US tariffs: an act of lunacy

The unilateral imposition of exorbitant tariffs by the Trump Administration is probably the biggest economic mistake inflicted by an American government on its own citizens since FDR’s time and the biggest threat to global economic well-being in recent decades.

Some believe that this is just another blustering display by the US president, a mere negotiating posture. According to this view, the US would return to the previous status quo after obtaining some concessions.

Unfortunately, all evidence suggests that this will not be the case. From Trump’s own obsessions (he called himself “Tariff Man”) and the estimates provided by the Treasury Secretary, it appears that the US will end up permanently imposing an average tariff rate on goods of between 10% and 20%, compared to the current 2.2%.

It is likely that, in the coming days, agreements will be publicized for propaganda purposes with countries that maintain high tariffs (such as India) or that depend militarily on the US (such as Japan or Israel), agreements that Trump will sell as a success, giving the impression of having acted astutely. However, all this will only be a smokescreen that will hide the paradigm shift that has taken place.

A return to protectionism

In short, we are not facing a new show from the US president, but the resurgence of a protectionism that will cause lasting damage to international trade relations, a temporary fall in living standards across the planet and an increased risk of geopolitical and, perhaps, military conflict. Why do I give it more relevance than other observers?

Firstly, Trump did not sign the executive order on tariffs in the Oval Office without much fanfare, but instead organized a showy staging, grandiosely christening the day Liberation Day: “April 2, 2025, will forever be remembered as the day American industry was reborn, the day America’s destiny was reclaimed (…), one of the most important days in American history: our declaration of economic independence.” Politically, it is hard to believe that such a performance would have a short life and be reduced to a successful negotiation.

Secondly, what transpires from this aggressive tariff policy is a set of fallacious economic beliefs whose objectives have little to do with achieving fairer international trade, but rather with a short-sighted policy of reindustrialization, on the one hand, and a fanciful policy of raising revenue, on the other. The Trump administration’s dream (in the words of its trade advisor) is to replace taxes paid by Americans with tariffs supposedly paid by foreigners.

Reindustrialize, collect and punish

This approach raises serious problems. From the point of view of reindustrialization, tariffs are imposed on countries, but it is companies that decide to build their factories in the US, not governments. One wonders why American businessmen do not want to build factories in their own country: as is the case with foreign businessmen, the main reason is the lack of manufacturing competitiveness in the US.

What will those countries that barely charge tariffs, or that charge lower tariffs than the US, be able to offer in a negotiation if the decision is made by companies? What will offer the EU, “which generally has low tariffs”, as acknowledged in the rushed and anecdotal White House report on Trade used as a botched justification for the tariffs[1]?

On the other hand, the revenue objective is also problematic: if too high tariffs are imposed to protect American industry, they will cause a sharp drop in imports, reducing the tax base; and if one wants to prevent imports from falling dramatically, tariffs will have to be lower, which will not protect domestic industry at all. As we shall see, this is not the only contradiction facing such a policy.

Tariffs are not only intended to reindustrialize and raise revenue, but also to punish. Thus, they add to the traditional policy of sanctions imposed by the USA (United Sanctions of America) on its adversaries. In other words, Trump has sought to impose a revolutionary tax on the world for the “privilege” (sic) of selling in the US.

Although many of the punitive tariffs will end up being ineffective, in the base case the US will go from charging an average tariff of 2.2% to charging a tariff of between 10% and 20%, historically high figures that take us back to times we thought we had happily left behind. Furthermore, the reprisals of various state actors, as is the case of China, will give rise to a trade war and will hamper international trade, igniting the fuse of a less prosperous and more dangerous world.

We cannot forget that the Smoot-Hawley Tariff Act, passed by the US government in 1930, contributed to aggravating and prolonging the Great Depression, which was the determining factor – although obviously not the only one – in cementing the arrival of dangerous movements in Europe and Asia (such as militarism in Japan in 1932, Nazism in Germany in 1933 or the Bolshevism of the Popular Front in Spain in 1936), thus indirectly leading to bloody wars such as World War II. Thus, the aggressive, bullying and almost pre-war rhetoric of President Trump and members of his cabinet sow the seed of a much more tense and uncertain world.

