The Cost of Chaos

Trump's tariffs: "America first" or "America alone"?

Apr 27, 2025

“There are decades where nothing happens; and there are weeks where decades happen.” Vladimir Ilyich Lenin

With a single speech on April 2nd, “Liberation Day”, President Donald J. Trump shocked the world by declaring the existence of a national emergency and using the authority granted to the president under the International Emergency Economic Powers Act (IEEPA) to impose the largest US tariffs in modern history, an increase of roughly 10x from the level of tariffs imposed at the end of his first term. The Liberation Day tariffs were subsequently modified through a series of exceptions, exemptions, revisions, pauses and reinstatements, leaving economic decision makers the world over in a massive state of confusion, consternation and condemnation. As a result of the President’s chaotic tariff rollout, US economic policy uncertainty is now at levels last seen during the darkest days of the global financial crisis and the covid pandemic, causing investors to dump USD-denominated financial assets and businesses to defer major spending and investment plans, bringing US-China trade to a virtual standstill, and forcing governments across the world to reconsider their trade and other relationships with the United States.

When Donald Trump took office in January 2025, the US economy was generally in very good shape, far better than when he left office four years earlier. Yes, consumer prices had increased by 20% or so during the Biden administration, but when Trump took office for the second time inflation had already cooled substantially, unemployment remained near record lows, stock prices were at or near record high levels and the dollar was strong. Most newly elected presidents who inherited such a robust economy from their predecessor would probably have chosen to leave things well enough alone, and take credit for the current state of affairs, but Donald Trump chose instead to shake things up and launch what the editorial board of the Wall Street Journal has called “the dumbest trade war in history”.

It is far from clear how the Trump tariff “plan” will ultimately play out, but if the past several weeks are any guide we should all prepare for more chaos, confusion and economic contraction in the weeks and months to come. The White House has recently made public its roadmap for conducting tariff negotiations with the ninety or so countries subject to ‘reciprocal’ tariffs, setting an aggressive target completion date in early July. It is certainly possible that over the next ten weeks the Trump administration will surprise us all and come up with a sensible restructuring of the framework of US international trade relations, but until this happens it would probably be best if we all kept our expectations in check. In particular, we should remain skeptical of future White House announcements of large corporate capital investment “commitments” into the US or of big trade wins for the Trump tariff negotiators, which may in actuality be little more than PR exercises designed to curry favor with the White House or to deflect attention from the fact that our “never surrender” President has once again elected to retreat from a losing battle over his ill-considered tariffs.

President Trump’s ‘tariff plan’ raises many unanswered questions. Why did the President of the United States think this was even a remotely sensible thing to do? What does he hope to accomplish by imposing unprecedented levels of tariffs on imports from virtually every country in the world? What impact will the shambolic rollout of the President’s tariffs have on the international position of the United States? And what might come of all this, once the dust has settled and the smoke has cleared?

Let’s explore.

What does the President hope to accomplish with his tariffs? It is quite possible that President Trump still does not know what exactly he hopes to achieve with his “big beautiful tariffs”, even as his administration begins to negotiate trade concessions with the ninety countries subject to his ‘reciprocal’ tariffs. And it is almost certainly true that our largest trading partners don’t know what the President wants either. At various times, the President has said that his tariffs are intended to “make America rich”, generating “trillions of dollars” of incremental federal government revenues, but he has also said that his tariffs are intended to eliminate the US trade deficit in goods. He has said that his tariffs will keep America from getting “screwed” and “ripped off” by those of our trading partners, “friend and foe alike”, who have had the temerity to sell to the US large quantities of cheap goods which we have voluntarily chosen to purchase from them, with no acknowledgement of the United States’ own trade surplus in services or the favorable financial ramifications of our imbalanced current account deficit. He has said that his tariffs are a matter of national security at a time of economic crisis. And he has said that his new tariffs will bring US manufacturing “roaring back” to the levels of the 1950s, without explaining what types of manufacturing he has in mind or why this would necessarily be a good thing.

