Over the weekend President Donald Trump announced a batch of tariff increases on US imports of goods from the closest partners of US trade, Canada and Mexico. He proposed a 25% rise in tariffs (with a lower rate for oil imports from Canada). Then he announced a 10% rise in tariffs on all Chinese imports. Thus Trump started his new trade war.
And yet as soon as he started it, he stepped back. Trump announced that he was postponing the tariff increases with Canada and Mexico for a month because their governments had agreed to do something about the smuggling of fenatyl drugs into the US, which he claimed was killing 200,000 Americans every year. This figure is nonsense, of course, because under 100,000 Americans die from drug overdoses from all chemicals each year. As it is, the smuggling of fenatyl over the US-Canadian border is miniscule – certainly compared to the drug cartel operations on the Mexican border. Moreover, as Mexican President Sheinbaum pointed out to Trump, the cartels are able to operate their violent methods because of gun running operated by Americans in the US.
The Canadian and Mexican governments rushed to do a deal with Trump, promising batches of troops on the borders to stop trafficking and more joint anti-drug forces with the US etc. This seems to be enough for Trump to postpone his tariff move, although the tariffs on China will go ahead (no drugs there?). Also small package imports that have been free of import tax up to now will be brought into the customs system – and that will hit internet online purchases made by Americans for goods from abroad.
So what are we to learn from these shenanigans? Are the threatened tariff increases merely being used to browbeat other countries into concessions to Trump? Or is there a coherent economy policy in all this?
There is method in this madness. On the external front, Trump aims to make America ‘great again’ by raising the cost of importing foreign goods for American companies and households and so reduce demand and the huge trade deficit that the US currently runs with the rest of the world. He wants to reduce that and force foreign companies to invest and operate within the US rather than export to it.
He reckons this will boost incomes and jobs for Americans. And with the extra tariff revenues, the government will have sufficient funds to cut income taxes and corporate profit taxes to the bone (indeed, Trump says he wants to abolish income tax altogether). If this is the plan, then the tariffs will eventually be applied fully, with China probably getting an even bigger increase.
If Trump follows through with his protectionist tariff measures, what will be the impact on trade and the US economy? The current planned tariffs would affect $1.3trn worth of US trade, with 43% of all US imports affected.
The accumulated increases in tariffs since Trump first launched them in his 2016-20 term would reach levels not seen since 1969, just before the international tariff reductions of GATT and the WTO during the ‘globalisation’ decades of the end of the 20th century.
In effect, tariffs are a tax on imported goods, which the US treasury can pocket. A 25% tariff on Canada and Mexico would raise costs for US automakers. This tariff is set to add up to $3,000 to the price of some of the 16 million cars sold in the US each year. Food costs would rise as well, with Mexico supplying over 60% of fresh produce to the US.
The precise impact will depend on how long the tariffs stay in place and if other countries retaliate. Already China has announced a series of counter-measures. China’s commerce ministry said the country would impose export controls on tungsten, tellurium, ruthenium, molybdenum and ruthenium-related items; essential components in tech products. China is also planning a 15% levy on liquified natural gas.
Within the US, if the tariff increases are followed through, domestic prices will rise and there will be upward pressure on inflation. There is a counteracting factor. If the US dollar increases in strength against other trading currencies, then the dollar cost of imports will be lower, reducing the price impact of the import tariffs. But most likely, the US inflation rate will head upwards. Inflation is already starting to rise again. Tariff increases will send the rate above 3% in 2025.
A US ‘think-tank’, the Tax Policy Center, estimates that the average American household’s after-tax income will fall 1%, or $930, by 2026 if the tariffs are fully implemented. That’s because consumer prices would rise by 0.7% and real GDP would lose 0.4%. The Peterson Institute for International Economics estimates tariffs will leave the US economy about 0.25% smaller next year and 0.1% in the long run. “The policies he’s pursuing have a high risk of inflation,” said Adam Posen, director of the Peterson Institute for International Economics think-tank. “It seems that promoting manufacturing and beating up US trade partners are goals that, for Trump, are a higher priority than the purchasing power of the working class.”
Trump claims that the extra revenue from tariffs would be used to cut taxes and this supposedly would help household incomes. But estimates of any extra revenue from tariffs are put at just $150bn a year. And income tax cuts will mainly benefit the higher income earners, while rising inflation will hit the lower income groups.
