.
When the administration last week doubled US tariffs on steel and aluminium from 25 per cent to 50 per cent, the reaction wasn't, 'What on earth are they thinking?' It was, 'Well, that doesn't much change the overall average.'
All by itself, the so-called 'baseline (that is, universal) reciprocal' tariff of 10 per cent renounces the post-war trading order – and it's already seen as no big deal.
This new Washington Consensus isn't the only factor. Many businesses are pushing back against the new tariffs, arguing that the barriers will boost costs, disrupt supply chains and turn earlier investments into losses. But once they've adapted to the new regime, the same calculations will push the other way: Please don't change the rules again.
In addition, domestic producers facing less competition from abroad will be able to raise their prices. Once they start collecting the rents created by trade barriers, they'll favour retaining them, or maybe raising them further.
FISCAL CONSEQUENCES
Perhaps the most important force cementing tariffs in place will be their fiscal consequences. This came into sharper focus last week when the Congressional Budget Office did an official score of the revenues the new taxes will raise.
According to the CBO's numbers, if the new tariffs imposed between Jan 6 and May 13 stick (30 per cent on imports from China and Hong Kong, 25 per cent on cars and auto parts, the 10 per cent baseline tariff, the 25 per cent tariff on steel and aluminium, and partial 25 per cent tariffs on products from Canada and Mexico), they would reduce budget deficits by US$2.8 trillion over the next 10 years.
This takes account of lower debt-interest payments, slightly slower economic growth, and inflation 0.4 percentage points higher this year and next.
Nearly US$3 trillion is an enormous sum, even by US budget standards – and as public debt continues to grow, the government will need that money. In discussions over the budget Bill before Congress, projected tariff revenues aren't directly involved.
Official and unofficial scorers focus on the effects of the Bill on projected deficits and debt while leaving tariffs to one side – they aren't in the measure, they're the result of executive action not legislation, and in the past the revenues have been both modest and stable, hence barely worth discussing.
That's going to change. Revenues are revenues, as US Treasury Secretary Scott Bessent points out. If tariffs raise US$3 trillion over the next 10 years, that matters a lot. Added to the budget Bill, they even simulate fiscal responsibility.
To be clear, even US$3 trillion wouldn't come close to stabilising projected public debt. But it would be enough to cover most of the new fiscal losses in the forthcoming budget Bill. (It wouldn't cover all of them, as Bessent claims, because scores of the Bill ignore the front-end loading, 'temporary' measures and other accounting gimmickry which disguise its full likely cost.)
More to the point, once it becomes routine to fold tariffs into discussions of fiscal sustainability, bringing the barriers back down will be hard. When the fiscal crunch comes and public debt demands immediate attention, as it must, policymakers will have to select from, say, higher income taxes, lower health-insurance subsidies and limits on social security payments.
Alternatively, higher tariffs. If you see tariffs as a tax on foreigners not Americans – another misconception fostered by the new orthodoxy – the answer is obvious.
Economic policy regimes can shift, as we've just witnessed. So there's hope: Restoring the old trade order isn't impossible. The question is how much damage, over how many years, will be needed to force another big rethink. Right now, I see few grounds for optimism.
