It’s not April Fools day (1 April). But it might as well be as later today US President Donald Trump announces another barrage of tariffs on imports into the US in what Trump calls ‘Liberation Day’ and what America’s voice of big business and finance, the Wall Street journal, has called “the dumbest trade war in history.”
In this round, Trump is raising tariffs on imports from countries that have higher tariff rates on US exports, ie so-called ‘reciprocal tariffs’. These are supposed to counter what he views as unfair taxes, subsidies and regulations by other countries on US exports. In parallel, the White House is looking at a whole host of levies on certain sectors and the tariffs of 25 per cent on all imports from Canada and Mexico which were earlier postponed are being now reapplied.
US officials have repeatedly singled out the EU’s value added tax as an example of an unfair trade practice. Digital services taxes are also under attack from Trump officials who say they discriminate against US companies. By the way, VAT is not an unfair tariff as it does not apply to international trade and is solely a domestic tax – the US is one of the few countries that does not operate a federal VAT; relying instead on varying federal and state sales taxes.
Trump claims that his latest measures are going ‘liberate’ American industry 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 deficit and force foreign companies to invest and operate within the US rather than export to it.
Will this work? No, for several reasons. First, there will be retaliation by other trading nations. The EU has said it would counter US steel and aluminium tariffs with its own duties affecting up to $28bn of assorted American goods. China has also put tariffs on $22bn of US agricultural exports, targeting Trump’s rural base with new duties of 10 per cent on soyabeans, pork, beef and seafood. Canada has already applied tariffs to about $21bn of US goods ranging from alcohol to peanut butter and around $21bn on US steel and aluminium products among other items.
Second, US imports and exports are no longer the decisive force in world trade. US trade as a share of world trade is not small, currently at 10.35%. But that is down from over 14% in 1990. In contrast, the EU share of world trade is 29% (down from 34% in 1990) while the so-called BRICS now have a 17.5% share, led by China at nearly 12%, up from just 1.8% in 1990.
That means non-US trade by other nations could compensate for any reduction in exports to the US. In the 21st century, US trade no longer makes the biggest contribution to trade growth – China has taken a decisive lead.
Simon Evenett, professor at the IMD Business School, calculates that, even if the US cut off all goods imports, 70 of its trading partners would fully make up their lost sales to the US within one year, and 115 would do so within five years, assuming they maintained their current export growth rates to other markets. According to the NYU Stern School of Business, full implementation of these tariffs and retaliation by other countries against the US could cut global goods trade volumes by up to 10 per cent versus baseline growth in the long run. But even that downside scenario still implies about 5 per cent more global goods trade in 2029 than in 2024.
One factor that is driving some continued growth in world trade is the rise of trade in services. Global trade hit a record $33 trillion in 2024, expanding 3.7% ($1.2 trillion), according to the latest Global Trade Update by UN Trade and Development (UNCTAD). Services drove growth, rising 9% for the year and adding $700 billion – nearly 60% of the total growth. Trade in goods grew 2%, contributing $500 billion. None of Trump’s measures apply to services. Indeed, the US recorded the largest trade surplus for trade in services among the trading – some €257.5 billion in 2023 — while the UK had the 2nd largest surplus (€176.0 billion), followed by the EU (€163.9 billion) and India (€147.2 billion).
However, the caveat is that services trade still constitutes only 20% of total world trade. Moreover, world trade growth has fallen away since the end of the Great Recession, well before Trump’s tariff measures introduced in his first term in 2016, furthered under Biden from 2020, and now Trump again with Liberation Day. Globalisation is over and with it the possibility of overcoming domestic economic crises through exports and capital flows abroad.
And here is the crux of the reason for the likely failure of Trump’s tariff measures in restoring the US economy and ‘making America great again’: it does nothing to solve the underlying stagnation of the US domestic economy – on the contrary, it makes that worse.
Trump’s case for tariffs is that cheap foreign imports have caused US deindustrialization. For this reason, some Keynesian economists like Michael Pettis have supported Trump’s measures. Pettis writes that America’s “long-term massive deficits tell the story of a country that has failed to protect its own interests.” Foreign lending to the US “force[s] adjustments in the U.S. economy that result in lower US savings, mainly through some combination of higher unemployment, higher household debt, investment bubbles and a higher fiscal deficit,” while hollowing out the manufacturing sector.
But Pettis has this back to front. The reason that the US has been running huge trade deficits is because US industry cannot compete against other major traders, particularly China. US manufacturing hasn’t seen any significant productivity growth in 17 years. That has made it increasingly impossible for the US to compete in key areas. China’s manufacturing sector is now the dominant force in world production and trade. Its production exceeds that of the nine next largest manufacturers combined. The US imports Chinese goods because they are cheaper and increasingly good quality.