If the impact of the tariff increases were to reduce economic growth, then the so-called relative success of the US economy compared to other major economies would be in jeopardy. US real GDP growth has already slowed at the end of 2024 to a 2.3% annualised pace. The tariff measures would take that growth rate lower this year and next.
So as Trump imposes tariffs, US inflation is picking up and output growth is slowing down.
Those countries subject to Trump’s tariff increases will be hit hard. The Peterson Institute reckons that “for the duration of the second Trump administration, US GDP would be around $200 billion lower than it would have been without the tariffs. Canada would lose $100 billion off a much smaller economy, and at its peak, the tariff would reduce the size of the Mexican economy by 2 percent relative to its baseline forecast.” Indeed, JP Morgan economists reckon these measures could push both Canada (already weak) and Mexico into an outright recession.
The impact on China will depend of the size of the tariff increases. At the moment, it’s only 10% but Trump has said it will eventually be 60%. If the US imposed an additional 10 percent tariff on China and China responded in kind, US GDP would be $55 billion less over the four years of the second Trump administration, and $128 billion less in China. Inflation would increase 20 basis points in the US, and after an initial dip, 30 basis points in China.
These estimates assume that the tariff measures will be implemented. So far, Trump has postponed their implementation as he continues his ‘bargaining’ tactics with his trading ‘partners’. But remember, he also plans to raise tariffs for all EU imports – and that is still to come.
Overall, increased tariffs and other protectionist measures by all sides in retaliation will weaken world trade and economic growth. World trade growth showed some recovery in 2024 after contracting in 2023. Trump’s tariffs will stop that recovery in its tracks.
In the 1930s, the attempt of the US to ‘protect’ its industrial base with the Smoot-Hawley tariffs only led to a further contraction in output as part of the Great Depression that enveloped North America, Europe and Japan. Big business and their economists condemned the Smoot-Hawley measures and campaigned vociferously against them being implemented. Henry Ford tried to convince the then President Hoover to veto the measures calling them “an economic stupidity”. Similar words are now coming from the voice of big business and finance, the Wall Street journal, which called Trump’s tariffs “the dumbest trade war in history.”
The Great Depression of the 1930s was not caused by the protectionist trade war that the US provoked in 1930, but the tariffs then only added force to the global contraction, as it became ‘every country for itself’. Between the years 1929 and 1934, global trade fell by approximately 66% as countries worldwide implemented retaliatory trade measures.
While Trump has broken with the neo-liberal policies of ‘globalisation’ and free trade in order to ‘make America great again’ at the expense of the rest of the world, he has not dropped neo-liberal policies for the domestic economy. Taxes will be cut for big business and the rich, but also the aim will be to reduce the federal government debt and cut public spending (except for arms, of course). This year, the US budget deficit will be almost $2 trillion, of which more than half is net interest – about as much as America spends on its military. Total government debt oustanding now stands at $30.2 trillion or 99 per cent of GDP. America’s debt as a percentage of GDP will soon exceed the second World War peak. The Congressional Budget Office estimates that by 2034, US governmental debt will exceed $50 trillion – 122.4 per cent of GDP. The US will be spending $1.7 trillion a year on interest alone.
Trump has let Elon Musk loose to massacre federal government spending, close down departments (possibly closing the Department of Education) and sack thousands of public employees to ‘reduce wastage’. The problem for Musk is that most of the ‘wastage’ and spending is on ‘defense’, but no doubt he will plough on reducing civilian services and even ‘entitlement programs’ like Medicare.
Trump aims to ‘privatise’ as much of government as he can. “We encourage you to find a job in the private sector as soon as you would like to do so,” the Trump administration’s Office of Personnel Management’s said. As Trump sees it, the public sector is unproductive, but not the finance sector, of course. “The way to greater American prosperity is encouraging people to move from lower productivity jobs in the public sector to higher productivity jobs in the private sector.” – these great jobs were not identified. Moreover, if the private sector stops growing as the trade war intensifies, those higher productivity jobs may not materialise anyway.
Michael Roberts Blog 
and now the rest of conservatives and liberals around the world will implement this downsizing of public sector.
hope this will become a farce ( first reagan did)
Trump has already stated that those tariffs are not a bargaining tool, but a policy of his government. So, the tariffs will probably be enforced and he sees it as a tool of reindustrialization.
