The Free Press
Journalists have always had a tendency to treat Donald Trump as a gold medalist in some kind of Olympics of Stupidity. But even for them, the trade war he has fitfully waged over the last two weeks has been dazzling in its illogic and arbitrariness. He has imposed tariffs, both on China and on his country’s nearest neighbors and closest allies. Then called them off. Then reimposed them.
Sowing ill will, repelling investors, decimating the 401(k) plans of those who once thought it was a good idea to vote for him, Trump appears to most newspapers readers as a mad king, or as the crazed naval captain Humphrey Bogart plays in The Caine Mutiny—someone from whom control ought to be wrested, and soon.
Yet there is powerful evidence behind certain Trump arguments. European and Chinese ambitions really do have something to do with abuses of the U.S.-Mexico-Canada Agreement on free trade. The United States now imports half a trillion dollars in goods from Mexico every year—more than we import from China. That is because, since Trump left office in 2021, China has increased its manufacturing presence along the U.S. border, in order to take advantage of favorable trade terms in the USMCA. So have European companies. So have American ones, including Elon Musk’s Tesla.
Trump is no less correct that the present architecture of the global economy is unsustainable. In peacetime, this country runs large, permanent trade deficits not just with China, Europe, and Mexico but with the entire world, and has accumulated $36 trillion in debt in the process. That’s $323,000 per taxpayer.
It is a paradox that the United States, which dominates the world economy and writes its rules, should have wound up behind the globalist eight ball. There is a sophisticated body of economic and institutional thinking about how this has happened, regularly batted around in academic economics departments. It could be used to defend a protectionism such as Trump’s. Unfortunately for him, it has mostly been developed by leftists, who are unappreciated by and unknown to his voters.
Trump’s great misfortune in his second term is that he has lost the services of Robert Lighthizer, the sophisticated tariff enthusiast who was U.S. trade representative in his first administration. Lighthizer had mastered these theories and could debate them convincingly, even where he didn’t agree with them.
Much of the difficulty with trade is tied up with the power of the dollar. The Berkeley legal theorist David Singh Grewal, an authority on the architecture of globalism, notes that holding the reserve currency is not just an “exorbitant privilege,” as Valéry Giscard d’Estaing used to say. It can also be a burden. Every country that wants to participate in the global system has to hold dollars. This drives the dollar’s value up, up, up, to the point where American exports become uncompetitive. That is how the United States lost its industrial base. Orthodox free traders take solace that this trade deficit is balanced by a capital surplus: Our financial products have swept the world. Unfortunately, those products are T-Bills. Where China specializes in manufacturing, we specialize in debt.
Complicating matters, the dollar has a double function: “The supply of U.S. dollars must do more than mediate transactions within the U.S. economy,” Grewal writes; “it must also lubricate the growth of the globalized world economy as a whole.” When the world is starved for funds, we can either let it suffer by withholding dollars, or we can print money and endanger our own citizens through housing and other bubbles. Since the Clinton administration, it has comforted a lot of people to assume there is no contradiction between the dollar’s global and national functions. Those people did not vote for Donald Trump.
Trump believes America has gone uncompensated for services rendered. The Trump theory about America’s role in the global economy resembles that of certain second-wave feminists about women’s unwaged and unappreciated housework. America’s “chores” include security guarantees and serving as a global economy–stimulating consumer of last resort. By meekly assenting to such burdens, we’ve been ripped off. An economist keenly attuned to this argument is Yanis Varoufakis, the volatile former finance minister of Greece. As Varoufakis sees it, Trump is now pursuing a master plan, one that Varoufakis himself considers “solid—albeit inherently risky.” Its goal is not just to get better terms of trade but also “to shock foreign central bankers.” Writing a few weeks ago, Varoufakis expected it to be a hairy maneuver.
So it has proved. The S&P 500 is down more than 4 percent since the start of the year. Trump’s Treasury secretary, Scott Bessent, has talked about a “detox period,” which implies a managed transition to a newer, healthier global economic regime, a weaning of sorts. That would be good. A gradually introduced tariff on Mexico might (whether one approves of the policy or not) incentivize the world’s investors to favor American factories over Mexican ones. But we have something less like detox and more like cold turkey. An out-of-the-blue 25 percent tariff risks subtracting value from the economy without any means of replacing it. The result, to pursue Bessent’s metaphor of detoxification, has been the economic equivalent of delirium tremens.
What is more, Trump is trying to use the same tariffs for three different things: 1) raising revenue, 2) transforming the economy to be more worker-friendly, and 3) sanctioning (or outright punishing) foreign countries. He frequently loses track of which he wants to achieve and winds up—in every case—settling on punishment.
This approach made a bit of sense when he was browbeating Gustavo Petro of Colombia into accepting deportees. But not in the case of Claudia Sheinbaum’s Mexico—which had already given the U.S. much of what it publicly sought on limiting migration and cracking down on fentanyl. To foreign voters this looks arbitrary—and they have rallied behind whichever of their leaders is sitting at the other side of the table from Trump. Sheinbaum has risen to 85 percent approval ratings in some polls. Even French president Emmanuel Macron has shot back up to 27 percent—high for him.
A couple of factors complicate Trump’s position. It is by no means clear that his authority to impose tariffs is even constitutional. Article I, Section 8 gives tariff authority to Congress, which in the old days maintained a “schedule” of tariffs that it could adjust this way and that. Congress delegated that power to the White House in the 1930s. So, oddly, the presidential tariffing authority that Trump is claiming is a building block of the very administrative state that Trumpism is supposed to stand against.
Now the president is claiming part of his authority to levy tariffs from the International Emergency Economic Powers Act of 1977. This may help explain why the administration has made such a big deal of paltry fentanyl seizures in Canada.
Another problem is that there is little public case being made for the tariffs. The tone of U.S. press reports always focuses on foreign anger (and thus on Trump’s vulnerability) and not on an equally present foreign fear (and thus on Trump’s strength). You have to sit till late in the newscast or read many paragraphs into the story to discover that Canada’s central bank, for instance, is dropping rates for fear of recession.
Whether such coverage is fair or not, Trump, like a shorn Samson, has thus far been unable to cut through it, even though he has a real case to make. The maquiladora system that spread in the free-trade dawn of the 1990s was a way for U.S. companies to avoid paying union wages when making T-shirts and a few primitive widgets. But now Mexico has transformed itself into a lightly regulated launching pad for sophisticated European and Chinese companies of all kinds, meaning that American workers must compete against Latin American labor across the entire spectrum of global-economy products that American consumers buy. While Americans certainly don’t want their retirement funds drained, they do want the country protected from a flood of Chinese automobiles.
The problem with trade policy is that injustices can be both glaringly evident and tedious to explain. Yet explain them Trump must, and in a way that will be entertaining on a television screen. If he cannot engage the public in the trade war that is turning into the biggest debacle of his second term, he will have a hard time persisting. If he can engage them, he may win, and may even deserve to.
For another view on Trump’s tariffs, read Niall Ferguson: “A User’s Guide to Wrecking the Global Financial System.”