Two hugely important questions about Trump’s trade war

Donald Trump’s long-threatened trade war has finally begun. The Trump administration slapped big new tariffs on Canada, Mexico, and China on Tuesday, spurring retaliation from other countries, a market sell-off, and new fears about the future of the US economy. Finally making good on a months-old threat, just after midnight Trump set 25 percent tariffs on Canadian and Mexican imports, and 10 percent tariffs on Canadian energy imports — targeting two of the US’s biggest trading partners. Trump also increased the tariff he imposed on Chinese imports last month from 10 percent to 20 percent. Canada quickly hit back by imposing 25 percent tariffs on certain goods they import from the US, threatening more within weeks if Trump didn’t reverse course. China announced its own retaliatory measures against certain American agricultural exports and tech companies, while Mexican officials promised to respond in the coming days. There’s likely more to come — Trump said last week that new tariffs on the European Union would also be ready soon. In the short term, Americans will likely see higher prices on many products or goods that are imported or are made with imported components, from cars to electronics to agricultural products to gasoline (the US imports Canadian crude oil). Meanwhile, American companies that export their products to these countries, such as the agriculture industry, will take a hit from retaliatory tariffs. But where this all is headed in the longer term is far from clear, and will depend on two major questions. First: what exactly is Trump’s preferred endgame for his trade war? And second: How bad will the economic fallout at home be? Does Trump view himself as bargaining in advance of a deal — or trying to permanently overhaul the economic system? Trump repeatedly said during his presidential campaign that he planned to impose gargantuan tariffs on foreign imports and spoke of the policy in glowing terms. Contrary to traditional economic wisdom, he insisted, his tariffs would have no downsides: They’d boost domestic industry, bring jobs back to the US, and raise substantial revenue (to let him cut taxes more). “Tariff,” he’s said, is the “most beautiful word in the dictionary.” Economists and financiers generally view this as utter folly, pointing out that tariffs will make imports (and US-made products using imported components, like cars) more expensive for American consumers, while spurring retaliation from targeted countries that will hurt American exporters, slowing economic activity more broadly and risking a market panic and recession. Trump has been unmoved by these arguments. Yet while it’s clear that Trump loves tariffs, it’s less clear what, exactly, he thinks he’s trying to achieve with them. At times, Trump has seemed to view tariff threats mainly as a negotiating tactic, to win policy concessions in deals with other countries. This is what investors have generally hoped — that the tariffs are short-term posturing, and that Trump will ultimately declare victory and move on, signing “big beautiful deals” that he can brag about while returning to something like business as usual. But Trump and certain advisers have also sometimes spoken of his ambitions in grander terms. For instance, Trump has suggested that vast sums of new tariff revenue could allow him to abolish the income tax, which would imply he wants huge new tariffs to be very permanent indeed. At times, his sympathies seem to lean in the direction of “autarky” — the idea that the US should be fully independent of the global trading system, reliant only on what they can make at home. “We shouldn’t have supply chains. We should have them all in the United States. We have the companies to do it,” he said in 2020. The US is so interconnected in the global trading system that this would be an unfathomable change entailing a massive collapse in living standards, so few people take Trump literally on this. But if he genuinely wants to push the economy at least a lot further in this direction, we could be in for a whole lot more chaos to come. How bad will the economic fallout be? The other big question hanging over Trump’s decision-making is just how bad the economic pain from all this gets at home. Investors and establishment Republicans have long hoped that Trump wasn’t serious about his trade war. They’ve also suggested that, if he did go forward with it, a bad market reaction could hopefully convince him to seek a face-saving exit. Already, there are various concerning economic signs. Stocks have fallen. Consumer confidence is falling, in part because of all the uncertainty from Trump’s chaotic behavior. Major retailers are saying they’ll hike prices because of the tariffs. A model from the Atlanta Fed forecast a surprisingly large decline in GDP growth in the first quarter (though that forecast is currently an outlier). Agriculture state Republicans are concerned their home state industries will be hit. These signs are certainly ominous, but it’s important to keep them in perspective: We have not yet reached the point of a recession or an outright economic crisis. As of midday Tuesday, the Dow Jones Industrial Average had only fallen to where it was in mid-January, and the NASDAQ to where it was in November (with its greater fall driven in part by concern over whether AI stocks are overvalued). Tariffs, and the accompanying uncertainty, haven’t been greeted warmly by investors, but there’s a lot more to the economy than tariff levels. And we simply don’t yet know if Trumponomics will actually be damaging enough to push the economy into recession. What is very clear, though, is that the prices of many things American consumers buy regularly will go up. Considering how President Joe Biden’s popularity was battered by inflation, one would think Trump would be concerned about this. But since the election, Trump has repeatedly said he doesn’t agree that he won mainly because of inflation. (Voter anger over immigration was more important, he says.) Conveniently, this lets Trump justify pursuing a tariff policy that will raise prices. And we will soon see what the American public thinks about that.