ON “LIBERATION DAY” President Donald Trump upended more than half a century of American trade policy by imposing sweeping tariffs on imports. These are off-the-charts in their historic significance. From just 2.3% in 2024, the average American tariff on imports is now expected to rise immediately to about 30%—where it was in the late 1800s. Mr Trump is a 20th-century man presiding over a 21st-century economy who wants to take it back to the 19th century.
Not only is the magnitude of the hike unprecedented, but the tariffs will have a much more pervasive effect on the American economy than previous episodes. That is in large part because today merchandise imports are around 11% of GDP, more than twice their level in the late 19th century.
The tariffs blow an enormous hole in the liberal trade order that America has led and fostered since the second world war. They undermine every free-trade agreement America has ever signed. Those agreements were reciprocal: each country set zero tariffs on bilateral trade. Past free-trade-agreement partners now face stiff tariffs on their exports to America, among them South Korea (26%), Israel (17%) and Australia (10%). Canada and Mexico escaped this round of tariffs but still face the threat of 25% duties on their goods. If Mr Trump is willing to rip up his own agreement—known as the USMCA—with those two neighbours, then all past agreements are null and void, and future ones are of limited value. No one can sign any such deal with confidence if tariffs can be imposed on a whim.
Is there a principle behind the astonishing array of duties imposed on April 2nd? Mr Trump’s obsession with tariffs has long been known, but he offered a kaleidoscope of ever-changing rationales for them. They would raise revenue, reshore jobs, reduce trade deficits, ensure reciprocity by providing bargaining leverage, and so on. Economists took glee in pointing out the contradictions.
The president now touts his tariffs as mainly “reciprocal”: “whatever they charge us, we charge them.” This makes them sound fair. Far from it. The calculated tariffs did not measure tariffs or non-tariff barriers facing American exporters. They were, instead, based on the bilateral trade balance with each country—merchandise only, excluding services, in which America tends to run a surplus. According to the US Trade Representative’s office, the calculation of the tariffs “assumes that persistent trade deficits are due to a combination of tariff and non-tariff factors that prevent trade from balancing”. The implicit goal here is balanced trade on a bilateral basis.
This is bonkers, akin to an individual trying to have balanced trade with the local grocery store (with which she runs a large trade deficit) as well as with her employer (with which she runs a large trade surplus). There may be reasons to seek overall trade balance, but there is no rationale for balancing trade on a bilateral basis.
And seeking to balance overall trade through bilateral measures misses the macroeconomic nature of that imbalance, including the role of America’s large fiscal deficit in driving the flow of capital to the country. Of course, the trade deficit may narrow if America slips into a recession—hardly the outcome anyone hopes for.
Will this ignite a global trade war that sends trade volumes spiralling downwards, like the 1930s? That depends on the foreign reaction. The higher tariffs could spark retaliation. The EU is already prepared with “counter-measures”. A more optimistic view is that Mr Trump’s move may trigger a wave of foreign envoys descending on Washington in the hope of reaching deals that would satisfy the president and allow the tariffs to be removed. He loves to bargain and may yet be flattered into easing the tariffs.
Perhaps the most shocking aspect of this week’s events is the ability of one person to completely remake American trade policy. All previous major changes have involved building large coalitions and developing a social consensus over time— both of which required majority support in both houses of Congress.
But now Congress has delegated so much tariff-making authority to the president that it is, in effect, sidelined during this fundamental shift in trade policy. Mr Trump feels empowered to act unilaterally because he is. That may be acceptable under normal presidents, but this is not a normal presidency. A situation in which the occupant of the White House can make such momentous changes on his own, unchecked, reflects serious political decay in American politics.
What makes this all the worse is that the political constituency for the new tariffs is extremely small. Indeed, there is no consensus in Congress that such draconian steps are warranted; nor is there a general view among the American public that trade is a big problem. Mr Trump inherited an economy in decent shape. Congress was happy with the status quo and the public put trade far down its list of priorities, well below inflation, health care and the cost of living.
In other words, no one was asking for any of this. In fact, a Gallup poll released last month found that 81% of Americans surveyed believe trade is an opportunity for growth—the highest level since the poll began in 1992—and only 14% view trade as an economic threat.
The tariffs cast a dark cloud over the global economic outlook. But the damage they will do to America goes far beyond the national accounts. As Richard Cooper, an economist who served in the Carter and Clinton administrations, pointed out long ago, “trade policy is foreign policy.” These tariffs—on friend and foe alike, as Mr Trump likes to say—are almost certain to push friends away. It isn’t easy to have good diplomatic relations with a rogue power that flippantly and capriciously blocks trade. Co-operation with allies on all manner of issues, from security to public health, is likely to suffer. Mark Carney, Canada’s prime minister, was not being loose with his words when he said recently that the long-standing co-operative US-Canadian relationship is “over”. Europeans are thinking the same thing. And trust, once lost, is hard to rebuild.
Mr Trump has done a lot of damage—to America and the world. The president was right in at least one of his Rose Garden statements. With tariffs, he said, “we can be so much wealthier than any country, it’s not even believable.” He got that last bit right.
Douglas Irwin is the John French Professor of Economics at Dartmouth College.
