Let’s deal with the big, almost certain effects first.
This is the beginning of the end of the American alliance system, empire and world economic system.
Trump is planning on putting tariffs on Europe, too. He put higher tariffs on Canada, supposedly one of America’s closest allies, than on China. Hitting the majority of America’s vassals/allies all at more or less the same time, with them retaliating with their own tariffs means an end to the American created world economic system. It will also lead to the end of NATO and, in time, other alliances. Europe’s mainland isn’t practically subject to threat of invasion from the US the way that Canada and Mexico are, they don’t have to put up with this, but threats to Greenland make it clear that the US is more likely to invade an actual EU member than Russia is.
Hard to have an alliance with a nation you’re in a trade war with who is threatening to invade one of your countries and who, by all accounts, is serious about it.
And while the tariffs are all justified on “national security” which is “letter” legal, everyone knows that’s bullshit. Trump is violating the purpose of the WTO, USMCA/NAFTA and other trade treaties the US has signed.
There’s no way the world trade order survives this and no way the American empire does either, since it’s based on an alliance system and bases around the world, many of which are in countries Trump is declaring his trade war on. Even countries who escape tariffs for now can’t feel secure. Ironically it’s the tariffs on Canada which will do the US the most international harm: everyone knows that Canada has been a completely supine vassal giving to the US everything it wants. Canadian exports, minus oil and gas, are less than its imports from the US, so there’s no legitimate re-balancing argument, even. Foreign leaders have read reports making this clear.
Alright, enough about the top-line effects. Let’s look into the theory of tariffs Trump appears to believe.
Trump has nominated Stephen Miran American to be chairman of the Council of Economic Advisers. Stephen is a senior strategist for Hudson Bay Capital management, and he wrote a 40 page brief, primarily on tariffs, called “A User’s Guide to Restructuring the Global Trading System.“
The most important part of his thesis is the following argument about the effect of tariffs.
1) The currency of the exporter will depreciate to make up the difference in cost.
2) Consumer prices will not go up, therefore;
3) the exporting country is damaged, the importing tariffing country is not.
4) But the tariffing country does get revenue! Free lunch, in other words.
5) Importer profit margins take any hits hits not covered by the exporter’s currency depreciation, not prices, or at least they did last time.
This argument is given empirical backing by looking at what happened when Trump imposed tariffs during his first term: the Yuan depreciated and consumer prices didn’t rise.
Let’s run thru this.
- China tends to control the price of its currency. If the Yuan depreciated, it’s because the Chinese government chose to depreciate it. They may not choose to do so this time.
- America has no option but to buy from China. From machine goods to basic electronics to parts for America’s defense industry, there are no domestic or European alternatives for much of it.
- China doesn’t, therefore, have to depreciate its currency. It might sell less goods, but it will still sell tons. It’s a political decision.
- If the exchange rate does drop, or balance, which is not a sure thing, even with non-controlled currencies, then US exports to that country become more expensive, and the exports to that country drop. In the case of Canada, which imports more goods from the US than vice-versa, what is likely to happen is import substitution: Canadian importers will probably switch to China.
- In fact, this will be a general issue. Any country the US puts tariffs on will replace a lot of imported US goods with Chinese goods.
- Not all importers can eat the losses. The reason Trump put only 10% tariffs on oil and gas is that American refiners have thin profit margins. Any increase in crude prices from tariffs will be passed on to consumers. (Aside: this is clearly the Achilles heel and Canada should put an exit-tariff on crude to hurt the US as much as possible.)
- Importers also don’t have to eat the price increases. In the pre-Covid world, there was a lot less consumer inflation. But when Covid happened, prices increased faster than costs because Covid supply shocks were a good excuse to raise prices. Some importers may eat the increased costs, others may pass them on, and even raise prices more than the tariffs. If they have pricing power, if people must buy from them, then why not? Fear of Trump might cause some to eat the difference, but there are a lot of obscure, little importers. Apple passing on costs or gouging will be noticed so they’ll probably eat it. Others won’t.
- The money the government receives comes from Americans, really, not foreigners. They pay the tariffs. There are elites who are going to be hurt by Trump’s tariffs.
What Miran doesn’t talk much about is the idea of import substitution. The real reason to do tariffs is to protect and nurture internal producers. This is important to Trump, he’s talked about it often.