It has become very clear by now – for those who still didn’t want to see – that Trump is an emperor of decline and not an emperor of revival. The USA will not rise again, there will be no Postwar Miracle Part 2. The American Empire is now in inexorable decline, albeit not yet in terminal stage (this will take up to a century and a half to happen, if we assume decline will be linear from this point).
Protectionism won’t work for the USA because, as Alexander Hamilton (the father of protectionism) correctly theorized, it only works for nations with the so-called “infant industry”. The USA had the infant industry in the 19th Century vis-a-vis the British Empire, but now the USA is today’s British Empire – it has the elderly industry, not the infant industry. The owner of the infant industry of the 21st Century is China; but since China is a socialist nation, that transition also means the transition to socialism instead of the transition to a new phase of capitalism that the ascension of the USA against the UK represented.
In Marxian terms, that means the OCC of the capitalist world has reached a critical mass where it cannot keep geographic, geopolitical cohesion anymore: the transfers of value from the Third to the First Worlds, and from the First World to the USA are not enough to revalorize the USA’s total (social) capital anymore (with the augmented effect of elevated degree of fiction in its total capital).
So, my prediction remains the same. Trump will fail, and he will be only the first of a streak of weak POTUSes who will inevitably lead the USA to decline, thus inaugurating what I called its “Byzantine” era.
A famous quote: history repeats itself, the first time as tragedy, the second as farce. Globalized capitalism cannot return to the niche from which it emerged, i.e., to its national anteriority (once toothpaste is out of the tube, it can’t go back), except as a marker of its decline. It’s a question of historical stage and unlimited expansion, of hubris reaching its capitalist limit, now that this imposture survives only through chaos, the bomb market, wars, the bursting of one financial bubble after another. And the imposture of hallucinating narratives that don’t exist in the reality of the overexploited proletariat, which (alas) unknowingly carries the whole edifice of capitalist class relations.
Viewed parochially from an unusually snowy Vancouver, there’s relief and resentment. Canadians (I’m from the UK long ago) aren’t much into performative patriotism, as so many Americans are, but nobody likes being bullied, especially by their so-called friends, and our politicians know that. There won’t be any major consequences – Canada is too weak for that – but I think Ottawa will have a closer eye on non-US markets after this and cooperation with US anti-China policies might be slower and more half-hearted than otherwise. That might be both true and more consequential elsewhere. Certainly the EU would be wise to improve its relations with China.
Fellow professor Michael Roberts China is the only one who has been ashamed: Trump imposed tariffs of 10% and the Chinese have imposed tariffs on the US of 15%. The only way to win in this world is not to bend. Petro shouted, barked but received the immigrants sent by the US and Mexico literally has diarrhoea in its trousers and now it will reinforce the border with the US with 10,000 troops, almost proving Trump right. And by the way, the country that imposes tariffs does so not to make itself great again, but because it is weak. So Trump and the American plutocrat class are portraying themselves.Long live the Chinese.Warm and affectionate greetings
The true story is much more revealing, at least in the case of Mexico: in exchange for the extra troops at the border, Trump agreed to stop the flux of American firearms that filled the Mexican cartels’ arsenals.
So yes, that’s the little dirty secret of Mexican drug trafficking: it was fueled, probably with a trade surplus against Mexico, by the American MIC.
As genuinely humorous as it was to see Trump offer concessions to Mexico over a fight he started, with Trump’s display that not only are international treaties and agreements signed by past regimes worthless (not that the US has ever respected treaties), but even agreements brokered under himself can be ‘renegotiated’ at anytime, how likely is it that any action will actually be taken on the guns that make up the majority of the cartel arsenals?
A China é a fábrica do mundo e os EUA a loja do mundo. A guerra tarifária pode interferir na produção e realização da mais valia (venda de produtos) no mundo? A guerra tarifária não levaria a tendência da taxa de lucro a baixar ainda mais?
A China é a fábrica do mundo e os EUA a loja do mundo. A guerra tarifária pode interferir na produção e realização da mais valia (venda de produtos) no mundo? A guerra tarifária não levaria a tendência da taxa de lucro a baixar ainda mais?
Translation:
China is the factory of the world and the U.S. the store of the world. Can tariff war interfere with the production and realization of the added value (sale of products) in the world? Couldn’t the tariff war lead the trend of the rate of profit to lower even further?