No one who knows anything about the economics of international trade believes that the President’s tariff policy can or will achieve all of these objectives, if only because so many of Trump’s stated objectives are fundamentally inconsistent with one another. If Trump’s tariffs succeed in greatly reducing the US trade deficit, they will not generate large amounts of incremental revenue, even at the higher tariff rates. Neither Donald Trump nor any other US president can significantly reduce the overall US trade deficit without also addressing America’s large and growing fiscal deficit, which Trump’s tax cut plans and the emerging Republican budget framework will almost certainly increase. National security is a real concern of relevance to certain goods subject to tariffs, perhaps steel and semiconductors, but it does not explain why we have tariffs on bananas. And while Trump’s tariffs might incentivize some companies to shift a marginal portion of their manufacturing activity to the United States, or at least to make splashy PR announcements to that effect, US manufacturers will almost certainly be among the biggest losers from Trump’s tariff policy, a message which their CEOs have attempted to convey to the White House in recent weeks.

It is of course possible that Trump’s infatuation with tariffs has more to do with the exercise of raw presidential power than with trade economics per se. On several occasions, the President has made clear that he views tariffs as a negotiating tool, perhaps a substitute for sanctions, but tariffs and sanctions are of course very different things typically used for very different purposes. The President has been quite frank about his intention to use his newly announced ‘reciprocal’ tariffs (which are not in fact reciprocal in any conventional sense of the word) as a bludgeon with which to beat our trading partners into submission to his own will. But the President does not say what he hopes to achieve with this exercise of raw presidential power, and it is quite possible that he himself has not yet figured this out.

Trump’s tariff rollout was truly chaotic. Even if one were inclined to give President Trump the benefit of the doubt as to the economic coherence of his various trade objectives, I think any reasonable observer of Trump’s tariff rollout over the past weeks would have to conclude that over its first 100 days in office, the second Trump administration has been even more chaotic than the first administration, which is saying quite a lot. As evidence, consider for example the following summary timeline of selected Trump’s tariff announcements over the past three months:

January 20. As part of his “America First” agenda, newly inaugurated President Trump signs a sweeping Executive Order initiating a “comprehensive review” of US trade policy.

January 26. Six days after taking office, President Trump unexpectedly announces a 25% tariff to be imposed on all goods imported from Colombia (which the White House press release misspells as “Columbia”, as in the University). The tariff is imposed after the Colombian President refuses to allow a US military plane carrying deported Colombian nationals to land. After some heated back and forth with the Colombian President, Trump doubles the tariffs to 50% and then promptly reverses course and suspends the tariffs entirely.

February 1. President Trump signs three executive orders imposing a 25% tariff on goods from Canada and Mexico, a 10% tariff on Canadian energy exports, and a 10% tariff on Chinese imports. The tariffs imposed on Canada and Mexico appear to be in violation of the Presidents’s own USMCA trade pact, but are justified legally as “emergency” measures necessary to deter an “invasion” of illegal immigrants and fentanyl crossing our northern and southern borders.

February 3. Two days after the Canada and Mexico tariffs take effect, the Trump administration “pauses” them for one month, after both countries agreed to enhance their border enforcement measures.

February 27. President Trump announces an additional 10% tariff on China, to take effect March 4th.

March 3. The Office of the US Trade Representative issues a short report entitled, “The President’s 2025 Trade Policy Agenda”, committing the USTR to undertake a “strategic, yet vigorous” review of the “structural challenges distorting the global trading system in ways that undermine U.S. competitiveness”. The report makes no mention of any near-term tariff plans being considered by the Trump administration.

March 4. Trump’s February 3rd “pause” of the Canada and Mexico tariffs is rescinded, and the previously announced 25% tariffs officially take effect, with certain exemptions (eg for USMCA compliant goods). Trump’s second round increase in tariffs on China also takes effect.