With respect to Mexico, the idea is to get factories in Mexico to move to the US. They exist in Mexico primarily because Mexico used to have tariff free access to America, and has lower costs than America. There will be some effect here. The calculus will mostly be about uncertainty, though, not costs. In most cases producing in Mexico is probably still cheaper, even after a 25% tariff, than producing in America. But given how erratic Trump is, and that he’s indicated there may be more and higher tariffs, it may make sense to move factories to the US. The US won’t tariff itself.
But this is more complicated than it looks, because the US doesn’t make most of the parts any factory will need, so those have to be imported, and tariffed, or a supply network needs to be built in the US.
That’s what the US wants. If you want sell to us, you have to make it here, not just assemble it.
This is fair enough, actually, but it’s based on an assumption of continued dollar privilege.
The US is able to run these long term, consistent trade deficits because of dollar privilege. It can print dollars and everyone will take them.
But if the US world economic system is breaking up, if NATO is likely to die, and if the US is tariffing its allies, will dollar privilege survive? After all, you don’t really need dollars to buy from the US, because the vast majority of what you buy from the US you could buy from China instead, and Chinese prices are cheaper. If America doesn’t want you to export to them, well, what good are the dollars?
This is why Trump has been making horrific threats to BRICS about replacing the dollar. BRICS has reassured them it doesn’t intend to do that, but it’s not clear they aren’t lying and in any case, what BRICS has mostly been doing is changing from using the US dollar in trade to just using bilateral currencies. More and more, BRICS members trade with each other in their own currencies, without using the US dollar.
This chart, again from the Visual Capitalist, is worth staring at a bit:
As the chart notes, the US dollar is still #1, but that chart isn’t comforting. Remember that China, not the US, is the #1 trade partner of the most nations in the world. And note that while the US is China’s #1 export destination, exports to the US accounted for 2.9% of Chinese GDP, down from 3.5% in 2018. Eighteen percent of China’s exports went to the US in 2023.
The point, here, is that if you can’t sell to America because of tariffs, and if the US doesn’t have much you want to buy because China is cheaper, why do you need the US dollar?
If the US dollar loses privilege, if people won’t accept it because it can be used in trade with any country, then America has a problem: it can’t just print dollars any more and if it can’t print dollars any more, Americans can’t keep massively over-consuming.
This means a massive demand drop from Americans: they will have to consume much less. You might think that means an opportunity for American firms to step into the breach, but this will happen with very little demand from in the American market (and with the trade war, no one else is going to be buying from the US as their first, second or third choice.)
The American cost structure is high and American “capitalists” prefer to play financial games to make things. The American competency crisis is real, and not caused by DEI. The market has high barriers to entry, incumbents addicted to oligopoly profits and no basic machine industry and almost no basic electronic parts manufacturing.
The transition period will be ugly. Beyond ugly. Quite likely “economic collapse” level ugly.
There was a way to use tariffs and industrial strategy, but starting a trade war with half the world all at almost the same time was not the way to do it. You pick sectors (start with machine tools and basic electronic and machine parts), tariff that, put in subsidies and restructure the market for those goods. Once that’s going, you move back up the chain.
That’s how you use tariffs and industrial policy to reindustrialize.
Trump’s tariff plans are based on assumptions that are not going to hold in the real world, during a global trade war. Tariffs are important and often good and I support their use, but like everything else, they must be used intelligently.
Enough for today, we’ll talk about the effects (almost entirely positive) of Trump’s tariffs on everyone else in the world next. Trump is doing what no one else could: destroying the American empire and the neoliberal world order. I’m very thankful and as long as we can avoid war Trump’s actions are positive in the middle to long term for far more people than they’re bad for. Just, well, not Americans in the short to middle term or anyone who gets invaded.
More soon.
j
So what should we call this clusterfsck? In memorian of the last country to screw itself over backwards, UK – Truxit? Axit? Uxit?
Daniel Lynch
Well, Trump has already withdrawn the tariffs on Mexico, with Mexico merely promising to send more troops to the border. No one expects the troops to stop drug smuggling or stop immigrant smuggling, but Trump is pounding his chest and claiming a victory. Maybe something similar will happen with Canada, we’ll see.
Like Ian, I am not opposed to tariffs, particularly against China, but WTF is up with the tariffs on Canada? Apparently Trump thought Canada would capitulate to his demand to become the 51st state. If so, Trump is detached from reality.
Meanwhile I am more concerned about Musk’s attempted takeover of the Treasury department. That’s some serious constitutional stuff, not to mention rule by an oligarch who simply purchased his influence. Congress should shut Musk down but won’t. SCOTUS may eventually have something to say about it. Crazy stuff.
NR
Well, this is what working-class whites wanted, and they’re going to get it. I hope they like it.
