The Trump administration’s tariffs have already raised some $152 billion this year—and that amount is set to rise, as a more comprehensive round of tariffs went into effect this week. The new baseline tariff for goods entering the United States is at least 10 percent—and much higher for a variety of countries. That has left the entire world—including trade economists—scrambling to figure out the meaning of the new global trade order.
Were economists wrong about the predicted effects of tariffs? Have tariffs helped restore manufacturing to the United States? And how effective have sanctions been as a geopolitical tool?
Those are just a few of the questions that came up in my recent conversation with FP economics columnist Adam Tooze on the podcast we co-host, Ones and Tooze. What follows is an excerpt, edited for length and clarity. For the full conversation, look for Ones and Tooze wherever you get your podcasts. And check out Adam’s Substack newsletter.
Cameron Abadi: Economists warned vociferously that tariffs would spark sharp inflation in the United States; some warned that shortages would be a result of tariffs. We haven’t seen those effects yet. Has this experience so far with tariffs taught us something new about economics?
Adam Tooze: I think the key word in your setup there was we haven’t seen the effects “yet.” So I mean, I think there’s no doubt at all that the economists and the economics are right in that they can predict the direction of travel, but it’s complicated and it’s hard to pin down exactly when it’s going to happen. What I mean by that is that all the signs are that the U.S. economy is experiencing a rebound in inflation. Prices are beginning to edge back up. The Fed, which monitors this most closely, held interest rates, didn’t reduce them in part because it’s concerned about this rebound. And the rebound is exactly where you’d expect it to be, namely on the goods side, not the services side, because the goods are the traded bit. And normally they exert downward pressure because global competition drives goods prices down. And in this case, they’re having the opposite effect. So the telltale signs are there, but the lags are long and variable, as the monetary economists like to say. In other words, it could take a while for the full effect to be felt. In fact, it could take months, quarters, as much as a year would not be surprising in some sectors where you really have to grind through complex supply chains. And there is an element of bargaining about this, about bargaining power.
And this is what the Trump administration endlessly harps on. This is this phrase they use where they say, “Oh no, the foreigners are going to eat the tariff,” by which they mean that people supplying American markets with goods have the option of either passing through the tariff and risking loss of market share, or just loss of markets, because people won’t be able to afford Mexican, Brazilian, Chinese goods at the higher prices, or they can swallow some of the increased cost into their own profit margin. And then they’ll, of course, in the longer term, have to decide whether they really want to stay in the market or not. So this will take some time to work its way through, but I don’t think there’s any question that in the end, the effect will be bad. This is like Brexit, right? The sky didn’t fall immediately, but the consequences to the British economy over the medium term have been really bad. And I don’t think there is really any serious doubt that the consequences for the U.S. economy of these tariffs, notably for U.S. consumers, notably for low-income consumers in the U.S., are going to be bad, not to say terrible. What the example also, however, shows is that economics is an orthodoxy, and when an orthodoxy is challenged, it responds with indignation and threats of the end of the world. And there really isn’t a cow holier to economics than free trade, and there isn’t anything on which economists, broadly speaking, agree more than the kind of tariffs that [U.S. President Donald] Trump has been levying are dumb and they really can’t do much good.
But on this, I think they have very good reason to think that. Their faith is solidly founded in experience, and it will just take some time.
CA: The Trump administration made predictions of its own about the effects of the tariffs, claiming that tariffs will help return manufacturing to the United States. Are U.S. manufacturers already benefiting from tariffs in any way?
AT: I mean, there’s three different levels to think about this. One is the pure price effect of the tariffs. And it’s early to be drawing any conclusions. They’ve come into effect in a really haphazard way. The variable you’re trying to affect is investment. Investment is made over long term or at least the medium term. You’d have to be out of your mind to have conditioned any substantial investment decision on the totally haphazard direction of tariff policymaking since the advent of the Trump administration. The only thing you know is they’re probably going up, but who knows by how much. And furthermore, the effects of tariff increases of the type that Trump has been pushing through, notably the really heavy tariffs on things like steel and aluminum, are very, very ambiguous as far as the broader American manufacturing sector is concerned, because there are as many or far more, in fact, steel and aluminum users in the United States—far, far more—than there are producers of steel and aluminum. So if you have a tariff that raises the price of aluminum and steel in the Midwest as the Trump tariffs measurably have done and did during his first term as well, the main impact is to damage the competitive position of American manufacturing whilst, of course, handing a windfall to the standout manufacturers of steel and aluminum in the United States. The German car industry can’t decide whether it is more hurt by the tariff agreement with Europe, or in fact more benefiting from the higher cost of steel and aluminum that manufacturers in the U.S. now have to pay. So that’s an inherently ambiguous thing.
