Trump’s incoherent trade policy will do lasting damage – The Economist – 10.04.25
- Michael Julien
- Apr 11
- 4 min read
Even after his backtracking, the president has done profound harm to the world economy.
After the terror, the euphoria. When, on April 9th, President Donald Trump postponed for 90 days the most illogical and destructive of his tariffs, after a meltdown in financial markets, the s&p 500 index of American stocks rose by 9.5%, its fastest daily rise in nearly 17 years.
The darkest scenarios for the world economy that had been envisaged by investors until that moment are now unlikely. It seems there is some limit to the market falls the president will tolerate on his watch. After the chaos that had followed Mr Trump’s announcement of “reciprocal” tariffs a week earlier, that is no small source of comfort for the world.
But do not mistake the consolation of having avoided disaster for good fortune. The scale of the shock to global trade set off by Mr Trump is still, even now, unlike anything seen in history. He has replaced the stable trading relations which America spent over half a century building with whimsical and arbitrary policymaking, in which decisions are posted on social media and not even his advisers know what is coming next. And he is still in an extraordinary trade confrontation with China, the world’s second-biggest economy.
Investors and companies everywhere have been put through the wringer. Global markets crashed in response to Mr Trump’s first tariff announcement. The S&P 500 fell by about 15%. Long-dated Treasuries sold off, as hedge funds were forced to unwind their leveraged positions. The dollar, which is supposed to be a safe haven, fell. After the tariffs were delayed, stockmarkets enjoyed a vertiginous climb. Between its low and high on the day, Nvidia’s value fluctuated by over $430bn.
Even after the tariff pause, however, Treasury yields remain elevated. Global stocks are 11% below their highs in February—and justifiably so. Mr Trump has still raised America’s average tariff rate to over 25% since January, with the promise of more levies, including on pharmaceuticals imports, to come. The president’s advisers display a jaw-dropping insouciance about the damage tariffs can do to the economy. In their view, foreigners foot the bill for tariffs and market declines hurt only rich investors.
Yet the dollar’s fall all but guarantees that tariffs will cause American consumer prices to surge, hurting households’ real incomes. The knock-on hit to consumer spending, including on goods made in America, is likely to be substantial, compounded by the blow to confidence from volatile stocks.
A similar blow will be dealt to capital spending. More than the precise level of tariffs, firms crave certainty that the rules of global trade will remain stable, so that they can plan their long-term investments. For example, although China’s accession to the World Trade Organisation (WTO) in 2001 led to an explosion of trade, it did not involve materially lower trade barriers with America. Instead, businesses gained the confidence that there would not be a trade war, an effect that economists later estimated as being worth a staggering 13-percentage-point reduction in duties.
Mr Trump has now put that confidence effect into reverse, for both America and its trading partners—especially since his tariffs have disregarded America’s past trade deals, including those he signed in his first term. It is still unclear what Mr Trump really wants to achieve in his 90-day holding period: his apparent goals of extracting concessions from other nations and reshoring manufacturing jobs contradict one another.
If tariffs are lowered, reshoring will not happen. Yet if trading partners suspect he is committed to protectionism, why would they offer concessions? And even if all the tariffs are rolled back, the memory of “Liberation Day” will linger in the minds of any company building a supply chain.
In any case, Mr Trump remains in an open stand-off with China from which it could be hard to back down. As we published this leader, America’s new tariff on Chinese imports had reached 125%; China’s levies, including in retaliation, came to 84%. These tariffs are high enough to devastate goods trade between the world’s two largest economies, which have hitherto been deeply intertwined even as tensions have ratcheted up between the superpowers.
Mr Trump says that “China wants to make a deal”. But, as with America’s allies, only he knows what such a deal might be. For more than a decade there has been no shortage of Western complaints against China’s approach to trade. The country has long violated at least the spirit of the WTO.
Its model of state capitalism, in which its exporters are supported by an opaque system of subsidies and state-backed finance, can be hard to square with a transparent, rules-based order. And China’s manufacturing surpluses have been so large in part because its own consumption is too low. None of this makes America poorer in aggregate, but it does mean that trade with China is not perceived to be fair—especially by those workers who have been displaced by it.
Superpower showdown.
Yet a destructive and unpredictable tariff war was never the right way to approach these problems (which were in any case poised to improve as China stimulates its economy). Both sides’ tariffs are causing deep economic harm; they may also raise the risk of a military showdown. A more promising route for America was to marshal its allies into a free-trade bloc large enough to force China to change its trade practices as the price of admission.
This was the strategy behind the Trans-Pacific Partnership, a trade deal that Mr Trump binned in his first term. Scott Bessent, the treasury secretary, talks of doing a trade deal with allies and approaching China “as a group”. But now that it has bullied its allies and reneged on its past deals, America will find they are less willing to co-operate.
Such is the short-sightedness of Mr Trump’s reckless agenda. In a mere ten days the president has ended the old certainties that underpinned the world economy, replacing them with extraordinary levels of volatility and confusion. Some of the chaos may have abated for now. But it will take a very long time to rebuild what has been lost. ■
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