IT´S NOT OVER: DONALD TRUMP COULD STILL BLOW UP GLOBAL TRADE / THE ECONOMIST

The end of the beginning

It’s not over: Donald Trump could still blow up global trade

Ideology, complacent markets and a need for revenue may still lead to big tariffs

IF DEALMAKING MEANS threatening catastrophe in order to win small gains, then Donald Trump is the master of the art. 

Having threatened Canada and Mexico with 25% tariffs which would have imperilled the carmaking that criss-crosses North America’s borders, he granted them both a 30-day reprieve on February 3rd. 

In return, he got a modest boost to their help securing America’s frontiers, including from 10,000 extra Mexican troops, plus the reiteration of some old promises.

Was the “dumbest trade war in history” also the shortest? 

Investors seem to think so. 

For months they saw Mr Trump’s threats as negotiating ploys. 

Then, as tariffs loomed, the S&P 500 index of American stocks fell by 3%. 

But since the first deal with Mexico they have recovered their poise, and more than half their losses.

Unfortunately, that looks like complacency. 

It would be a mistake to conclude Mr Trump’s trade aggression is a tactical distraction. 

More probably, it is only just getting started.

For one thing, a blanket 10% tariff really did go into effect against China—adding more than half as much again to existing average levies on the country. 

China has set out its retaliation, which will come into force on February 10th. 

And Mr Trump has vowed to strike more blows, including, perhaps, to fulfil his threats against the European Union and Taiwan.

For another thing, the president genuinely believes that tariffs would be good for the American economy. 

It is true that in his first term Mr Trump repeatedly backed out of tariff threats; America’s effective average tariff rate rose by just 1.5 percentage points. 

Ever the showman, he delights his base by throwing America’s weight around and boasting of his victories.

However, he repeatedly sets out his vision for the re-industrialisation of America by force. 

He wants manufacturers to choose between tariffs and moving production to America—which he promises will be a low-tax, deregulated business paradise. 

He also castigates countries with which America runs trade deficits, which he calls “subsidies”, as if buying from a foreigner involved a gift rather than a beneficial transaction. 

And he has extolled the federal budget of the late 19th century, under presidents including William McKinley, when America’s federal government raised much of its revenue from tariffs because there was not yet a federal income tax.

That leads to the biggest reason to fear tariffs, which is that the federal government needs the money. Its deficit in 2024 was 6.9% of GDP. 

Official forecasts show this remaining above 5%, despite assuming that many of Mr Trump’s tax cuts from his first term will expire as scheduled at the end of 2025.

In reality Republicans want to renew those tax cuts and then some. 

Mr Trump is odd in his belief that tariffs are desirable on their face. 

But plenty of Republicans may prefer them to defying him and putting up income taxes. 

A 10% universal tariff would raise about 1% of GDP in annual revenue—not much less than the cost of renewing Mr Trump’s earlier bill. 

Today’s rules prevent a simple majority in Congress from passing budgets that raise deficits more than ten years into the future. 

So if universal tariffs were in the law, it might enable permanent tax cuts. 

As a result, although it is impossible to imagine a wholesale return to the 19th-century tax system—not least because America’s government is a far bigger share of the economy—a step in that direction is all too plausible.

The blow to the global economy would be profound. 

Mr Trump is right that America holds the cards in a trade war. 

It is an enormous, diverse free-trade zone with plentiful natural resources. 

The big costs of a step towards autarky would be borne by places that depend on America for trade, none more so than its immediate neighbours. 

However, the Smoot-Hawley levies that helped wreck global trade in the 1930s raised America’s tariff rate by only six percentage points, and from a much higher starting-point. 

Their effects were exacerbated by deflation and the retaliation against America that followed. 

Thankfully, today’s world economy is much healthier, but retaliation is still certain. 

And if a trade war can rage when there is no global slump, what happens when a recession hits?

Hold your fire

Mr Trump is sensitive to Wall Street’s opinion, viewing the stockmarket as a kind of presidential scorecard. 

If it concludes that he is always bluffing when he threatens self-harming policies, it will fail to move—making him think it is safe to follow through. 

Expect, therefore, that the president will take the global trading system to the cliff edge repeatedly, each time with a growing risk that he pushes it over.