The deception

From the days leading up to his announcement, President Trump claimed that his tariffs would be reciprocal, something he emphasized in his presentation to the media: “I will sign a historic executive order instituting reciprocal tariffs on countries throughout the world. That means they do it to us and we do it to them. Can’t get any simpler than that.”

The concept of reciprocity is undoubtedly simple, and even fair, if it were true. But it is not.

In fact, Trump lied blatantly. The tariffs supposedly imposed by other countries on the US that he showed on his famous chart were not the real tariffs, but arbitrary numbers based on dividing the US trade deficit in goods with each country by the figure for imports[2]. Once this figure was obtained, Trump established his new “reciprocal” tariffs by dividing that quotient by two, with a minimum tariff of 10%:

As you can see, although it may seem surreal, the variable that does not appear in the formula for calculating the supposed tariffs of other countries is precisely the real tariffs imposed by those countries. Therefore, this formula is not economics but alchemy, a formula designed ad hoc to justify arbitrary figures in an attempt to balance the US trade deficit.

Furthermore, the calculation of the trade deficit and imports only includes goods and not the sum of goods and services, which is what determines the trade balance between two countries. For example, the US has a trade deficit in goods with the EU, but a surplus in services. In other words, the EU sells goods to the US and buys services from it in exchange, and the net balance is so low that it can be considered insignificant. Despite this, the US has decided to impose a tariff of 20% on us when the weighted average tariff charged by Europe is only 2.7%. This is not an isolated case: according to WTO-based data from the Cato Institute, China charges an average tariff of 3%, but Trump wants to impose a rate of 34%; Japan charges 1.9%, but Trump wants the Japanese to pay 24%; Taiwan and Switzerland charge 1.7%, but Trump wants them to pay 32%. Brazil charges 6.7%, double that of the UK (3.3%), but both will suffer the same minimum tariff of 10%, according to the table presented by Trump[3]. Calling this reciprocity is an insult to intelligence.

From an economic point of view, the equation also makes no sense, as it is based on a false concept of equilibrium that presupposes that currency movements must at all times compensate for trade deficits, and that if they do not, it is exclusively due to manipulations in bad faith by the governments of other countries (limitations on free trade, currency manipulation, etc.).

If Trump had wanted to apply a principle of reciprocity, he could have raised some tariffs very slightly, but he would also have had to reduce others to match those countries that charge less. For example, the US charges a tariff of 25% on light trucks, compared to the 10% tariff charged by the EU or the 0% (yes, zero) charged by Japan. On the other hand, the US has regulations that are the most restrictive and protectionist in the world, such as the Jones Act on cabotage navigation[4]. Do you think Trump is considering eliminating it “out of reciprocity”?

Obviously, the reason why the US president referred to these calculations as “tariffs” was to deceive his fellow citizens into believing that a flagrant injustice was taking place and that the rest of the world was abusing the US.

He also did so with a surprising nationalist, vulgar and bellicose language, unproper of the president of a serious country: “For decades, our country has been looted, pillaged, and plundered by nations near and far, both friend and foe alike (…). Foreign leaders have stolen our jobs, foreign cheaters have ransacked our factories, and foreign scavengers have torn apart our once beautiful American dream”.

Finally, the fact that the US government has started a trade war when it enjoyed practically full employment adds degrees of folly to the decision and raises the unanswered question of which workers it will count on for its supposed reindustrialization.

Why tariffs are harmful

Protectionism is based on a deification of exports and a demonization of imports that does not correspond to reality. Countries import products from other countries for two reasons: either because the imported good does not exist in the destination country or because it is cheaper to bring them from abroad. Thus, the North American consumer benefits from imports that offer a wider range of alternatives and lower the cost of living.

In the US, trade deficits are nothing new[5]. They were the norm for most of the 19th century, which did not prevent the country from growing and becoming a world power. In 1910, by the way, US government spending was still just 2% of GDP. Nor have tariffs been an obvious impediment to growth in the last 50 years, or during the happy Reagan days, which Trump vindicate, or even during Trump’s own first term in office. On the contrary, during the Great Depression the US enjoyed a trade surplus. Perhaps that is why Milton Friedman considered the trade deficit a non-problem.

