Napoleon won his wars by hitting the enemy where it was least expected, and that’s what needs to be done with Trump. The proper response to the “reciprocal tariffs” he unleashed on the world on April 2 is not in tit-for-tat tariffs-on-goods. That’s stuff for kids, the kind of tariff policies that were believed in centuries ago, in the good old days of 17th-century mercantilists.
History has taught us that such tariff policies that earned the nickname “beggar-my-neighbor policies” only cause economic disaster, crashing demand and undermining the business trust necessary for investment. It only leads to further cycles of slashed consumption and shuttered businesses, spreading poverty among laid-off workers.
That’s what the Smoot-Hawley Act passed on June 17, 1930, did to America, ensuring the Great Depression would last an additional decade, right up to World War II. With the decision to go to war, America finally engaged in vast military expenditures, putting an end to the depression and nudging the economy back to health.
So the correct response to a silly retro-tariff 1930s-style war is, if need be, a sophisticated 21st-century economic policy of non-tariff barriers slapped on American services. Why services? That’s where America derives its current extraordinary wealth and economic supremacy. Especially the unprecedented wealth that accrues to digital tech giants, such as Google, Paypal, et al. The Silicon Valley firms that are the main source of current American economic power and that have taken refuge in fiscal paradise, such as Ireland or Luxemburg, to avoid paying taxes in America.
Initial response to Trump’s expansion of his trade war
Yesterday, the world’s initial response to Trump’s fantastic list of reciprocal tariffs on some 180 countries, his latest shock-and-awe tactic, was predictable.
The noted American economist, Lawrence Summers, who served as President of Harvard University and as Secretary of the Treasury in the Clinton administration and is now on the board of directors of artificial general intelligence company, OpenAI (which, let’s note in passing, is the one Musk left to create his own AI company), was bemused by the clear lack of economic knowledge behind Trump’s trade war. He posted on Musk’s beloved X:
“It’s now clear that the [Trump] Administration computed reciprocal tariffs without using tariff data. This is to economics what creationism is to biology, astrology is to astronomy, or RFK thought is to vaccine science. The Trump tariff policy makes little sense EVEN if you believe in protectionist mercantilist economics.”
Yes, Trumponomics is bad economics indeed! David Dayen, a notable American journalist, currently the editor of The American Prospect, who holds progressive views and frequently critiques corporate power, monopolies, and financial misconduct, noted that there was no apparent policy behind the tariffs or whether it is even possible for the U.S. to ramp up the kind of domestic manufacturing Trump wants.
Economist David Rosenberg concurred on Bloomberg yesterday:
It’s worth listening for a minute to the other side as well. Here is Commerce Secretary Howard Lutnick on CBS, making the case for Trump’s trade war. But let’s focus on his message, setting aside for now the discussion he’s having with the CBS journalist about his comment on social security monthly checks that he’d made a few days ago when he categorized as “fraudsters” anyone complaining about not getting their check.
That bizarre episode merely revealed Lutnick’s systemic misunderstanding of the reality of people who need those checks to make ends meet every month. An extraordinary lack of empathy that happens to be shared with Trump and his whole team: One often wonders whether they have lost their moral compass.
So what was Lutnick’s message? That Trump’s trade war amounts to a “reordering of global trade” (true) and that “Americans will be the winners” (not true). But fear not, Lutnick said, “people are going to build factories on American soil right now” and “[y]ou’re going to see employment leaping [in America] starting today.”
And what happened? Aside from the stock markets crashing around the world, from Wall Street to Asia, unemployment immediately reared its ugly head: Both automaker Stellantis and appliance manufacturer Whirlpool announced layoffs because of the tariffs. Stellantis, for example, confirmed a temporary shutdown of its Windsor assembly plant in Ontario, Canada, between April 7 and April 21, due to the tariffs. This shutdown affects production of the Chrysler Pacifica, Chrysler Grand Caravan, Chrysler Voyager and Dodge Charger Daytona.
A blip or the start of a dire future?
History tells us to expect reciprocal tariffs to make American consumers pay more across the board and for all goods, American and imported, as American firms take advantage of the price rise in imported goods to raise their own prices. That’s what all firms always do in a free market economy, so don’t expect American firms to stay put and do nothing.
And this, in turn, will crash American consumer demand, further depressing the American business outlook. And expect shutdowns in manufacturing around the world to cause pain as people are laid off. A down-spiraling cycle in America and abroad. And history repeats itself, back to the Smoot-Hawley Act.
As to rebuilding manufacturing in America, that will take from three to five years as a minimum, between getting building permits to finalizing construction.
