Andrés Velasco | There is no method to the tariff madness

Is there any method to the trade tariff madness US President Donald Trump unleashed on April 2? No one can answer this question with confidence, because Trump is a politician who has made unpredictability part of his brand.

But answer it we must, so here is a list of possible reasons why the American president launched the trade equivalent of World War III.

Start with the obvious: Trump actually thinks the tariffs will bring manufacturing jobs back to the United States and make the American economy great again. This was always a half-baked notion, at best. But if Trump believed that his latest tariffs would amount to America’s “liberation day”, subsequent events should have disabused him. The US stock market has tanked, analysts are close to predicting a recession, and pressure is building on the Federal Reserve to cut interest rates and fix the mess.

Moreover, economics textbooks suggest tariffs should cause the dollar to gain in value, as Americans import less and therefore supply fewer dollars to the currency market. Instead, the shock from the scope and scale of Trump’s “reciprocal” tariffs was so nasty that the dollar depreciated against the world’s major currencies, which can only mean traders are expecting US economic activity to decline.

Let us consider something else then: maybe Trump does not care about the US economy as a whole, but wants to reward the Midwestern blue-collar workers who tipped the 2024 presidential election in his favour. But that theory does not work, either. True, tariffs on finished goods such as foreign-made autos can provide some protection for American firms and workers, but the tariffs on imported auto parts work in the other direction, making domestic car production less profitable.

The devil is in the details, and there are lots of things we still do not know, but it is plausible that Trump’s tariff fusillade will reduce the effective protection US industry enjoys, destroying old manufacturing jobs instead of creating new ones.

The one thing that is certain is that cars – both foreign and domestic – and other consumer goods will become more expensive. And that is not the sort of thing Trump voters are likely to celebrate.

In a more conspiratorial vein, let us instead conjecture that Trump does not give a hoot about the fate of American workers, and instead wants to help tech oligarchs like Elon Musk become even richer. That sounds plausible, but the economics does not add up here, either. Tech is mostly an export industry, in which the US enjoys global leadership. Yes, China is quickly catching up, but I am still writing this column using a Microsoft product, and you are probably using a US-designed piece of hardware to read it.

Sheltering the domestic market against imports is not what US tech leaders are losing sleep over, and tariff protection is not on the list of things they want from government. On the contrary, Trump’s tariffs could cost them dearly, because if affected countries want to retaliate against the US, they would be wise to focus on services (including tech services), where America enjoys a large trade surplus.

Do you live outside the US and rely on American tech products for work and fun? Well, next time you may have to pay a great deal more for the privilege.

National power

So, why is Trump doing what he is doing? Still searching for a nerdy answer, I went looking in a nerdy source: Albert O. Hirschman’s classic book, National Power and the Structure of Foreign Trade.

Back in 1945, Hirschman single-handedly invented the now trendy field of geoeconomics. He distinguished between the supply effect (trade makes a country richer and therefore politically and militarily stronger) and the influence effect (a large and rich country can exert political power by restricting other countries’ access to its market).

So, it would seem Trump is appealing to the influence effect. He flexes his political muscles by making it expensive for foreign competitors to sell goods across the 50 US states. So far, so good.

But Hirschman’s analysis does not stop there. To gain political power through trade, he advises, you should focus on countries that pose an economic and geopolitical threat; that rely heavily on trade for their prosperity; and that find it difficult to shift trade away from you and towards third parties.

Does anyone think that Trump’s minions carried out such an analysis to decide on whom they would impose tariffs? Consider some of the victims. Canada does rely heavily on US trade, but in what sense is it a threat? Many East Asian countries trade a lot, but not primarily with the US, and can probably redirect at least some of the exports that will now not end up at the local Walmart.

Jordan, which is to endure a 20 per cent tariff, is clearly a US ally, and not a country where America has to use trade sanctions to gain influence. And, if Hirschman’s logic is at work, why impose 50 per cent tariffs on Lesotho, a tiny, impoverished, and land-locked African economy that exports only garments and diamonds?

Hirschman does make one other ominous point: the country that used trade threats effectively to gain political power, especially in Central Europe and Eastern Europe, was Nazi Germany after 1933. One can only hope that is not Trump’s model.

So, in the end, the only explanation for Trump’s tariffs lies in the answer to the age-old question of why babies suck on their big toes: because they can. America and the world will pay dearly for his infantile behaviour.

Andrés Velasco, a former finance minister of Chile, is Dean of the School of Public Policy at the London School of Economics and Political Science.© Project Syndicate 2025www.project-syndicate.org