Maurice Obstfeld (Peterson Institute for International Economics) has refuted Pettis’ view that the US has been ‘forced’ to import more because mercantilist foreign practices. That’s the first myth propagated by Trump and Pettis. “The second is that the dollar’s status as the premier international reserve currency obliges the United States to run trade deficits to supply foreign official holders with dollars. The third is that US deficits are caused entirely by foreign financial inflows, which reflect a more general demand for US assets that America has no choice but to accommodate by consuming more than it produces.”
Obstfeld instead argues that it is the domestic situation of the US economy that has led to trade deficits. American consumers, companies and government have bought more than they have sold abroad and paid for it by taking in foreign capital (loans, sales of bonds and inward FDI). This happened not because of ‘excessive saving’ by the likes of China and Germany, but because of the ‘lack of investment’ in productive assets in the US (and other deficit countries like the UK). Obstfeld: “we are mostly seeing an investment collapse. The answer must depend on the rise in US consumption and real estate investment, to a large degree driven by the housing bubble.” Given these underlying reasons for the US trade deficit, “import tariffs will not improve the trade balance nor, consequently, will they necessarily create manufacturing jobs.” Instead, “they will raise prices to consumers and penalize export firms, which are especially dynamic and productive.”
As I have explained before, the US runs a huge trade deficit in goods with China because it imports so many competitively priced Chinese goods. That was not a problem for US capitalism up to the 2000s, because US capital got a net transfer of surplus value (UE) from China even though US ran a trade deficit. However, as China’s ‘technology deficit’ with the US began to narrow in the 21st century, these gains began to disappear. Here lies the geo-economic reason for the launching of the trade and technology war against China.
Trump’s tariffs will not be a liberation but instead only add to the likelihood of a new rise in domestic inflation and a descent into recession. Even before the announcement of the new tariffs, there were significant signs that the US economy was slowing at some pace. Already, financial investors are taking stock of Trump’s ‘dumbest trade war in history’ by selling shares. America’s former ‘Magnificent Seven’ stocks are already in in a bear market, ie falling in value by over 20% since Xmas.
The economic forecasters are lowering their estimates for US economic growth this year. Goldman Sachs has raised the probability of a recession this year to 35% from 20% and now expects US real GDP growth to reach only 1% this year. The Atlanta Fed GDP Now economic forecast for the first quarter of this year (just ended) is for a contraction of 1.4% annualised (ie -0.35% qoq). And Trump’s tariffs are still to come.
Tariffs have never been an effective economic policy tool that can boost a domestic economy. 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. The Great Depression of the 1930s was not caused by the protectionist trade war that the US provoked in 1930, but the tariffs then did add force to that 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.
More and more studies argue that a tit-for-tat tariff war will only lead to a reduction in global growth, while pushing up inflation. The latest reckons that with a ‘selective decoupling’ between a (US-centric) West bloc and a (China-centric) East bloc limited to more strategic products, global GDP losses relative to trend growth could hover around 6%. In a more severe scenario affecting all products traded across blocs, losses could climb to 9%. Depending on the scenario, GDP losses could range from 2% to 6% for the US and 2.4% to 9.5% for the EU, while China would face much higher losses.
So no liberation there.
Michael Roberts Blog 
Again, without trying to sound like a broken clock, I still don’t get the economic rationale for the vicious attacks on Canada, which largely is reciprocal in terms of tariffs
The fentanyl stuff is total BS. He is using that as an excuse because he is violating the terms of the free trade agreement (that HE negotiated and said was a great deal for the US).
You know I criticised you for your one-sided treatment of the Covid induced inflation a couple of years ago which you attributed primarily to a supply side shock without factoring for the demand side expansion caused by Covid support funds. Well this mistake will now make itself felt with the supply side shock caused by tariffs which is not so dissimilar in magnitude. Now if Trump was pro-working class and therefore decided to issue ‘Tariff Cheques’ of say $1,600 to each household covering the cost of tariffs then prices could rise but households would not be worse off. But Oligarchy Trump won’t because he sees tariff taxes as the means to reduce income taxes benefitting the rich. In this case there will be insufficient demand for price rises due to additional tariffs which will scorch profit margins instead. With prices locked there will be little incentive to produce in the USA itself because there simply won’t be the improvement in margins to encourage it. This would not be the case if tariff cheques boosted demand sufficiently to accommodate these price rises. Which means Trump will ‘Make America Break’ rather than make it ‘Great’. (Incidentally this debate on tariffs and prices is analogues to the debate on higher wages and prices.)
On a second note, in my forthcoming article on tariffs I analyse whether or not the USA is being ripped off as Trump claims. Sure Trump points to the crude trade deficit, but when we factor for intra and inter company trade, add in services adjusted for travel, and the surplus on foreign income, lo and behold, it is the US which continues to rip off the world although this is declining. And it is declining because inward direct investment over the last ten years into the USA has far exceeded outward investment resulting in income paid to the rest of the world, (profits, interest & dividends) growing faster than income received from the rest of the world. Seems Biden did not do such a bad job after all.
If I may add some advise, would it not have been better to delay this blog for 24 hours to take in the scale and depth of these tariffs to be announced today. They say the messianic Trump is ignoring the markets but there will come a time when the markets cannot be ignored so we may be in for a few surprises today.
