The Economics of Smoot-Hawley 2.0, Part I

Tariffs will be very high as far as the eye can see. What does that mean?

The Aug. 1 deadline has come and gone, and Donald Trump hasn’t made any trade deals. What some gullible reports call “deals” are at best “frameworks” in which other countries have suggested — without signing anything — that they’ll do things that might help the U.S. economy. For the most part even these understandings are vaporware. For example, the European Union literally has no way to deliver the increased U.S. investment and increased imports of U.S. energy the Trump administration has trumpeted as part of the so-called deal.

What we’re left with is that the United States has, for all practical purposes, unilaterally imposed high tariffs. So you should think of Trump’s trade policy as the second coming of the 1930 Smoot-Hawley tariff, effectively reversing the results of 90 years of trade liberalization. In fact, average U.S. tariffs, which were very low just a few months ago, are roughly back to Smoot-Hawley levels.

Unless the courts rule Trump’s tariffs illegal — which they clearly are, but I fully expect the Supreme Court to uphold them anyway — Smoot-Hawley 2.0 is the new normal.

How should we think about this astonishing policy reversal? Beyond the paywall I’ll discuss the following issues:

1. Where we now stand on tariffs, with historical context

2. The likely impact of tariffs on U.S. and world trade

3. The effect of tariffs on U.S. growth. Spoiler: significantly negative, but maybe not as bad as you imagine. But big costs for families.

I’ll follow up next week with some of the larger implications of Trump’s tariffs. Crucially, what Trump is really waging is mostly a class war against middle- and lower-income Americans rather than a trade war against other countries. The hit from his tariffs to the typical family is much bigger than the hit to GDP. Also, it’s important to understand that all of Trump’s tariffs violate solemn agreements — agreements ratified by Congress — that the United States has made in the past. So the Trump tariffs have inflicted massive and possibly irreparable damage on U.S. credibility.