Off the deep end: Trump goes nuclear on tariffs

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Wednesday the 2nd April 2025 will go down in history as one of the most consequential days of the second Trump administration. Standing in the White House Rose Garden with a cardboard sign, the president announced a sweeping package of tariffs targeting most of America’s main trade partners. Trump’s “Liberation Day” tariff package has increased the US effective tariff rate eightfold from 2.6% to 22.5% - the highest level in more than 100 years. Markets balked, with the S&P 500 losing more than $5 trillion as recession fears surged and investors fled.

This did not come out of nowhere. A belief in protectionism as an economic panacea is one of the only consistent threads of the Trump worldview. As far back as the 1980s, he has argued that they are a necessary step to rebuild American manufacturing and rebalance the country’s economic relations with the rest of the world. Nonetheless, Trump’s announcements went further than markets and policymakers expected - both in their severity and their intellectual incoherence.

Last week, we released a video on Tariffs and why we think that they won’t work which can be found here. Let us know your thoughts.

What’s the issue?

The methodology was simple. Take the tariff rate that US trade partners charge the US, and halve it. The problem is that the “tariff rate” in question does not correspond at all to the actual level of tariffs that these countries levy on US goods. Trump said the EU has a 39% tariff on US goods, but the WTO puts the figure at 4.8%. 

Savvy Twitter users quickly worked out that the tariff rate was actually calculated by a rather simple formula: trade deficit with a country / imports from that country. This was initially denied by White House deputy press secretary Kush Desai, who pointed instead to the below formula, apparently unaware or unable to deduce that it is, in fact, precisely the formula Twitter had described.

Quantum brain mathematics. The ε and φ are set at 4 and ¼, so conveniently have a product of 1.

Yes, you read that correctly: the White House invented the numbers using a middle-school equation, and then denied using said equation because they couldn’t correctly solve it. 

Why Is Trump Wrong?

Source: United States Trade Representative

It’s difficult to know where to begin when the United States government starts creating global policy on arguments that wouldn’t pass a high school economics exam, but here goes:

• Bilateral trade imbalances do not imply “unfairness” or “cheating” - they are the result of economies producing goods that they are relatively better at producing. This is the theory of comparative advantage. Cambodia is relatively better at producing textiles and apparel than it is at producing high-tech goods, so it sells lots of cheap clothes abroad, and being a relatively poor country imports a fairly small volume of US-made Teslas and Boeing airplanes. This has nothing to do with the tariff and non-tariff barriers that Trump raged about on Wednesday. 

• Bilateral trade balances are not even necessarily desirable. Your suppliers do not have to be your customers. The core takeaway from the theory of comparative advantage is that trade and specialisation are good because they allow countries to play to their strengths and produce more overall. It does not make sense for America to try to produce garments and sell them to consumers in Cambodia, because the US economy is significantly more productive when its workers make Boeing 787s instead of $5 polyester t-shirts. 

• Focusing on bilateral trade balances is a misunderstanding of global trade: As we’ve written before, supply chains are dynamic and cannot just be stopped at the border of one country by a tariff. The underlying root causes of global trade imbalances - high savings rates in surplus economies such as China and low savings rates in deficit countries such as the US - continue. 

The upshot of all of this is clear: prices for US consumers will increase as quality and choice slide, and global growth will slow. Economists at JP Morgan have already raised their odds for a US and global recession this year to 60%. 

Similarly, the uncertainty that Trump’s chaotic policymaking has created will not encourage investment into the United States or revitalise American manufacturing. One of Trump’s central beliefs about tariffs is that they will push firms to move their production to the US. But the inconsistency and incoherence of Trump’s economic policy is likely to seriously deter them from doing so. As Nobel Prize winning economist Paul Krugman wrote in a recent blog post:

“Permanent tariffs are bad for the economy, but businesses can, for the most part, find a way to live with them. What business can’t deal with is a regime under which trade policy reflects the whims of a mad king, where nobody knows what tariffs will be next week, let alone over the next five years.”

We’re going to be giving away $100 USD to 3 people who refer this newsletter to 5 of their friends and family. 

• Also you can’t just create 5 emails and sign up, we’ll know. This isn’t first come first serve either, we’ll randomly draw from the pool. Contest ends next week, April 13 at Midnight. Good Luck.

What next?

The economic illiteracy of the ‘tariff formula’, along with Trump’s preoccupation with bilateral imbalances and so-called “cheating”, suggest that this is actually not about economics at all. Rather, it is about kicking back politically against the countries that Trump thinks take advantage of America. Much like the new administration’s approach to European defence policy, Trump seems obsessed by the notion that countries are ‘free riding’ on the US and are not sufficiently grateful for all it does for them. It is possible that the tariffs are not a negotiating tool or a means to an end, but have become the end itself. 

Trump’s second administration is much more ideologically committed than the first, and so we shouldn’t necessarily expect Trump to reverse course on the tariffs just because the markets hate them, or to use them as a bargaining chip with trade partners. It is notable that countries that have bent the knee to Trump did not escape the tariffs. Japan had offered to increase purchases of American LNG and had dangled a $500bn investment in US AI from venture capital investor SoftBank, and was still hit with 24% levies.

Washington’s global standing and influence will diminish. Many of the countries punished hardest by the Trump formula are developing countries in the Global South that are highly dependent on exports to the US but represent only a tiny fraction of overall US imports. These countries, like Cambodia or Lesotho, will suffer greatly from the tariffs. 

Source: World Bank

As these countries reel from the dual shock of the tariffs and sweeping cuts to US foreign assistance under USAID, it is inevitable that they will lean toward more reliable economic partners like China.

Wednesday’s announcement was a hammer blow to liberal economic order. Trump is seemingly blind to the fact that America built and benefits greatly from this order, and instead views it as a burden that the US must shed. The most obvious beneficiary of this will be his greatest adversary: China, while households from Pittsburgh to Phnom Penh face lower incomes and higher prices. Liberation Day may well be successful in achieving Trump’s goal to rewire global economic order, but not in ways that he will expect or like. 

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