'Outside of US military adventurism, Donald Trump’s tariffs are about about the most disruptive thing a US President has done in decades.
When “Liberation Day” was announced, no-one really new what it would entail. The reality has been much worse than most feared. While New Zealand exporters fared relatively well - and were perhaps even advantaged by a 10% tariff on goods going into the US - the reasoning and method behind calculating the tariffs was disturbingly crude.
The fact that a bunch of countries that aren’t really countries were included on the list suggests that ChatGPT would have done a better job of designing the new import taxes than the Trump administration did. The “tariffs” Trump alleged other countries are charging the US aren’t really tariffs at all. Economically, it’s a meaningless number.
But then the US President has for years claimed that Trump Tower is 68 storeys when it is actually 58 and lied about all manner of other things, so it is part of a more general pattern of behaviour.
But behind the changes appears to be an overarching goal: to increase Trump’s current power at the expense of the United States by forcing other countries to try to buy more stuff made in the US.
Nations around the world will have to offer sufficient supplications in order to try to avoid the worst of it. Like everything else in Donald Trump’s long career, it appears to be driven by a fear of someone else beating him, however that is defined.
And it dovetails nicely with the anti-woke sense of grievance that seems to permeate the current administration.
The White House released a paper on how all the tariffs were calculated. It contained some janky maths and a few flash-looking equations but the bottom line was basically this: it worked out who it runs trade deficits with, and divided that by export numbers to reach a figure at which trade with each nation would be “in balance”.
Those numbers were then “discounted” by a half to come up with the new tariff that the US would charge its importers for imports from various countries.
In other words, trade should be “in balance” with every nation of the world. Everyone with whom trade was already basically equal, such as New Zealand, or those such as Australia who actually run a trade surplus with the US (ie they import more from the US than they export) they just got a blanket 10%.
Balanced trade, what could be fairer than that, the Trump administration and its acolytes are claiming.
But this undermines the entire point of trading with different nations - with some of which you have trade surpluses and deficits. Nations trade with others because everyone in the world is good at making different things. It is called comparative advantage and in an open system with relatively low tariffs it means that consumers in all countries are better off because they can buy lots of stuff more cheaply from countries that are efficient at making things, and so they produce those things at scale, and at lower cost.
It means that all countries don’t need to be good at everything. New Zealand, and more recently Australia, no longer manufacture cars. Why? Because it was more expensive to make them in sub-scale industries in New Zealand than for them to be made elsewhere. When Australia finally ended subsidies to its car industry, which made good, but not great cars that fewer consumers were buying, the manufacturing left.
Trump’s subsidies ignore all that and basically levy the biggest tariffs on emerging markets that make cheap goods: China, India, Vietnam, Cambodia and - the highest rate - Lesotho.
Trump said his Liberation Day was going to end a period in which “our country has been looted, pillaged, raped, plundered” by other countries.
For those trying to gin up an intellectual framework over this exercise, it can broadly be summed up as this: The US cannot continue to soak up the world’s excess production in the form of global imports and Treasury bonds (the debt the US Government sells to fund itself). The US’ position of global leadership, which includes running deficits to, in part, provide the western world’s security guarantee, has mean the US dollar has remained higher than it should have been, making US exports less competitive.
US leadership has cost America economically is basically the argument. It is a narrow argument that ignores the fact that a global trading system based on rules is greatly in the broader economic interest of the US, and of course to it having the perks that come from global leadership, including calling the shots on just about any Western military intervention anywhere.
It is also the case that Trump has said he wants to rejig the US tax system to make it less reliant on income taxes and replace those with import taxes (tariffs). There is a domestic political imperative here - he needs money, or forecast revenue at least, to cover the cost of extending some tax cuts that are due to expire.
Given that the US is still the largest economy in the world, measured by gross domestic product, and that the United States has remained extraordinarily productive and innovative, quite how all of this pillaging and plundering was supposed to be happening is beyond comprehension.
US markets dropped dramatically on Friday (NZT). The S&P 500 fell by 4.8%, making it Wall Street’s worst day since March 2020, during the Covid-19 pandemic. The US currency fell by up to 2.1%.
That matters because instead of tariffs driving the US dollar up on the back of inflation fears, it means that the US currency is seen as risky. Trump has made the world’s safest currency less safe. While the administration might consider that a success, it could turn problematic.
Trump has already signaled that he might be prepared to lower tariffs if other countries offer the US something phenomenal.
Trump said that “every country has called us” and that relenting on the tariffs would ultimately depend on what they offered.
“If somebody said that we’re going to give you something that’s so phenomenal, as long as they’re giving us something that’s good,” he said.
In classic Trump style he also said he might cut the tariffs on China if it sold social media platform TikTok to a US firm.
New Canadian Prime Minister - and former Bank of England and Bank of Canada boss Mark Carney - declared that the day effectively marked the death of the US-led economic order that has been in place since the Second World War. It is worth quoting at length.
“The global economy is fundamentally different today than it was yesterday. The system of global trade anchored on the United States, that Canada has relied on since the end of the Second World War—a system that, while not perfect, has helped to deliver prosperity for our country for decades - is over.
“Our old relationship of steadily deepening integration with the United States is over.
“The 80-year period when the United States embraced the mantle of global economic leadership - when it forged alliances rooted in trust and mutual respect, and championed the free and open exchange of goods and services - is over.
“While this is a tragedy, it is also the new reality.“
For New Zealand in the short term, this means higher tariffs for especially wine and beef exporters selling into the US - but lower compared to other competitors such as the EU. We are not immediately disadvantaged.
The real question is the extent to which the EU and the bloc of China, Japan and Korea respond. There are plenty of other countries with tariff barriers - to what extent will some of them allow greater access to US markets?
Meanwhile, as with the US effectively withdrawing from helping Ukraine, this could well set up a chain of events in which the rest of the globalised world starts to try to work around the US. The cost of living in the US - which Trump was elected to lower, will likely rise.
It isn’t necessarily the tariffs themselves, but a new era of American unreliability.