March 12. The Trump administration implements a global tariff on steel and aluminum imports, both set at 25%. (The tariff on aluminum had already been raised to 10% during Trump’s first administration.) Canada and the EU respond with retaliatory tariffs of their own.

March 27. The White House announces a 25% tariff on all car imports, scheduled to take effect on April 3 (imported automobiles) and May 3 (imported auto parts).

April 2. President Trump’s makes his now infamous Liberation Day speech, in which he declares yet another national emergency to address the U.S. trade deficit. His new plan imposes a 10% universal tariff on all imports from roughly 100 countries set to begin April 5th, with only four countries exempt from this baseline tariff: Russia, North Korea, Belarus and Cuba (all of whom are subject to sanctions, which has reduced their trade with the US). In addition the President also announces the imposition of higher individual "reciprocal" tariffs for 57 countries set to begin April 9th. (The number of countries subject to reciprocal tariffs was subsequently raised to 90.) The level of reciprocal tariffs to be imposed on our major trading partners generally range from 20-50% (added to the baseline tariff), resulting for example in a total tariff of 54% placed on China (subsequently raised to 64% and eventually to 145%) and 30% on the EU block countries (subsequently reduced temporarily to 10%).

April 3. Trump’s 25% tariff on imported automobiles takes effect, leading to a surge in auto purchases as consumers rush to buy before the price increases hit.

April 9. Trump’s reciprocal tariffs for 57 countries were scheduled to take effect on this day, but are unexpectedly “paused” for 90 days, for all countries other than China, on which tariffs are increased to 125%. China responds to the second round of Trump tariffs with its own reciprocal tariffs of 125%, causing the President to up the US tariff yet again to 145%. China halts exports to the US of several rare earth minerals and introduces a new regulatory system to restrict access to the Chinese market for American companies.

April 11. The White House announces further adjustments to Trump’s reciprocal tariffs, with a temporary exclusion for consumer electronics exported to the US by all countries other than China. (The reciprocal tariff rate on electronics from China is reduced to 20%, but not to zero as for other countries) Separately, President Trump hints at further potential exemptions to his “no exceptions” baseline tariff announced on April 2nd, which do not materialize. He also says that he will consider approving federal government subsidies to US industries negatively impacted by his tariffs (eg agriculture and autos), again without any details or commitments.

April 14. In response to strong push back from Detroit, the President indicates that he might be receptive to pausing his previously announced auto tariffs to allow US auto manufacturers time to sort out the impact of the complex tariffs on their highly-integrated North American supply chains, and to provide additional time for the US Commerce Department to provide much needed guidance on how the complex tariff rules are supposed to work.

April 23. President Trump states publicly that he is open to cutting the rate of tariff currently imposed on China, “perhaps significantly”. Senior Trump officials then walk back the President’s statement, saying that he does not intend to cut the China tariffs “unilaterally”, that there are no specific plans to cut the tariff by 50% or more (as previously reported), and that there is in fact no current dialogue between the US and China, although the President would be willing to “take a call” from President Xi.

April 24. Treasury Secretary Scott Bessent announces that the US has had “very successful” initial tariff negotiations with South Korea, one of our largest trading partners. Observers note that the US already has a Congressionally-approved free-trade pact with South Korea, as a result of which South Korea currently imposes virtually no tariffs on US exports.

April 25. In an interview with ABC news, the President claims that he has already made “200 deals on tariffs” (over twice the number of countries subject to reciprocal tariffs) and that he expects all of his tariff negotiations to be wrapped up “within three to four weeks”.

April 26. White House sources provide the Wall Street Journal with an ‘exclusive’ preview of the Trump administration’s roadmap for negotiating trade concessions, setting a target completion date of early July (ninety days from the April 9 pause). The high level ‘roadmap’ specifies broad categories for negotiation (eg tariffs and quotas; non-tariff barriers to trade; digital trade; rules of origin for products; and economic security and other commercial issues), but with little additional detail.