But the immediate problem is another: Trump, with his unpredictability, bossing around, firing people and constantly changing policy tactics, is causing uncertainty and killing business trust, which is key for investment.
This is exactly the point made by Rosenberg in the above video: “The next thing is going to be a recession,” he says, “these people [Trump et al.] do not even understand tariffs: it’s not the foreign exporters but the American importers who are paying the tariffs.” The tariffs are going to “lead to a contraction in personal real income in the US” and that “leads to negative consumer spending, which is 70% of the US economy and 20% of the global economy”. So yes, the trade deficit “will be eliminated but not for the reasons Trump thinks.”
Without stability, certainty and trust, investors cannot predict costs and simply won’t invest. This means that Trump’s reciprocal tariffs meant to “rebuild American manufacturing” can only fail.
Trump’s Make America Wealthy Again is likely to quickly turn into its reverse: Make America Poor Again — just like in the 1930s.
What to do to limit the damage from reciprocal tariffs?
There are three important steps that can be taken.
One: Remain open to negotiations and refuse to play the game of upping the ante: As EU Commission President von der Leyen emphasized in her speech responding to Trump’s reciprocal tariffs, the EU is open to negotiations, holding off tariffs for a couple of weeks. That is the right first step.
Two: Expand the scope of the negotiations: There is also much to be learned from Canada’s current Prime Minister Mark Carney, a central banker with a long experience first in Canada and then as Bank of England Governor. What he has to say is particularly interesting as Canada, along with Mexico, were America’s closest allies to be first targeted by Trump’s trade war.
He is calling for a global approach, a total renegotiating from the ground up of not only Canada’s commercial ties but also of the defense and security relationship with the U.S.
The point is this. Don’t try and negotiate “a trade deal” as such, it won’t work. One just never knows what comes next as Trump roars and threatens people like a mob boss. As Trump’s son Eric says: “I wouldn’t want to be the last country that tries to negotiate a trade deal with [Trump]. The first to negotiate will win — the last will absolutely lose. I have seen this movie my entire life.” Instead, what is needed is a global approach to the negotiating table because that is the only way to take into account, as Carney wisely notes, Trump’s unpredictability and aggressiveness.
Clearly, the EU’s von der Leyen is thinking along the same lines with her Readiness 2030 plan. She will be coming equipped with it to the negotiating table with Trump, able to talk about both tariffs and defense. She can tell him that Europe is ready to take on its own defense and ensure its security, which is, after all, exactly what Trump has been hollering for, accusing Europeans of not paying their dues in NATO.
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Three, if all this fails, broaden the trade negotiations to include non-tariff barriers on American services: there is still the possibility to make Trump see reason by threatening so-called “non-tariff barriers,” i.e., fiscal measures and the like, on American services, especially digital ones. If, for now, EU-US trade is roughly in balance, it’s largely because American services make up for the shortfall on the products front.
The numbers speak for themselves:
- the EU has a goods trade surplus with the US, meaning it exports more goods to the US than it imports from the US — for example, in 2023, the EU exported €503 billion of goods to the US market, while importing €347 billion; this resulted in a goods trade surplus of €157 billion for the EU;
- The US has a services trade surplus with the EU, meaning it exports more services to the EU than it imports from the EU — for example, in 2023, the EU exported €319 billion of services to the US, while importing €427 billion from the US; this resulted in a services trade deficit of €109 billion for the EU.
So, the EU-US trade balance is roughly in equilibrium when goods and services are considered together. The difference between EU exports to the US and US exports to the EU stood at €48 billion in 2023, the equivalent of just 3% of the total €1.6 trillion trade between the EU and the US.
But the story doesn’t end there. EU-US business ties have numerous beneficial impacts:
- The EU and the US are also major investment partners. EU and US firms have €5.3 trillion worth of investment in each other’s markets (2022 data);
- US exports of goods and services to the EU support 2.3 million jobs in the US, and EU firms’ investments in the US employ 3.4 million people. To learn more, visit the EU’s Business Footprint in the United States Project.
In short, the EU is the most important trade and investment partner of the United States, and it’s that relationship that Trump is trying to break: The employment of nearly six million people on both sides of the Atlantic is now at risk because of Trump’s reciprocal tariffs.
Obviously, it’s high time to stop this folly. And if it means hitting Google, Paypal and Apple where it hurts, Europe should not hesitate to do so.
Or at least threaten to do so to force Trump to back down.
Editor’s Note: The opinions expressed here by the authors are their own, not those of impakter.com — Cover Photo Credit: Julius Silver.