Oh and food prices are going to massively increase too, since Trump is deporting all the farm workers. I suspect the plan is to replace them with forced prison labor, i.e. slavery, but we’ve already tried that in a few places and the results weren’t good. The farmers said that the prisoners were lazy and weren’t good workers. And this was with prisoners who volunteered to be there, it’s going to be even worse with people who are forced into it. Buckle up.
Ian Welsh
Amazing. Trump’s all over the place. Paused, though. We’ll see if this stays the case.
Mark Level
So all the Rachel Maddow conspiracy propaganda that “Trump works for Putin and Russia” was mistaken, & he’s secretly been working for Ghina!? Even the greatest fiction writer would have a hard time pulling such a plot twist off. It is true, however, that DJT regularly trumpets his admiration for his “friend” President Xi.
If Trump already backed down on a threat with a country as relatively weak as Mexico, perhaps many other will soon call his bluff?
While the clowns in the Biden administration (chiefly Blinky & Sullivan, but also Janet Yellen) are incredibly stupid, perhaps Trump’s “very smart people”, like Mitt Romney’s “binders full of women” may not stack up that well after all?
How wonderful that Mr. Miran’s economic “theories” overturn a deeply held right-wing dogma that goes back at least a century, that “There is no free lunch.” He’s saying that there IS a free lunch, coming straight from the consumers’ wallets, via extorting foreign powers. This does not differ too widely from the Biden Chicken-Hawks’ belief that “We can regime change everyone and bend the entire world to our Power.”
Those who write Superhero stories often exploit the trope that despite the SH’s massive powers, there’s always an underlying vulnerability created as a result. Beyond being entertaining, and insult-comic skills, Trump’s vaunted unpredictability is starting to look not so much like an asset as a detriment.
Well, (real President) Elon DID promise a huge economic Crash early in the Trump 47 reign, and perhaps this is one of the few times a politician told a truth. The Ruling Class uses Crashes to further impoverish the little people and fill their own purses, so maybe everything is going according to plan . . . Obama set the standard, but the Republicans can do him even better.
Buckle Up!! Democracy is never coming back to the USA (as the Leonard Cohen song perhaps ironically suggested) but Creative Destruction is ramping up. Those oh-so-smug “Christians” in the Republican party sure love kicking down the weak & vulnerable. It’s odd that their “God” is more like a steroidal version of (some aspects of) Nietzchean philosophy than the unworldly Galileean, but there we are.
Ian Welsh
Mexico is a “pause with negotiations”. My guess it that would involve re-shoring. We’ll see.
Seattle Resident
Mark, that was W’s crash. Obama did some clean up on it, but left the looting apparatus in place.
Mark Level
Hey, SR–
I would argue that it was Greenspan’s Crash, understand the timeline well. It had a dire effect on my life, I went from working 2 jobs (one voluntary for my union) to 3 from 2011-14, with subsequent damage to my health which I eventually recovered from.
All those “leaders” are cut from the same cloth. Your point is correct, sorry if my presentation made it look like I thought otherwise.
j
The tariffs might just be the bigger version of Trump’s good ol’ “I’ll sue ya”. He’s good with bluff, and smoke and mirrors. Has always been his way to bring home the bread, but surprisingly little of it, at that. Like, the supposed billionare is just a millionare in all likelyhood, all of his fancy businesses like the water or the suits or whatnot bring just in a few hundred K in a year. What probably nets more is stuff like the hotels, where his business model is not to make a good hotel, but skin seven skins off of everyone he can sucker into “partnering” with, and “investing” into him, but these bigger fish don’t come around that much.
Where I’m going with this is that we should expect that he keeps on doing what he has been doing. One does not learn everything from scratch when they get a new gig. They build on what they already are good at.
Now as to all of this Elon in the Treasury stuff, I haven’t bothered to read up on that too much, and that might be the problem, but I fail to understand what’s the big deal. Someone has to be in charge of the money, and that someone is going to be wanted to be your own guy. That someone is not going to be elected, it’s a bureaucrat’s job, although high level, that is, political. So could someone explain to me what’s the panic about? I mean, suppose he cuts the money from the security, I mean, deep state, well, good riddance. Or social spending, well, democrats are going to throw a tantrum on camera, but they will neither stop nor reinstate it after they get back in charge.
