The costs of confinement
Donald Trump’s fortress economy is starting to hurt America
The pain from trade and immigration restrictions cannot be postponed forever
Illustration: The Economist/Ricardo ReyBrick by brick, President Donald Trump is building a wall around the world’s largest economy.
As America’s tariff barriers on everyone else have gone up, so has the drawbridge, making it harder for migrants to enter the country.
The president wants to turn America into a fortress that keeps out foreign incursions.
In fact, he is cutting America off from the very goods and talent that helped make its economy the envy of the world.
Already the damage is starting to show; once wreaked, it will not easily be reversed.
That is not how investors see it.
In the six months since “Liberation Day”, when Mr Trump slapped tariffs on America’s trading partners, financial markets have swung from panic to euphoria.
Elsewhere the picture is mixed.
Inflation has risen only a little, as America’s importing businesses have absorbed much of the tariff pain.
Although employment has stagnated as migration flows have stopped, America’s economy will probably grow by 1.5-2% in 2025.
Some of the explanation for this resilience is that average tariffs are not as high as was feared, in part because of rollbacks and in part because trade flows are adapting fast.
In April analysts were warning of America’s average tariff rate reaching 28%.
By August, however, customs revenue raised at the border pointed to a rate of only 11%.
It also helps that few countries other than China have retaliated at scale against American duties.
Big economies including Britain, Japan and the European Union have struck deals that reduce Mr Trump’s proposed tariffs, without levying their own.
The president is fortunate, too, that America is in the middle of an astonishing stockmarket boom, fuelled by optimism about artificial intelligence (ai).
Since a trough in April, the S&P 500 has risen by 40%; valuations now exceed 40 times cyclically adjusted earnings, not far off the record set during the dotcom years.
Wealthier investors are in turn spending more and propping up growth.
Yet the economy cannot dodge the costs of isolation—and these will only mount over time.
For a start, the stockmarket cannot go on rising this fast for ever; and the higher it soars, the greater the danger of a crash, putting the wealth effect into reverse.
The damage from the tariffs that are in place is starting to be felt.
And the collapse in migration is an enormous and underappreciated shock to the economy.
Between 2000 and 2020 annual net migration into America was 1m, on average; under President Joe Biden it reached 2.5m a year.
In 2025 net migration could be zero or negative for the first recorded time since the Depression.
The biggest immediate problem will be higher inflation.
Our tracker suggests that Mr Trump’s tariffs are currently boosting consumer prices by 0.3 percentage points.
This will probably rise over the next few months, and peak around the turn of the year.
Economists at Goldman Sachs have found that the more long-standing the tariff, the more it has been passed on to prices.
This may be because of the president’s volatile policymaking, which encourages companies to wait to raise prices until they know they must.
When they do, domestic producers, shielded from competition, follow suit.
These effects will soon push underlying consumer-price inflation close to 3.5%.
Already the prices of imported items such as clothes, electronics and household appliances have surged above trend.
And people have noticed, especially in poorer households.
Our latest polling with YouGov says that Americans disapprove of Mr Trump’s handling of inflation by a margin of 28 percentage points, compared with a net approval of six points in January.
Higher inflation might also dissuade the Federal Reserve from cutting rates further, threatening those ultra-high stockmarket valuations.
The real damage will be in the longer term.
America accounts for only 15% of global final demand for goods imports.
If its drawbridge remains up, the world will gradually integrate without it.
Mark Carney, the prime minister of Canada, hopes for closer ties between the CPTPP, a mostly Asian trade bloc that includes Canada, and the EU.
America is a big enough economy that it can step back from global trade without suffering an economic cataclysm.
However, in time tariffs will erode its competitiveness and its economic power—especially if its allies integrate more deeply with China.
Global investors have already become more wary of the dollar, which is down by 9% against a basket of currencies this year.
Lower migration will do damage, too.
The administration’s assault extends to high-skilled workers, some of whom face a $100,000 fee for visas.
Rationing entry by price rather than lottery has its merits.
But not all the visas are allocated by chance.
Combined with his no-holds-barred deportation programme and attacks on universities, Mr Trump is signalling to the world’s best minds that they are not welcome in America.
That will hurt America most of all, because the benefits of skilled migration are enormous.
The average migrant with a graduate degree boosts the Treasury’s coffers by a net $1.8m over their lifetime, which helps explain why skilled migrants account for 5% of the labour force but 10% of labour earnings.
Once the impact of migrant innovators such as Elon Musk are accounted for, the benefits are larger still.
One study attributes 30-50% of American productivity gains between 1990 and 2010 to skilled migrants.
When it shuts the door to mobile talent, America is giving up one of the main ingredients of its success.
A gloomy city behind a wall
Because other countries have not raised tariffs, America would have to unilaterally lower its duties.
But domestic firms, used to protection, will lobby for them to remain.
Migrants’ faith in the country as a place where they can thrive will not be rekindled overnight.
America once thought of itself as a shining city on a hill.
As the walls go up, it will seem more like an isolated fortress.
The longer this lasts the more likely the world is to move on without it.
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