What is less ambiguous, but hard to assess in its overall economic impact, is the stream of discrete investment decisions by really large global players, which the Trump administration is trumpeting on the White House website. The Biden people did the same thing. And what you see there is kind of glad-handing, invitations for the White House, conference calls with leaders of not just American but global business in which what Trump seeks to do is basically strong-arm or persuade major corporate players into investing giant amounts of money. The announcements are huge, like the Project Stargate, this AI, OpenAI, Oracle, SoftBank project, that’s $500 billion. Apple announced $500 billion investment in the United States, and then another $100 billion this week. Nvidia is also in the $500 billion range. Micron technology, $200 billion. IBM, $150 billion. I mean, these are huge numbers that are clocking up. But these aren’t specifically tariff-related. These are corporate announcements extracted by a phone call from the president of the United States who says, “Believe me when I say, this is where you need to invest and produce.” And corporate leadership decides it’s probably a good idea to say yes and announce a really big number. What that will in due course translate into, I think we have to wait and see. That’s the only sensible thing.
The third level at which one can gauge the effect of policy like this, and it’s really too early for this to be fair, but it’s not just calculations about the market impact of price changes as a result of tariffs or headline-making announcements by individual businesses, but what shows up in the American macroeconomic statistics in terms of actual investment spend by businesses on the ground in the America GDP numbers. And those figures are not bad so far, but they don’t suggest any trend break, any dramatic acceleration compared to the already-accelerating numbers under [former President Joe] Biden. And in the long run, it’s really hard to see how all of this uncertainty can be good for business investment.
CA: How should we assess these tariff threats as a geopolitical tool? How are these threats now working in other cases? I’m thinking specifically of India, which has come into the administration’s focus most recently.
AT: I thought this was a super interesting question, and I agree with you that if you’re going to cite an example of where the tariffs have worked best, it would be against Europe. But I think this goes to the underlying theory of the world that Trump has, because he’s not a thoroughgoing realist, right? Trump has this weird view, I think. Maybe one could describe it as like a Gulliver’s Travels view of geopolitics. He basically thinks of the United States as a sleeping giant that has somehow been tied down by exploitative relationships by a bunch of smaller countries, which are not as powerful as the U.S. but have exploited the fact that it’s had dopey liberal leadership for all these decades. Really, since the 1980s Trump’s been banging on about this. And so all of these smaller powers have ganged up on the United States to extract surplus. And what needs to happen to put the world right is that Trump wakes America up, it flexes its muscles, and then in a matter of weeks, if not days, if not hours, all these small countries will realize where the power actually lies and they’ll all fall into line and do deals with America and they will just queue up and there’ll be this big flow back of resources that’s long overdue to the United States, which is the result of all of their thieving over all these years. And with regards to Europe, of all the places in the world, that’s probably the one that you could maybe apply the Gulliver model to. Like systematic free riding, both in terms of export surpluses and defense, by a bunch of medium-sized to small countries that can all be bullied into line.
But with regard to the Chinas, the Indias, the Russias, the Brazils of this world, that’s just not a plausible model. It just doesn’t work. India is particularly fascinating. In New Delhi they must just be so puzzled because the Trumpian accusation is India buys Russian oil. But behind the scenes, everyone understood that the entire design of the Biden-era anti-Russian tariffs was to encourage India to buy Russian oil at massively discounted prices, right? The aim was not to hurt India, which was considered a swing variable. And [Indian Prime Minister Narendra] Modi can’t afford to be seen to be intimidated by the Americans and fall into line. They need the oil. So the idea was to set a cap on the prices so that India could basically take advantage of Russia. That was the whole game plan. That was the whole design. And so the Indians went ahead and did it. And now all of a sudden someone in the Trump administration has woken up. It’s truly bizarre. And the Modi people will have thought that they were a key strategic piece in the American jigsaw puzzle against China. And a key element of that is the manufacturing of smartphones by Apple in India. And all of a sudden, you’ve now got this huge pressure on Apple to relocate all their production to the United States, whereas the whole plan was to use India as the way to move Apple out of China. And then Trump comes along and says, “Well, what I really need you to do is to allow American agroindustry into the Indian food market.” And Modi just kind of goes, you know, you can do, Trump, whatever you damn well like with American farmers.
And Trump is famously, like, not really fully coherent on this because he doesn’t understand the complex politics. But Modi does. Modi is like a properly skilled democratic mass politician. And he knows that hundreds of millions of people in India depend on small peasant farming. And so Modi just kind of looks at him and goes like, “What are you talking about, no way.” He does the reverse move and says, “I am now going to defend India’s farmers against obtrusive American agro-capitalism.” And you know, Modi was in political trouble. This will suit him very well, I imagine.