Because we have to remember that both of the parties are funded by the same people, and that means they work for the same people, and so they both push essentially the same neoliberal economic policies. It goes left foot, right foot, sure, but the direction is set. And this brings us to the question of “democracy dead”, too. Democracy, and the greatest country, it’s middle class, and all of that died in the US in ’81 when Reagan took office and ushered in the neoliberal age. It’s taken about 3-4 decades for this to bear fruit to the point that the decline is obvious, but it’s here, and the Orange Guy is just a symptom of the disease. A symptom in the exact same way as having the country “run” by a zombie the four previous years. Trump will do his thing, an the next guy will do theirs, and so on. Each one advancing the nation some further distance downhill. On this road there sure are important milestones, but the problem is not that X guy reached Y milestone, the problem is the road you are on.
Z
Canada on pause too now with the US tariffs.
https://x.com/toddspears1776/status/1886536876917440814
Canada will pause their proposed tariffs for 30 days and will implement a $1.3 billion border plan which includes:
– Appoint a Fentanyl czar
– Reinforce the border with new choppers, technology and personnel
– Send nearly 10,000 personnel to the border
– List cartels as terrorists
– Launch a Canada- U.S. Joint Strike Force to combat organized crime, fentanyl and money laundering
Z
BC Nurse Prof
Yes, Ian
https://www.cbc.ca/news/politics/nato-alliance-trade-war-1.7449397
“NATO chief is confident U.S.-Canada trade war wouldn’t hurt allied solidarity. Others aren’t so sure”
Ian Welsh
Saying armed force isn’t off the table to take Greenland…
KT Chong
Megan Kelly posted a one-hour interview with the new US Secretary of State (Marco Rubio) on Friday, which reveals some drastic changes in US foreign policy positions:
https://www.youtube.com/watch?v=S5RJwmw1ihE
different clue
Well, it looks like Ran Prieur was right about Trump. Trump is basically a Neutral Chaos agent in simplistic terms. He is ” the Joker” of American politics and governance.
Some men just want to watch the world burn. ( Other men, like President Musk, want to privatize the ruins and root through the ashes for valuables to monetize).
This is moving faster than any “Law” or “Congress” can keep up with. If somebody decided to try stopping Musk physically, are there factions of Armed Government Force who would be willing to go in there and use hard kinetic measures to scrape Musk and his people out of government spaces and places?
Mark Pontin
Good work, Ian. There are decades when nothing happens and there are weeks when decades happen, eh?
Back circa 2018, I’d have put the US empire’s collapse as due around 2035-2040. Biden and now Trump have greatly accelerated matters.
As regards that Hegelian world-historical figure, Donald Trump: —
When he’s (a) threatening BRICS countries that they must stay with the $ as global reserve currency or he’ll clobber them, while simultaneously (b) raging about how other countries are running trade surpluses with the US, this seems so deeply stupid — since for the US to have the global reserve currency (and be able to print money that the rest of the world will take), it must run trade deficits with the rest of the world so they’ve enough dollars for it to be the global reserve currency in the first effing place — that a judicious person allows on on general principle for the possibility that Trump knows better and this is just P.T. Barnum-type bait to feed his base.
Conversely, though, it’s possible that this truly is a man who, if he were in another timeline where his father didn’t pass his slumlord wealth along, would have been just another used-car salesman running from lot to lot, changing his name to stay ahead of his creditors. In other words, he may really be that stupid.
In general, I return to something I once heard from a Chinese VC, who’d been around in the 1980s when Americans first started turning up over there. He said: “We had never met people so greedy and so naive.”
He was being polite by using the word ‘naive.’
NR
Z: Canada announced that border plan a month ago, so…. What was the point of all this, exactly?
bruce wilder
If there is anything like a “principle of design” or “master plan” behind the chaos and opportunism, it is a Fortress North America: make sure Mexico and Canada and Central America throw in their lot with the U.S. of the multipolar future, rather than China.
It should be obvious that North America has advantages as the smaller “world island” far from the collapsing catastrophes of India and Southeast Asia and the Islamic world. If you are inclined to be a reactionary “America First” wouldn’t that be your assessment? Better not to play a game you can’t win and focus on a game you can.
StewartM
Far simpler explanation:
1) Tariffs are a national sales tax, in essence. As Trump plans more tax giveaways to the rich, he plans to make up for the revenue loss it by taxing the poors.
Why is anyone surprised? After all, a Republican congresscritter just proposed that we abolish the IRS and replace all income taxes with a 23 % sales tax. Apparently the 3.4 % effective income tax the billionaires pay (by a ProPublica analysis of 20 tax forms) is too much!
https://www.congress.gov/bill/118th-congress/house-bill/25/text
2) It’s a grift machine for Trump. If the first round of tariffs indicates anything, exemptions will be issued for those willing to bribe Trump.
https://news.lehigh.edu/politically-connected-corporations-received-more-exemptions-from-us-tariffs-on-chinese-imports
All else is window dressing.