Nothing much more to say. The diagnosis has already been done and is definitive. We are witnessing, live, the fall of the American Empire and, with it, the start of the transition era between capitalism and socialism (do not confuse with the transition between socialism and communism, which is still millennia away).
It is a fantasy to postulate China will collapse if a complete decouple between West and East (last paragraph of the post) happens. It would be true if China was a capitalist country — but it is not: it is a socialist country. As such, even if its instantly loses 20%+ of its GDP growth, it would still have the means to save its socialist regime, as it operates with a different logic than you bread and butter liberal democratic captalist nation (which would simply see an unending sequence of toppled “elected” regimes while financialization/dispossession would run rampant behind the scenes, in a descending spiral to barbarism).
If they really want to help, the Western working classes should start socialist revolutions in the own countries — by any means necessary — in order to lift the siege against China, thus making this capitalism->socialism transition irreversible.
I agree with everything you have written here. But are there another two reasons why the tariffs will fail? First, Trump assumes that be driving up prices of overseas goods people will choose American goods. But will they? If I want a BMW, I want a BMW not a Ford. Second, even if his basis idea wasn’t as flawed as you point out, does America actually have the capacity to fulfil the additional demand? Presumably if they did they would not have been importing in the first place.
High tariffs will likely increase inequality – and they may be intended to do so. Tariffs are a way that the president and ruling oligarchy can raise taxes without Congressional approval. Higher tariffs result in higher prices that will disproportionately hurt low- and middle-income Americans. On the other side of the coin, more tariff revenue could reduce pressure on Congress raise taxes on the wealthiest as the Trump tax cuts expire later this year with the country facing historically high levels of debt.
Without corresponding wage increases, higher prices will reduce the well-being of American households and could have a chilling effect on economic activity. Higher inflation could lead the Fed to consider raising interest rates. The resulting higher cost of capital could make it harder for American businesses to invest in plant and equipment in the United States. The likelihood of stagflation and recession rises…
In the 2010s, the United States imposed tariffs on steel and aluminum to protect its domestic industries.
Result:
– Higher production costs for automakers and the construction sector.
– Less incentive to modernize protected steel mills.
– Slower competitiveness, as foreign producers continued to innovate.
– U.S. companies that rely on imported raw materials (e.g., steel, semiconductors) had to pay more due to tariffs.
– They were then forced to produce with increasingly expensive production factors, accelerating diminishing returns and reducing overall competitiveness.
Impact on consumption and demand for services (restaurants, tourism, education, etc.):
– Law of diminishing marginal returns in the context of tariffs: as production increases, the marginal productivity decreases due to the rising costs of raw materials and industrial components.
– Ultimately, ZERO EFFECT on the trade deficit, which depends on exchange rates and global financial flows.
– Stock market volatility due to uncertainty surrounding these policies.
Instead of relying on protectionist measures, socialist policies could be more effective in rebuilding the economy through massive public investment rather than waiting for industries to return naturally.
Possible solutions:
– Nationalization of key industries
– Subsidies for infrastructure and research
– Wage increases, worker protections, and stronger unions with co-management of companies
A planned economy with strategic public investment could be a more sustainable way to strengthen industrial capacity rather than short-term tariff policies.
Hello, cordial greetings Michael, a question: Can we get a percentage of what the 7 mercenaries represent compared to the rest of the market? Thank you very much!
32%
The U.S. Economy Is Excessively Dependent on Financial Markets 📉
The American economy relies too heavily on finance, services, and stock market speculation.
In the event of a major financial crisis, wealth destruction could be massive due to the lack of a solid productive base.
Trade Deficit and Loss of Economic Sovereignty
For decades, the U.S. has been importing far more than it exports, creating a structural trade deficit.
Dependence on foreign-manufactured goods (from China, Mexico, etc.) weakens industrial autonomy.
Dollar and Debt: A Fragile Balance
As long as the U.S. dollar remains the world’s reserve currency, the U.S. can easily finance its deficit.
However, the rise of BRICS, the yuan, and alternatives to the petrodo…
American labor is more expensive than in Asia or Latin America.
Global free trade makes it difficult for the U.S. to bring back large-scale production.
Conclusion: An Inevitable Conflict ⚠️If Trump—or any other president—fails to reindustrialize, the U.S. risks a financial and economic collapse if confidence in the dollar weakens. However, to succeed, it will be necessary to break away from Wall Street’s financial logic, which directly contradicts the interests of the American financial elite. A clash is inevitable.
It makes little sense to impose tariffs on EU countries, if the reason is to get US companies and corporations to return to the US. In Ireland’s case, the Pharmaceutical Industry has been highlighted by the Trump administration. Firstly, It would be costly to relocate these industries back to the US. Secondly, they will be subject to retaliatory tariffs for imports into the Single Market assuming unity among EU member states – not a given).
Listening to Trump crash the world economy with his reciprocal Tariffs it was not so much liberation day as illiteration day.