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Despite this, the temptation of protectionism has been recurrent in the US since Alexander Hamilton. Although times change, the arguments do not. In 1979, Friedman himself criticized exactly the same pretexts that the current US Administration uses to justify its measures today: national security and the defense of the steel industry. Back then, the concern was Japanese competition; today it is Chinese competition. Plus ça change, plus c’est la même chose.

Economic sophisms

Protectionism is a paradigmatic case of bad economic policy. As Hazlitt said, “the art of economics consists of considering the most remote effects of any policy, and not merely its immediate consequences; of calculating the repercussions not only on one group, but on all sectors”.

In a democracy this generates a double problem. On the one hand, politicians are only concerned with the consequences of their decisions before the next elections, so they will always favor those that appear to be good in the short term, even if they are disastrous in the long term.

On the other hand, politicians like to take measures whose benefits are visibly concentrated in a few hands, as long as their disadvantages are diffused among the population as a whole. This is the case with tariffs.

As Hayek said, “the negative effects of the tariff are spread over a large number of people and are thus more difficult to see than its benefits, which are concentrated on a relatively small, uniform and easily identifiable group of people”. All the politician has to do is publicize the minority that benefits and ignore the majority that is harmed. That is why, at the White House tariff announcement, Trump handed the microphone to an UAW unionist who personified the privileged beneficiaries.

Nobody represented the majority that would be harmed, the ordinary citizen who is forced to buy a more expensive, uglier or lower quality car.

Increasing tariffs to protect a specific sector (for example, the steel or automotive sector) may artificially improve the situation of some companies, but at the expense of many others, who will see their costs increase and their customers’ purchasing power decrease. Ford, for example, will benefit, but the local restaurant may have to close because, because the extra money that the average citizen has had to spend on their car, will prevent him from having enough to spend on eating out. In other words, to improve the lot of the few, the lot of the many is punished, and the lack of competitiveness of certain sectors is made chronic at the expense of the survival of other sectors that were indeed competitive.

To avoid the temptation of protectionism, public education is essential. As Hayek said, “no society will follow a policy of free trade if the dominant idea is that trade with foreigners is bad or economically harmful. On the contrary, no society will tolerate high tariffs if the dominant idea is that restrictions on trade are ethically unacceptable, and that free international trade is always economically beneficial”.

The confused theoretical basis

The theoretical basis for the justification of a policy of high tariffs was provided by the current president of the White House Council of Economic Advisers, Stephen Miran, with an analysis published in November last year that fell into all kinds of oversimplifications and contradictions[6].

Miran’s analysis was based on the reductionist hypothesis that the whole problem of US macroeconomic imbalances stems from the overvaluation of the dollar due to its status as a global reserve currency.

However, like the climate, the economy is a complex and multifactorial system riddled with interactions that escape the straitjacket of the beautiful multivariate multiple regression models taught in universities. But unlike the climate, the factors are rational actors endowed with free will (unlike clouds or planets), and they are subject to emotional biases, panic and euphoria. Therefore, they react to stimuli in diverse and sometimes surprising ways, which multiplies the complexity of the system. Furthermore, the reality of the situation itself is influenced by the perception – always partial and limited – that the actors have of that same reality (Soros’ principle of reflexivity).

Undoubtedly, as a reserve currency, the dollar has a captive demand and is therefore more inelastic than other currencies, but thanks to this, the US has been able to finance its debt without its interest rates skyrocketing and put pressure on other countries to achieve its interests.

However, for Miran, it is the rest of the world that has profited from the dollar’s status, despite which Trump does not want to change that status and has threatened the BRICS if the dollar preeminence is endangered. This is the first contradiction which the report at least acknowledges.

But there are more contradictions. A large part of Miran’s analysis is devoted to defusing fears of the inflationary effect of tariffs. To do so, he relies on a single precedent: the tariff hike that Trump imposed on China in 2018, recklessly inducing a principle from a single data point.