Creigh Gordon
‘The real reason to do tariffs is to protect and nurture internal producers.”
Exactly, but you need a good faith effort to take advantage of the protection. Does anyone believe that will happen under the present circumstances?
different clue
You don’t build a Fortress North America by starting a ( for now) Cold War against the other two big countries which also live on North America. If Trump thinks that is how you do it, then he is as stupid as the people who voted for him.
Soredemos
In principle, I’d even be fine with just shooting fentanyl producers and dealers in sight (I’m tired of attending OD memorials), but this focus on Mexico is pretty silly. Most off what comes over the border is raw ingredients, which then get put together, usually crudely, in someone’s basement, local to where it’s going to be sold. Trump seem to have this hyper focus on the foreign aspects of the crisis (and it is a crisis, make no mistake) but is oblivious to the actually much bigger local drivers. And if you focused on those local elements you’d bring it to heel much more quickly and meaningfully.
I not only know people by name who are known dealers, but plenty of people who can name further dealers, and the dealers can all name their suppliers. All of this is super out in the open. You can’t even call it an open secret. It’s literally “Hey Bob, my man. Where can I get some blues?” and then Bob cheerfully tells you. No one, but absolutely no one, involved into the meth and fentanyl plague are criminal masterminds.
mago
Our tendency is to view the phenomenal world as solid, fixed and real while everything is in flux—constantly shifting and changing.
Not to get all esoteric about it or anything, but is there any reason to take this seriously, even though I face personal ruin if the madness takes hold for however long?
Just asking.
GrimJim
What we are witnessing is not a Trumpist Executive Coup, as such, so much as a Republican Governmental Coup.
That Trump is seizing power that is strictly, directly, and in no uncertain terms Constitutionally restricted to Congress; that he is using a personal Techno-Goon Squad led by Musk to actualize the coup; and that Republican Congress-critters are not only not speaking out about it but in many cases are applauding it, shows the utter depth of the coup.
Normally, even if one of their own was pulling this level of crap, the Republicans in Congress would speak out against it, as they could expect a Democratic president down the line to act in a similar way.
That they are not, and that they are not complete and utter idiots, indicates that they do not expect Democrats to ever again take the presidency.
And as any Democratic Congress could put Trump in the hotseat of an Impeachment for any one of the many shenanigans that he has pulled just in the last week and a half tells us that they do not expect the Democrats to ever again hold anything near a majority in either house, ever again.
So, they are completely in on the coup.
I expect a major push in these activities will be to disenfranchise a wide swath of Democratic-leaning groups, both de facto and de jure.
I expect any and all Federal outreach programs to “get out the vote” will be utterly destroyed, as will any sort of support for any group that generally votes Democrat.
Remember, Musk believes that charity should be illegal. Any kind of charity.
With the elimination of the income tax and the imposition of a tariff regimen, combined with the destruction of Medicare, Medicaid, SSI and SSD, I expect the middle and lower classes to be utterly immiserated within the next two years.
This will cause street riots unlike anything ever seen in the US before.
This will enable Trump to override Posse Comitatus, and outlaw all groups that support the “terrorists,” including the Democratic Party and all other Liberal organizations, which he and Musk and many of their followers believe are Socialist Satanic Commie Nazi traitors, anyway.
I don’t think Gitmo is being readied for “illegals,” it is being readied for dissidents.
It took Hitler only 53 days to destroy the German constitution. It might take Trump a little longer, but certainly not more than two years. All in time for the mid-term elections, which if they happen at all, will be nothing but a show, with only “approved” candidates being allowed on ballots.
“There are decades where nothing happens; and there are weeks where decades happen,” and we are living in those weeks.
If the Republicans are not stopped now, we are all lost.
Tc
I dont believe this is any kind of clusterfuck . Crazy like a fox (Trump is the fox’s pawn not the fox). Trump and the russpublicans have been wanting to break up NATO forever. He figured out last time that just quitting wont go over well, so he is setting up pretexts to alienate US allies. He and Musk work directly for Putin and indirectly for Xi. and both parties work for Bibi.
This Canada and Greenland stuff is dead serious not just drunk old buffoon stuff but even if he doesnt follow thru with annexation, he will use it to increase antagonisms about it until NATO is FINITO. The right is already talking about preemptively ceding Taiwan to China just like Ukraine.