Like Generalissimo Francisco Franco, the tariffs of 10–20 percent on all foreign imports that Donald Trump promised on the campaign trail are still dead. I pronounced them dead earlier this month (“Trump Is Already Caving on Tariffs”), and Trump’s Inauguration Day memo outlining his “America First Trade Policy” makes no mention of them. But that doesn’t mean the economy is out of danger.
Trump says he still intends, on February 1, to slap a 25 percent tariff on all goods from Mexico and Canada, our top two trading partners, and an additional 10 percent tariff on China, which is number three. Trump is fumbling for a justification to do so; after all, our current trade agreement with Canada and Mexico was negotiated by Trump’s own administration five years ago, and signed into law by Trump himself. Trump has said the Canada and Mexico tariffs are leverage to stem the flow of undocumented immigrants and illegal drugs. But he’s also said (seriously) that the Canada tariff is leverage to force Canada into becoming the fifty-first state. On Thursday, Trump told everybody gathered at the World Economic Forum in Davos, Switzerland, that any country that didn’t make its products in the United States would have to pay a tariff.
Trump’s trade memo is a directive to five Cabinet agencies to gin up whatever excuses they can find to impose tariffs on whatever countries they can. The goal is not to create a more equitable international trade regime, but rather to raise revenue that will offset, to the greatest extent possible, future tax cuts for the rich. As Trump said in his second inaugural speech: “We will tariff and tax foreign countries to enrich our citizens.” No longer is Trump’s trade policy intended to resuscitate American manufacturing. Its purpose is to force foreigners to bankroll a gaudily insolvent America.
That’s insane. It presumes that other nations that tax their citizens at higher rates are willing to pay for yet another American tax cut. It presumes that tariffs won’t raise prices on American consumers still incensed about inflation that peaked three years ago. And it presumes that a tariff-happy president won’t set off a trade war.
When pondering Trump’s policy arguments, it’s useful to remember that his thought processes are compromised by a combination of malignant narcissism and age-related dementia and that—even when lucid—he’s a habitual liar on a scale not witnessed previously at the upper tiers of American politics. Nobody is more aware of Trump’s frailties than Trump’s policy advisers. In coping with these, they fall into two camps. The Enablers (Stephen Miller and Russell Vought, for example) encourage Trump’s most toxic impulses so these can be channeled into extremist policies. The Turd-Polishers (Scott Bessent, Marco Rubio) value their reputations outside the Trump bubble and consequently translate Trump’s rantings as best they can into something that at least sounds rational.
Trump’s second administration will have more Enablers than his first, and fewer Turd-Polishers, because Turd-Polishers (sometimes called, more admiringly, “grown-ups”) tend eventually to publish White House memoirs that portray Trump unflatteringly. The shortage of Turd-Polishers this time out has a lot of commentators spooked. But I don’t feel confident that the Turd-Polishers are any less dangerous than the Enablers. Indeed, their reassuring air of competence may make them more dangerous.
A case in point is what’s come to be known as the respectable argument for indiscriminate tariffs, as outlined by a very scholarly sounding Bessent at his January 16 Senate confirmation hearing for treasury secretary:
The history of tariffs and tariff theory, optimal tariff theory, does not support [that tariffs raise prices]. Traditionally we see that the current—if we were to, say, use a number that has been thrown around in the press of 10 percent, then, traditionally, the currency appreciates by four percent, so the 10 percent is not passed through. Then we have various elasticities. Consumer preferences may change. And, finally, foreign manufacturers—especially China, especially China, which is trying to export their way out of their current economic malaise—they will continue cutting prices to maintain market share.
“That’s an academic view of it,” the panel’s ranking Democrat, Senator Ron Wyden of Oregon, replied. Translation: “I surrender.” Bessent’s nomination cleared the Senate Finance Committee with support from two Democrats, Virginia’s Mark Warner and New Hampshire’s Maggie Hassan, and now awaits final confirmation on the Senate floor, which is virtually assured.
But Bessent’s explanation, however elegant, didn’t strike me as making sense. I confirmed this by consulting two academics I respect, the economists Kimberly Clausing of UCLA and the Peterson Institute for International Economics, and Jason Furman of Harvard. For good measure I also consulted Paul Blustein, an excellent economic journalist formerly with The Washington Post and The Wall Street Journal and author of the forthcoming King Dollar: The Past and Future of the World’s Dominant Currency.
Clausing, who in 2019 published a well-received book on trade policy, was the most critical of the three. Citing a study she co-authored last spring, Clausing explained to me that “multiple high-quality studies showed that U.S. consumers bore the full burden of the China tariffs.” Blustein agreed. “The evidence from the last round of Trump tariff hikes indicates that the impact did get passed on pretty much fully to consumers,” he said, citing numbers compiled by Goldman Sachs and rendered in graph form by the University of Michigan economist Justin Wolfers.
As for the dollar, Clausing said that “of course exchange rates are expected to change somewhat,” but these “are determined by a host of considerations and are notoriously difficult to predict, so there is no way to know if this offset will occur, and how swiftly.” When I asked Clausing where Bessent got that a 10 percent across-the-board tariff would appreciate the dollar by 4 percent, she replied: “I’m sure he made this up. There is no generally accepted formula to apply here.”
Furman was less skeptical. “My guess is he has some study,” he told me. “I would have guessed 5 percent, and I recently asked a few top international macro people, who thought about 5 percent was reasonable. But I wouldn’t quibble with 4 percent—albeit it is overly precise.” Blustein took a middle view. Maybe the 4 percent figure appeared in some study, he said, and maybe it didn’t: “Remember, I’m not an academic economist.”
But both Clausing and Furman agreed that Bessent’s calculation assumes that tariffs won’t invite retaliation, which of course they will. That’s true of the 10 percent across-the-board tariff threat, which at this point is merely theoretical; it’s also true of Trump’s threatened tariffs on Canada, Mexico, China, and yet-unnamed countries, which are not. Because the latter tariffs aren’t global, whatever impact they had on the dollar would be much smaller, making their impact on prices much greater. And, Clausing pointed out, we aren’t just talking about import prices because when prices on imports rise, prices on domestic goods that compete with those imports rise too. “That means the effect on consumers could easily be twice as high.”
But let’s stick to the 10 percent tariff, because Bessent did, and because it’s the simplest way to illustrate cause and effect. Let’s further assume Bessent is right that the dollar appreciates 4 percent, and that by some miracle other nations fail to retaliate. In this Bessentian universe, two things would happen. With a 10 percent price increase offset by a 4 percent rise in the dollar’s value, consumers would still pay 6 percent more, which is a lot. The other thing that would happen is that the rise in the value of the dollar would cause U.S. exports to decline.
Remember exports? A desire to increase them is why nations build trade barriers in the first place. If the net effect of those trade barriers is to decrease exports, then you aren’t helping American manufacturing, you’re hurting it. Furman, Clausing, and Blustein all agreed on this point. Here’s Clausing:
The export sector will be hit, both due to exchange rate appreciation, but also ... due to the fact that our largest exporters are also often big importers that rely on global supply chains. Over half of U.S. imports are intermediate goods. U.S. manufacturing competitiveness will take a big hit from the tariffs, and it is doubtful that the trade balance will improve unless other factors change. (A recession could help, but I don’t think that is the mechanism the Trump team has in mind. That said, tariffs will certainly provide headwinds and economic disruption.)
Granted, Clausing was expressing an academic view. But it was a fairly comprehensive refutation of Bessent’s professorial-sounding bullshit. Trump’s extremist tariff policies, whether described crudely or described elegantly, pose a danger to the economy and do American manufacturers no favors. A polished turd is still a turd.