Trump’s tariff moves seem unpredictable, especially with Canada and Mexico. While tackling fentanyl smuggling is important, the data he cited appears exaggerated. The economic impact of these tariffs could hurt American consumers more than expected, especially with added taxes on online imports. Interesting to see how this plays out.
Another trade war brewing? These tariff increases might backfire, affecting both businesses and consumers. Delaying the Canada-Mexico tariffs shows how quickly political decisions can shift. The fentanyl argument feels more like a negotiation tactic than a solid reason. Curious to see if this strategy actually benefits the U.S. economy.
Trump harks back to the ‘Gilded Age’ covering the final quarter of the 19th century when the US industrialized behind a tariff wall becoming the first continental economy facilitated by a web of new railway lines. In the face of the rise of China and the BRICS his ‘Scramble for the Americas’ also harks back to the ‘Scramble for Africa’ when the old powers – Britain and France – sought to insulate themselves economically from the rising powers – the USA and Germany. This is more than a case of history repeating itself first as tragedy then as farce, in this case its more fiasco than farce.
Firstly, today the the working class numbers over 80% of the population. In the Gilded Age the urban working class was less than 20%. Secondly, total Federal taxes were 2.5% of GDP or about one tenth their level today due to much more state support which supports the standard of living of most of the present population. Thirdly, then the division of labour was continental, now it is still international despite all the setbacks. Finally, fictitious capital was less extensive, pervasive and developed.
Trump trying to roll back the wheel of history will find the track rutted, narrow and beset by frequent rock falls. Already DDT (Donald Dealmaker Trump) is not only being seen as toxic but as a populist buffoon even by his financial supporters. Goldman Sachs has reported that hedge funds and venture capitalists increased their shorting of the stock market ten-fold in January as distinct from November when they went long enthused by the prospects of the Trump magic. Bet all those pathetic and spineless billionaires who attended his inauguration regret spending millions for a ring side seat. As I have said Trump is the best recruiting sargeant-major for revolution and when he goes he takes them all with him. And this will happen quicker than people think. As soon as it becomes apparent that he has spent all his political capital and is isolated the country will turn on him and my advice to Musk is, leg it back to South Africa while you can afford it.
Peut être allumer une bougie à Saint Millei, patron des causes perdues…
Perhaps a votive candle to Saint Millei, patron saint of lost causes
Look at the first chart: the U.S. trade deficit began to swell rapidly from 1991, just when U.S. outsourcing of manufacture to China ballooned. (Gotta love that “socialism with Chinese characteristics:” grow PRC capitalism with foreign investment, splitting the surplus value made off China’s workers in return. And keep the “communist” tag to reinforce anti-communism among U.S. workers tossed aside by the outsourcing.
U.S. progressives virtually ignored outsourcing/globalization the whole time, with a blip of exception in Seattle in 1999 when the global powers formed the WTO. Trump is the result.
The problem with your narrative is that China really only started to take off from 2001 on — precisely when in finally entered the WTO — not in 1991, when you state US trade deficit began to swell (what event happened in 1991…).
Besides, Bill Clinton quickly and spectacularly reversed the US’s trade deficit, thanks to the absorption of the ex-Soviet sphere and space; it plunged in an inexorable and gargantuan trade deficit only from George W. Bush’s twin adventures in Afghanistan and Iraq.
No, outsourcing to China surged from the early 1990s.
“FDI inflows to China surged from almost nil at the start of the reform in the late 1970s to US$40-45 billion per year in the second half of the 1990s. The surge occurred in the early 1990s.” (IMF, http://www.imf.org/external/pubs/ft/pdp/2002/pdp03.pdf, p. 2f. and The National Committe on U.S. China Relations, http://www.ncuscr.org/wp-content/uploads/2008/02/page_attachments_Two-Way-Street-2016_Exec-Summary.pdf)
Just look again at the first chart in Roberts’ post: the trade deficit in goods swells rapidly from 1991.
All countries with large global financial centres have trade deficits due to the gargantuan production of fictitious capital whose flows globally are not tracked by national accounts. They represent concentrated areas of consumption. Hence the UK with it’s City of London and the US with it’s Wall Street. There is a subsidiary argument which I do not agree with and that is these centres due to financialization discourages goods production locally.
The big question here is: Why does the US want to reindustrialise when it has 4.2% unemployment and needs jobs with much lower wages than today? Why only include in the trade deficit the balance of goods and not the balance of services?