The art of the deal? According to President Trump, his tariff negotiations have been going exactly to plan and what appears as chaos to the rest of the world is really just part of his grand master plan, his “art of the deal”. His senior advisors claim that there is great method to the President’s apparent negotiating madness, what in game theory is apparently referred to as “strategic uncertainty”. If this is in fact the case, the President and his administration have done a truly masterful job of disguising their intentions from the rest of the world. More likely, however, the White House itself does not yet know exactly what it hopes to achieve in the trade talks, leaving our negotiating partners to try and figure this out for themselves.

As reported, China has pushed back strongly on the Trump tariffs, imposing its own retaliatory tariffs and other trade restrictions on the US, which have been met by further tit for tat retaliations by the United States, setting both countries on the path to an all-out trade war. Unlike the Chinese, most of our other trading partners have elected to hold fire on retaliatory action, perhaps in recognition of the real economic costs to themselves of tariff retaliation, an important lesson which seems to have been lost on our own President. Several large US trading partners (Japan and the EU) have reported after early discussions that the White House did not yet know what it wanted to achieve from the talks. Others like Vietnam seem to have concluded that for purposes of bargaining with the Trump administration, what really matters are not commitments to “buy American” (eg $300 million of planes from Boeing) but rather commitments to “buy Trump” (eg $1.5 billion of new Trump branded real estate projects), perhaps with a large Starlink contract thrown in for Uncle Elon to seal the deal.

The cost of chaos. Over the past several weeks, the St. Louis Fed index of economic policy uncertainty (EPU) has approached levels last seen during the darkest days of the covid pandemic. The trade policy uncertainty index (a component of the EPU) hit unprecedented levels, approximately three times higher than during Trump’s chaotic first term. The market value of US equities fell by 15% (20% for tech stocks) after Trump began rolling out his tariff plans, before a 10% rebound on the day Trump unexpectedly paused the implementation of his Liberation Day ‘reciprocal’ tariffs, gains which the stock market has subsequently clawed back. The yield on 10-year US Treasury notes jumped 50bp in response to Trump’s April 2 announcement, and the market value of the US dollar (DXY) has fallen close to 10% or so since Trump took office, with half the drop occurring since April 2nd.

Because of the increased uncertainty around Trump’s tariffs, US business executives don’t currently know what their future manufacturing input costs will be or how they should price their own products; they do not know how to secure let alone optimize their global supply chains; and in some cases they don’t even know what form their future operating models and business strategies should take. US consumers don’t know what will happen to the price of goods they purchase (including domestically manufactured goods), and they don’t know what will happen to their jobs and to their incomes in the event of a tariff-induced recession or an all-out trade war with China. Businesses, banks and investors don’t know what impact Trump’s tariffs may have on conditions in the real economy, the credit quality of the loans they make, the value of their equity investments, the price of oil or even the value of the US dollar. And to top it all off, the central role of the United States in the global economic system is once again under threat, at a time when the US is not well positioned to respond.

The threat to American financial primacy. Since World War II, America has risen to unchallenged leadership of the global economy. At the Bretton Woods Conference in 1944, forty-four allied nations agreed to peg their own currencies to the US dollar, which was in turn made convertible into gold at a fixed exchange rate ($35 per ounce). This system lasted until President Nixon broke the link to gold in 1971, setting the stage for our current system of largely floating foreign exchange rates. Ever since Bretton Woods, the USD has served as the world’s reserve currency, with the vast majority of global trade still priced in USD, including large amounts of trade which does not involve the USA. Today, relatively few foreign countries link the value of their domestic currencies directly to the dollar—those that do include the Middle Eastern oil exporters — but because of the dominant role played by the USD in global trade and capital flows, the United States remains far and away the dominant player in world economic and financial affairs, a phenomenon referred to as “American financial primacy”.

