“To me, the most beautiful word in the dictionary is tariff, and it’s my favorite word”, Donald Trump said in 2024*. He wasted no time following his inauguration on 20 January 2025 in announcing a 25 per cent tariff on Canada and Mexico, which he said were taking advantage of the US. “I look at some of these agreements" he continued*, "and I'd say ‘Who would ever sign a thing like this?’". Fun fact: the US-Mexico-Canada (USMCA) trade agreement was signed by Donald Trump in 2020.
And here is the central problem with trying to make sense of what the Trump administration is doing on trade. There is precious little coherence to the pronouncements he makes, and little exposition of precisely what the administration wants to achieve. Some of the claims are obviously nonsense, but are endlessly repeated by the administration regardless. An example is the assertion that the tariffs will be paid by foreign governments, not consumers – a claim that should be self-evidently false. Or the stated justification for targeting Canada being the flow of Fentanyl and migrants across the border, when both are insignificant.
And a second problem is the lack of direction. Tariffs are announced, then postponed, then put in place, then partially cancelled again, then increased when affected countries retaliate, and so on in an endless confusion of mixed messages and disorder.
This factor has prompted the question whether the Trump approach to tariffs is (i) strategic – in which the chaos is a deliberate ploy to make trading partners more willing to offer concessions, fearful of what is coming next from an president that is carefully crafting a reputation for unpredictability; or (ii) just chaos with no real underlying strategy, being made up largely on the hoof by a president who does not know much and is uninterested in the complexities of public policy. Alan Beattie at the Financial Times* examined this question, coming down on the side of the latter option.
Pitch to voters
Trade has played a central role in the whole Trump phenomenon. His central pitch to voters centred on the idea of the US having been taken advantage of by trading partners and deindustrialised by low-cost imports. The large US trade deficit is a particular subject of Trump’s ire. Both problems he sees as being caused by a set of trade agreements that worked against US interests, coupled with cheating by trade partners.
Is Trump right? The size of the US trade deficit is often seen as a cause for concern, albeit not universally. Critics argue that countries with large trade surpluses – primarily China and Germany – cause unemployment within deficit countries, since they are employing people to produce ‘excess’ goods beyond those they are able or willing to consume themselves. Conversely deficit countries are importing things that could have been produced domestically, creating domestic jobs. Whether or not this is a genuine economic problem, it certainly has become a political issue. Trump’s tariffs are supposedly aimed at addressing this concern, with a view to balancing trade.
However, it is pretty much universally agreed that they will not work. Macroeconomics tells us that a trade deficit is caused by an imbalance in savings and investment, plus the difference in government spending and tax revenue – i.e. the fiscal balance. The US has a trade deficit because it runs an enormous fiscal deficit – currently around 5.5% of GDP and far higher than other rich countries. If Trump truly wanted to move the US toward a trade balance, he would need to tackle this issue. While Elon Musk and DOGE are supposed to be reducing government spending, they are unlikely to make significant headway since achieving significant spending reductions will necessitate cuts to politically sensitive areas like Medicare and Medicaid. Furthermore, Trump appears to be committed to tax cuts that will exacerbate the fiscal imbalance. As such, tariffs targeted at specific countries, notably China, may affect the bilateral trade balance but, as happened in Trump’s first administration, that trade just gets displaced elsewhere, leaving the overall trade balance unaffected because the fundamental cause – the fiscal deficit – has not changed.
On manufacturing jobs, the verdict is, I would argue, more complex. It is undeniable that the era of globalisation from around 1980 onwards has had a detrimental impact on low skilled workers. Among those who did not attend university, wages fell by around 20 per cent between 1980 and 2016 in real terms*. The ‘golden age of capitalism’, from the end of WWII to around 1973, in which everyone got richer across the income distribution, has given way to a world of rising inequality, wage contraction among the low-skilled (and increased wage growth at the top end) and ever greater precarity of employment. Some of this is to do with technological changes, but it is also a result of deliberate policy interventions that prioritised the interests of capital over labour. Outsourcing manufacturing jobs, privileging consumer prices over jobs and subjecting low-income workers to ever greater competition with workers elsewhere – these are all policy choices, not inevitabilities. Trump’s political genius was to tap into the resentment and anger that these economic and policy changes have propelled.
Manufacturing has changed
This is a real economic problem. Will Trump’s policies reverse it? His response has centred on returning manufacturing jobs to the US through the imposition of tariffs, but this is very unlikely to work. Manufacturing has changed, with production now spread across multiple countries in so-called ‘global value chains’. Moving whole supply chains back to the US is going to be prohibitively expensive, result in rising consumer prices and make US-produced goods internationally uncompetitive. The model of manufacturing that underpins Trump’s approach simply hasn’t existed for the best part of 40 years, and is not coming back.
Moreover, the loss of manufacturing jobs is much more a result of increased productivity than foreign competition. The Center for Economic Policy and Research has done a rough calculation* on this that is a useful yardstick. If Trump were to succeed in balancing US trade exclusively through expanding manufacturing, they would need to increase production by around $906bn. This equates to an increase of 12.6% of current manufacturing production. Since roughly 12.8 million workers are currently employed within manufacturing, a 12.6% increase would lead to about 1.6 million new jobs. While this may sound significant, it is only around 1.0% of the current total US non-farm employment.
In short, manufacturing jobs are not coming back. Once upon a time the majority of people were employed in agriculture, but increased farm productivity put an end to that. The same is now happening in manufacturing. Reversing this trend is no more likely than great swathes of workers returning to farming.
Bringing this together, there are huge dangers going forward. However chaotic Trump’s trade policy might be, there are identifiable objectives that he wants to achieve, but his policies for doing so are very unlikely to work. When this is coupled with his personality trait of always doubling down, and the almost religious following among the MAGA faithful, those policy failures can only lead to more resentment, more volatility and more chaos.