As President Donald Trump prepares to announce major new import tariffs Wednesday, chaotic preparations and stock market unease have raised a basic question: Does he have any grand strategy behind a step that appears certain to hurt American consumers?
He has asserted that he does have a viable and coherent economic plan – one that emphasizes reviving homegrown manufacturing, resetting imbalances in global trade, and shrinking the size of government to help address swelling public debt.
Using economic pressure to force the world’s manufacturers to set up shop in the United States, President Trump hopes to slash the roughly $1.2 trillion annual trade deficit, boost national self-sufficiency, raise federal revenues, and unleash a jobs boom. On Wednesday, which he calls “Liberation Day,” he’s due to announce his reciprocal tariffs – taxing imported goods at levels that, the administration says, are equivalent to trade barriers that other nations impose on the U.S.
Why We Wrote This
President Donald Trump hopes to use reciprocal tariffs to boost national self-sufficiency while unleashing a jobs boom. What’s less clear is whether they can work.
He says the strategy not only can work, but already is working.
“We’re going to have growth in the auto industry like nobody has ever seen. Plants are opening up all over the place. Deals are being made,” the president told a joint session of Congress last month. “That’s a combination of the election win and tariffs.”
But if he has conveyed a vision, Mr. Trump has also sent mixed signals. What’s still a mystery is whether he will use tariffs as a tool to extract concessions and investments or as a long-term solution in itself. Even less clear is whether they can work.
“Most economists would say this doesn’t make sense in terms of promoting economic growth,” says Jeffrey Schott, a senior fellow at the Peterson Institute for International Economics. “It will dampen economic growth even as it feeds inflation.”
The president has acknowledged that his strategy may bring some near-term challenges, such as a possible recession. At the same time, it’s possible that by shaking up long-standing patterns of global trade, Mr. Trump will prompt a jump in factory investment within the U.S. by multinational firms – and perhaps push other nations to reduce their trade surpluses (in which exports exceed imports).
To many economists, a trade surplus or deficit isn’t inherently good or bad. But some acknowledge that America’s long-standing trade deficit with the rest of the world reflects unhealthy imbalances in a range of major economies.
In pursuing his strategy, President Trump faces at least two challenges. One is timing. The other is automation.
Charlie Neibergall/AP/File
The timing problem
Consider timing first. Under his plan, the bad stuff happens up front. Effectively a tax on much economic activity, tariffs typically mean slower growth, higher prices, and higher inflation. Companies may try to absorb the higher costs of their imports. But some of those costs are bound to get passed on to consumers.
Take autos. The president says he will impose 25% tariffs on imported cars starting Thursday and on auto parts no later than May 3. (Parts that qualify for preferential treatment under the United States-Mexico-Canada Agreement would be exempt for the moment.) The auto industries of the three nations are so intertwined, with some parts crossing borders multiple times, that untangling them will take time.
“It’s going to be a huge hit and a huge mess,” says Art Wheaton, director of labor studies at Cornell University’s School of Industrial and Labor Relations. Analysts at Wedbush Securities estimate the cost of a typical new car will rise by $5,000 to $10,000 almost immediately. President Trump’s tariffs will mean higher prices for many other goods, too, including imported food and anything using aluminum or steel.
If the 2024 election is any guide, voters hate higher prices. Such discontent may well rear its head in midterm elections next year. Republicans, who hold only a slight majority in both houses of Congress, are vulnerable.
The payoff from tariffs will be less immediate. Tariff revenues should swell federal coffers, and Mr. Trump has floated the idea of issuing a rebate to consumers. But he’s also talked about using the money to bail out losers in the new tariff regime, such as farmers, reducing the federal deficit, and paying for his proposed tax cuts or replacing the income tax. Economists say tariff revenues won’t come anywhere near to accomplishing even some of those goals.
The new manufacturing jobs, meanwhile, will happen long after President Trump’s term ends. To locate a factory in the U.S., companies have to find a site, negotiate with state and local governments to buy it, get their construction approvals, and build the factory, all before manufacturing jobs appear. It’s a process that takes years.
Uncertainty on employment
Those jobs are the president’s second hurdle. Will increasingly automated factories generate a boom of new manufacturing jobs? Presumably, there will be more robot technicians. But experts are divided on whether there will be a big surge in jobs for less educated, less skilled workers, to whom Mr. Trump has promised help.
“The key is that you create a pipeline, a pathway for low skill to high skill,” says Olaf Groth, a business and public policy professor at the University of California, Berkeley Haas School of Business and CEO of Cambrian Futures, an analysis and futurist firm for artificial intelligence and emerging tech. “If we get that pathway right, then yes, we could be looking at less income inequality. But without that pathway, we’re looking at more income inequality.”
Signals of sentiment suggest that Americans are skeptical. A Harvard CAPS/Harris poll released Monday found that the president’s job performance approval rating dipped from 52% in February to 49% in March. Investors are grumpier, too. The stock market this week closed out its worst first quarter in three years. Ditto for consumers. The University of Michigan’s sentiment index for March found that consumer expectations for the economy fell more than 30% since the election and that unemployment expectations were at their highest since 2009.
Hints of a slowdown are also creeping into the numbers. Consumer spending – a big prop to the U.S. economy – fell in January for the first time in 20 months before rebounding a bit the following month. Inflation remains stubbornly above the Federal Reserve’s 2% target. Economists are revising downward their estimates of economic growth for the first quarter.
Hollie Adams/Reuters/File
Leverage for Trump
The president retains some advantages. Some big names have already committed to big investments in U.S. factories, including Apple, Japan-based SoftBank, Taiwan Semiconductor Manufacturing Co., Johnson & Johnson, and the United Arab Emirates. Job growth – another big prop to the economy – continues, although at a decelerating rate. The tax cuts Mr. Trump is proposing could go some way toward cooling consumer anger over rising prices. Those price hikes should be a one-time event, although it may not feel that way if companies try to ease the sticker shock by delaying price increases.
In a strange way, the nation’s huge trade deficit also gives Mr. Trump negotiating leverage. Other countries need the U.S. more than the U.S. needs them. And America’s large domestic market insulates it better from a downturn in exports than its more export-dependent trading partners: Mexico, Canada, China, Japan, and the European Union.
Should the president use that leverage to negotiate down tariffs all around, it could boost growth in the U.S. and world economy. If he keeps tariffs in place to fund his tax cuts or to try to protect U.S. industry, growth is likely to slow around the globe, including in the U.S.
The ambiguity emanating from the White House makes it hard to know who’ll be leading America’s trade policies: Trump the negotiator or Trump the protectionist.