With American financial primacy comes enhanced geo-political power for the United States, which the French foreign minister Valery Giscard d’Estaing in the 1960s referred to as America’s “exorbitant privilege”. But with this privilege also comes certain international responsibilities to be borne by the US the responsibility to maintain a certain degree of policy and currency stability, to provide open and liquid capital markets, and to preserve our commitment to the rule of law, all of which are now perceived across the world as under serious threat from the Trump administration.

It is far too early to proclaim the death of “King Dollar”, but the threats to American financial primacy are real and the damage done by Trump’s chaotic tariff policy may not be entirely reversible, even if he ends up walking back large parts of his initial plan. It would appear that the global capital markets are currently engaged in some sort of “sell America trade”, a development which may be overstated in the press but which is nonetheless concerning. The cost of financing the US national debt is not yet at crisis levels; in fact it has moderated since Trump began backing off his announced tariffs, and US Treasury yields may well fall further if Trump’s tariffs drive the US economy into recession (perhaps triggering a cut in rates by the Fed). But the prospects for US fiscal policy do not look good, with the President committed to delivering on his campaign tax cut promises and the US Congress preparing a new budget framework which is forecast to expand the federal deficit over the next ten years by $5 trillion, which exceeds the entire amount of emergency fiscal stimulus approved by Congress during the global financial crisis and covid combined.

As long as the US continues to run fiscal deficits of this magnitude we will find it difficult to reduce our international trade deficit, regardless of tariff policy, a matter of fundamental economic math the irony of which is no doubt lost on the President and perhaps many of his supporters in Congress.

America first or America alone? The current threat to American primacy and power comes only partly from the effects of the Trump tariffs on international trade and the global economy. Perhaps an even larger threat comes from the effect which Trump’s various policies have had and will continue to have on international confidence in the consistency and credibility of the United States government. In just 100 days, Donald Trump has succeeded not so much in putting “America first” on the world stage, as in severing America from the world entirely. Some observers have suggested that the United States under Donald Trump now bears many of the characteristics of an emerging market country, with uncertain economic policies, corrupt politics, weak institutions, social polarization, and a less than firm commitment to the rule of law,, an observation which may be overstated or at least premature. It may well be that the world trading system is in fact dying right before our eyes, and if this is true we should all fear its replacement, an argument made recently by W&M economics professor David Feldman and his co-author Gary Clyde Hufbauer.

This is a blog about finance, not politics, and I know that many readers may not share (or care to hear) my personal views of Donald Trump. But let me remind you all that the smooth operation of the US economy and global finance depends critically on the underlying integrity of our legal system, on our continuing commitment to the rule of law and some semblance of order in the conduct of our own affairs both domestically and internationally. Our trading counterparties across the world rely on US law when choose to do business with the United States, and if we allow our legal and institutional foundations to decay, as they have so markedly over the past 100 days, we put at risk much that our forebears worked so hard to accomplish, with the very real possibility that America may someday soon find itself not first on the world stage, but alone.

Links

Why Does the US Have a Trade Deficit? Brookings Podcast, March 2025

Liberation Day, Banking & Beyond, Substack, April 8, 202

White House Announces Pause on Trump Reciprocal Tariffs, April 9, 2025

Trump Team Chases “90 Deals in 90 Days”, Reuters, April 12, 2025

America the Unstable, April 12, 2025

The World Trading System is Dying, and You Should Fear its Replacement, Peterson Institute for International Economics, April 15, 2025

How a Dollar Crisis Would Unfold, The Economist, April 16, 2025

Trump’s Trade War Threatens American Financial Primacy, WSJ, April. 20, 2025

How long will US banks continue to lead the world? WSJ. April 21, 2025

Breakdown in US-China relations threatens new Cold War, WSJ, April 21, 2025

Fed, Tariff Fears Send Dow Down 900 Points, WSJ, April 21, 2025