As crazy as Trump’s tariff mania is, the world will keep turning with not as much damage as the headlines have us believe, Michael Pascoe writes.
Recession in America, global growth reduced by a third, China shrunk, Australia whacked, the earth splitting asunder spewing forth serpents…or maybe not.
Nobody needs further proof that the inmates are running the Washington asylum, a.k.a. the White House, but yes, add to the pile the Trump gang’s view that Europe’s VAT and Australia’s GST are protectionist levies. On the other hand, keeping the VAT/GST in mind helps lower the fever around “Liberation Day” headlines.
It’s a given that tariffs primarily work as a tax on consumption. America doesn’t have a federal consumption tax, just a patchwork of state and local sales taxes ranging from zero to 10.1 per cent.
Try looking at Trump’s new blanket base tariff of 10% as a partial federal consumption tax, and it is not quite so scary. Even with the “reciprocal” tariffs, averaging about 15% by Goldman Sachs’ estimate, they only cover a minority of Americans’ consumption.
Cars, steel, aluminium, and some other goods yet to be specified are different, but overall, tariffarama should have less immediate US consumer impact than the introduction of Australia’s GST did. At that time, our central bank agreed to “look through” the one-off hit to inflation, as the Federal Reserve might be tempted to, given the likely concurrent impact of weakening consumption.
Trumpian idiocy
Make no mistake, Trump and friends are idiots, while those who voted for him and continue to support him are worse. Cue the Sky After Dark gang. Just as Trump falsely promised to lower the price of eggs, he has claimed the tariffs will lead to lower prices for Americans. Not on this planet.
The tariff crusade is and will damage America, making it less, not great again.
(An anonymous White House official also has been quoted as saying quality wasn’t the reason Americans bought more European cars than Europeans bought American cars. Tell him he’s dreamin’, too.)
In very rough numbers, the US imported US$3.3 trillion worth of stuff in 2024, some of which is re-exported. And Trump doesn’t seem to have thought of services yet, perhaps because the US runs a services trade surplus, perhaps because he doesn’t think. US retail sales were 58% more than that – US$5.28 trillion.
Unintended consequences?
And then there is the reality of exchange rate movements and exporters and American importers shaving margins a bit to stay competitive. Goldman Sachs is guessing the tariffs, including the 25% on auto parts and vehicles, will add 0.5% to America’s “core personal consumption expenditures”, an inflation measure.
If the Fed thought the tariff thing would stabilise – a big “if” – the central bank could stay relatively calm and not try to damage the US economy any more than Trump is. Of course, the bald numbers only tell part of the story. A couple of percentage points less than a fifth of Americans’ food is imported, so divide the tariff impact by five, and it doesn’t look so bad.
But nearly 60% of America’s fresh fruit and nuts are imported along with 40% of vegetables. Obviously not a problem if your diet is based on McDonald’s, though the 45 grams of Australian meat in a cheeseburger might cost 30 cents more.
The US can no more re-industrialise overnight than Elon Musk can live on Mars. US industrial capacity is only running a percentage point or so below its long-run average.
There are not vast arrays of American factories ready or wanting to fill the country’s $2 shops.
US consumers will have to keep buying imported food as US farmers already produce about as much as they can produce, never mind what happens if their illegal crop pickers are deported.
The international beef market is deep. America exports nearly four times as much beef as it imports from Australia. Its main markets are, in order, Japan, South Korea, Mexico, Canada and China. They are all countries looking for retaliation that is relatively painless for their own consumers. Ditching US beef fits that bill.
Which means there might be more tasteless American grain-fed beef available for McDonald’s patties if our superior free-range beef is priced out of the market, but I doubt it. American cattle farmers are not efficient enough.
Who will really pay?
Trump’s latest trade war is old news for China. It is already exporting more to the global “South” than it is to all of the “West”. China knows its economic future does not lie in selling MAGA hats to daft Americans.
As a Bloomberg writer summarised it:
“Trump’s escalating tariffs are expected to raise the cost of trillions of dollars in goods shipped annually to the US from other countries, with most economists predicting American consumers will be among the hardest hit as a result. Trump’s latest salvo also turbocharges the worldwide trade war he began, a conflict likely to be marked by tit-for-tat strikes that destabilize supply chains, stoke inflation and encourage more countries to form alliances that exclude America.
“That dynamic presents a political problem for Trump, as his strategy may halt US economic growth in its tracks. And even if he’s eventually proven correct that his trade war will help re-industrialize the economy, that wouldn’t happen for a long time. In the interim, those Americans who elected him to lower inflation may very well find the opposite to be the case.”
And the rest of the world will be moving on, leaving the US to stew in its own corrupt plutocracy, becoming steadily less great. The American auto industry promises to be the prime example of that – heavily protected and thus sentenced to needing protection to cover for higher prices and lower quality.
The entrepreneurial drive, hopes, and needs of the 7.9 billion people living outside the US won’t be stymied for long by Americans’ turning to isolationism and nationalist populism.
Ironically, “Liberation Day” is most likely to mean greater liberty from the American hegemon we have been addicted to. As I’ve argued elsewhere, the tariffs don’t help, but they are the least of what should be our concerns with the United States.
Now what we need is a government prepared to face up to that.
This post was originally published on Michael West.