So much for President Trump’s art of the deal, his handling of the import tariff policy would seem to be a cautionary tale of how not to go about a trade deal.
Unless, of course, the objective of that approach is to create the conditions for an economic recession and higher inflation at home; diminish the U.S. dollar and the U.S. Treasury market as safe havens in times of world financial market turbulence; strengthen China’s standing in the world economy at our expense; and reduce our credibility with our most reliable political allies.
Start with economic uncertainty. As an experienced businessman, Trump must know that monetary policy uncertainty is something that investors and markets abhor. Yet, this is something that Trump has delivered in spades with his erratic import tariff policy.
One day, we have a 25 percent import tariff on Canada and Mexico, and the next day, there is a one-month pause. One day, Smoot-Hawley-like reciprocal import tariffs are imposed on 60 countries, and the next week, there is a 90-day pause before those tariffs come into effect while trade deals are to be negotiated. One day, there is a 145 percent tariff on all Chinese imports with no exceptions; a week or two later, there is talk of halving those tariffs. One day, the Federal Reserve head Jerome Powell is to be fired; the next day, he is to be retained.
As should have been expected, the threat of higher import tariffs combined with policy uncertainty is already having a real effect on the economy. Consumer sentiment has sunk to a 12-year low, and inflation expectations have risen.
Meanwhile, businesses are delaying investment decisions because of a lack of knowledge about what their imported input costs might be and whether there might be supply chain disruptions. This has induced Goldman Sachs to cut its U.S. economic growth forecast to barely 0.5 percent for 2025 and to raise its inflation forecast to 3.5 percent by year’s end. It has also led to much talk in corporate circles about an impending economic recession.
Markets, too, have not taken kindly to the policy incoherence. Since inauguration day, the stock market has lost 10 percent in value, vaporizing $6 trillion in household wealth. More troubling has been the unusual weakness of the dollar and the U.S. Treasury bond market.
Usually, at a time of global market turbulence, one would have expected the dollar and the Treasury bond market to strengthen as investors sought a safe haven for their money. Instead, we have seen a weakening in those markets that could be an ominous signal of the loss of investor confidence in America’s economic exceptionalism.
If Trump’s handling of tariff policy leaves a lot to be desired, he appears to have made a significant miscalculation in his handling of trade relations with China. Trump seems to have thought that the imposition of a 145 percent import tariff on China would force that country to the bargaining table. Instead, the Chinese government is sticking to its demand that the United States must first unilaterally remove its punitive import tariffs before negotiations on a trade deal can start.
Judging by Trump’s repeated buckling to bond-market pressure, the Chinese government appears to be confident that time is on its side in its economic relations with the United States. President Xi Jinping knows that China can more readily withstand economic pain than the United States.
Another weakness of Trump’s trade policy has been the alienation of our allies and the tarnishing of the United States’ reputation as a reliable trade partner. Trump has managed to do this by threatening higher import tariffs on many allies than on our adversaries. He has also done so by acting unilaterally in flagrant violation of the United States’ treaty commitments to the World Trade Organization. This could make it more difficult for the United States to provide international leadership in the event that we were to have a future world economic and financial market crisis.
If there is one reason for optimism, it is that markets could force Trump to make a major U-turn in his trade policy. We have to hope that Trump soon heeds the market’s early warning signals before it is too late to avoid a further leg down in the equity market, an additional loss of the dollar’s status as a safe haven currency, and the onset of a painful economic recession.