Thus, according to Miran, a large part of the price increase caused by tariffs will be cushioned by a revaluation of the dollar. But if the strong dollar was the root of all evil, how is strengthening the dollar supposed to allay our fears? And if the intention is to boost American industry by making goods produced abroad more expensive, how is that going to be achieved if at the same time I’m arguing that they’re not going to become more expensive after all?

Despite this, the anti-inflation argument is now repeated by Treasury Secretary Bessent, who categorically and without batting an eyelid asserts that 40% of the tariffs will be absorbed by a revaluation of the dollar, that another 40% will be “eaten up” (sic) by foreign producers and that only 20% will be paid by US consumers.

Furthermore, the experience of 2018/2019 was not so rosy. According to the US Department of Commerce, US importers bore almost the entire cost of these steel tariffs, and imports fell by 24%. Meanwhile, US production increased by only 2%[7].

The experience with the Smoot-Hawley Tariff Act of 1930 was similar. Imports fell by 65%, but exports fell by almost the same proportion, a logical consequence of the domino effect of impoverishment and the protectionist reactions of the rest of the world.

Tariffs can therefore also cause a scarcity effect: foreign producers cannot sell at the imposed price (because they would lose money) and domestic producers are still unable to meet the unsatisfied demand. Supply is therefore reduced, and prices increase. A government can try to fix prices or fix volumes, but not both. To put it more simply, you can take the donkey to the watering hole, but you can’t force it to drink.

Finally, Miran warns of the risks involved in an aggressive tariff policy if the expected currency offset does not occur or if other countries respond with higher tariffs. He therefore proposes a gradual approach and warning the market of the measures to be taken to avoid uncertainties and surprises that provoke tumultuous reactions, just the opposite of what Trump has done.

A contradictory executive order

Trump’s executive order follows Miran’s reasoning and blames other countries for the trade deficit (and the latter even for the increase in opioid use in the US, as Miran does!), denouncing the alleged lack of fairness in reciprocal trade relations. The US is supposedly the target of a global conspiracy.

The executive order also accuses the rest of the world of “suppressing wages and consumption” in their own countries (how? why?) and defies logic by reversing cause-and-effect relationships. Thus, it argues that “persistent US goods trade deficits have hollowed out the American manufacturing base”. In reality, it is just the opposite: it is the free decisions of North American companies in not wanting to manufacture in the US, therefore emptying the American manufacturing base (by not being competitive) that has caused the trade deficit.

Finally, the Executive Order conceals the benefit obtained by American consumers, who have been able to buy cheaper, and two additional factors that contribute to explaining the trade deficit. The first is the consumerist obsession of American society and its traditional tolerance and addiction to debt, in addition to persistent budget deficits. The second is the natural and spontaneous evolution of the American economy towards the service sector.

Conclusion

This reckless and damaging action by the US government has been plagued by misleading data, dangerously aggressive language based on unjustified victimization and first-rate economic fallacies, to which the usual hubris of US governments must be added.

The protectionist agenda of the president and his advisors (chosen precisely for sharing his agenda and for their loyalty, rather than for their competence) poses a real threat to the free trade that has benefited the world so much. Trump thinks he knows about the economy without understanding its complexity, and nothing is more dangerous than believing that you know when you don’t: he who ignores that he ignores (whether he is president of the government, CEO or advisor, even from Harvard, specially from Harvard) is always more deadly than he who knows that he does not know.

This tariff madness based on mistaken beliefs and excessive and bellicose arrogance is dragging us into a trade war and collective impoverishment. The geopolitical aspect aimed at weakening the Chinese rival and dividing the BRICS is clear to everyone. Perhaps that is why the tariffs imposed on BRICS members have been so disparate, although, given the level shown by the Trump Administration with this action, it is doubtful that there has been such an intelligent intent.

However, just as the US underestimated Russia’s resilience, it is underestimating China’s resilience, which has several aces up its sleeve despite starting from a position of greater weakness. And as with the war in Ukraine, the collateral damage of this whimsical trade war will be the entire planet. How far and how deep will the US drag us for not accepting the end of its hegemony?