April 2 may go down as one of the darkest days in American economic history. On that day, President Donald Trump will unleash his tariffs (one of his favorite words) to make America and Americans really rich.
Despite all the lessons of history that tell why tariffs are disastrous policy, Trump clings to the delusion that these are the means to earn trillions and cut the $36 trillion debt. Some believe his love of tariffs goes back decades.
A few basic facts establish ground truth. The overall U.S. balance of payments, or for any state, has two components. One is the trade balance of all goods and services. Here the U.S. imbalance has always been significant. For 2024, the U.S. had a negative trade imbalance of just over $900 billion.
The second is the capital account for net investments. For 2024, the surplus is over $2 trillion. So why has Trump ignored this? This is a problem.
It is unclear how or why Trump became so obsessed with trade deficits. Trump long believed that trade imbalances harmed the U.S. economy but never said why.
Forty years ago, Trump criticized trade debts believing tariffs could provide for greater domestic manufacturing. Ironically, manufacturing had never been higher than under President Joe Biden. However, Trump was never known for changing longly held opinions.
Donald Trump’s focus on tariffs and reducing the trade deficit stems from his long-standing belief that trade imbalances harm the U.S. economy. As early as the 1980s, he criticized trade deficits, arguing they burdened the country and advocating for tariffs to promote domestic manufacturing. Trump does not seem to understand that the other side gets a vote and can easily lead to trade wars.
While the notion of “reciprocal tariffs” can be acceptable, what prevents or incentivizes the other negotiating partner from abiding by Trump’s rule? There is nothing.
The memory of the 1930 Hoot-Smalley Tariffs passed by Congress helped create the Great Depression and would cut international trade by about three-fifths. But Trump is not moved.
Tariffs have several really bad downsides: The first is higher prices for consumers. Tariffs are taxes on all imported goods. The extra costs are passed on to consumers, affecting the middle and lower classes and also increasing inflation.
Second is the threat of retaliation by trading partners. What would retrain that? Little. This makes U.S. goods sold in foreign markets far more expensive, driving down demand. Certainly in many sectors with low profit margins, this would prove disastrous.
Tariffs can lead to supply chain disruptions due to uncertainty about price points and lead to halts or uncertain production, especially for cars and high tech, where just-in-time arrival is essential.
Economic growth almost certainly will decline. Investment uncertainty and the need to regulate employment with demand will be affected. This will lead to job losses, as is being seen in the U.S. today, and a slowdown.
This form of domestic protection will produce inefficiency and reduced competition, driving costs upwards. This in turn will assure greater inefficiency and reduced global competition as states look inwards and are reluctant to invest capital abroad due to these uncertainties.
Global relations, especially with China and others can only weaken alliances with friends and aggravate adversaries, angered with the deterioration of trade.
Finally, these financial tensions and effects on the trade balances will produce all forms of market volatility. Investor confidence will be harmed. Indeed, the imposition of tariffs has already driven the Dow Jones from over 45,000 to the upper 41,000s and the technology-intense NASDAQ is 17,784, down from 18,972 six months ago.
When these tariffs are released on April 2, huge economic and financial disruptions will occur. The possibility of huge stock market declines is real. This will greatly affect lower and middle-class 401 K holders who will lose much of their retirement holdings. And as prices and costs soar, inflation will rise as will costs of living.
Depending on how the economy moves over the next weeks until April 2, it is possible it will develop a negative GDP. Two-quarters of declines will constitute a recession with negative psychological consequences that will have a political impact.
Trump’s views of tariffs will prove destructive and delusionary. The U.S. economy will suffer unless, for some inexplicable reason, Trump can turn history on its head.
Harlan Ullman Ph.D. is UPI’s Arnaud deBorchgrave Distinguished Columnist, a senior advisor at Washington D.C.’s Atlantic Council, the chairman of two private companies and the principal author of the doctrine of shock and awe. He and David Richards are authors of the forthcoming book, “The Arc of Failure: Can Decisive Strategic Thinking Transform a Dangerous World.”
