The Emperor’s New Tariffs: Small, Ugly and Stupid

Trump is throwing a tantrum, but the damage will be real

Many people expected Donald Trump to begin a global trade war soon after taking office. Many people in business, however, believed that after all the huffing and puffing he wouldn’t actually impose much in the way of tariffs.

What we actually have so far is Schrödinger’s trade war: Is it alive? Is it dead? Yes.

It’s hard to believe that just last week Trump seemed dead set on imposing 25 percent tariffs on Canada and Mexico, with similar tariffs likely soon against other trading partners. Then, suddenly, he put the whole thing on ice for 30 days. Trump tried to spin it as a victory, claiming falsely that he had won big concessions from our neighbors. But if you looked at what they actually agreed to — basically nothing they weren’t doing already — it was an ignominious retreat.

So is it over? No. This week Trump announced that he was imposing tariffs after all, but only on steel and aluminum.

Before we declare that the trade war is on again, however, there are three things you need to know. First, these tariffs are a much smaller deal than what Trump seemed about to do last week. Second, while they’re small, they’re ugly. Third, as an economic policy they are really, really stupid.

About the size of this week’s tariffs: Steel and aluminum are obviously crucial materials for the modern economy, and a major cost for some industries. But they’re a relatively small share of total imports:

Source: Bureau of Economic Analysis

By the way, I’ve included “manufactures of metals” because there’s some uncertainty about whether the tariffs will hit things like I-beams as well as just the metals themselves. Even if they do, however, a 25 percent tariff on metals will have an inflationary impact much, much smaller than a 25 percent tariff on everything.

Why do I say that these tariffs are ugly? Because this is a policy that gratuitously punishes allies who have done nothing wrong. Most steel and iron comes from nations that are or were American allies; imports of aluminum come almost entirely from Canada:

Source: Census via Reuters

Why does Canada produce so much aluminum? Because aluminum smelting uses a lot of electricity, and Canada has cheap hydropower. When a close ally produces what, you might say, Mother Nature herself intended that nation to do, how can that be a reason for punitive tariffs?

And of course we have a free trade agreement with Canada, which Trump is simply ignoring, claiming that we’re “subsidizing” our neighbor because they sell more to us than we sell to them. More on why that’s nonsense in a minute. But meanwhile, this is a clear signal to everyone that America can’t be trusted.

Finally, the stupid part: Steel and aluminum aren’t consumer goods. They’re “intermediate inputs,” used in the production of other things, notably cars and aircraft. Imposing taxes that raise the prices of these goods might encourage more U.S. production of metals (although that didn’t happen to any large degree the last time Trump imposed tariffs), but it will raise costs throughout the rest of U.S. manufacturing, making it less competitive and reducing employment. Even if we ignore indirect effects via interest rates, the dollar and so on, these tariffs are almost certain to reduce, not increase, manufacturing employment.

So what’s this all about? I don’t think we should waste time trying to come up with some rational explanation for Trump’s actions.

What I see, instead, is a temper tantrum. At some level Trump is aware that while he may have claimed victory over last week’s tariff standoff, everyone who actually knows anything thinks he got rolled. So my best guess is that these tariffs are his way of saying “You think I backed down? Well, watch this!” while taking actions that look big to the uninformed but not so much to people who can crunch the numbers.

It's also becoming hard to avoid the sense that Trump has developed a particular animus against Canada. I don’t know why he started floating the idea of annexing our neighbor, but the fierce pushback from the Canadians themselves and the ridicule he has received at home seems to have made him even more obsessive on the topic. And this may in part explain his decision to make Canada the biggest target of his mini trade war.

Among other things, Trump keeps overstating the size of that bilateral trade imbalance. In a recent interview with Fox News he declared:

I think Canada would be much better off being a 51st state, because we lose $200 billion a year with Canada. And I'm not going to let that happen. It's too much. Why are we paying $200 billion a year essentially in subsidy to Canada? Now, if they're a 51st state, I don't mind doing it.

Leaving aside the nonsensical nature of the argument, no, we don’t have a $200 billion a year deficit with Canada. Here are some actual trade deficits from 2024:

Source: Bureau of Economic Analysis

Our deficit with Canada is less than a third than Trump imagines; in fact, it’s smaller than our trade deficit with Ireland.

What? Ireland? Why do we run a huge deficit with the Emerald Isle? The answer is, we don’t. These are essentially fake numbers, caused by corporate tax avoidance: companies use artificially high or low prices in transactions between their subsidiaries to make it seem as if they’re earning most or all of their profits in Ireland, which has a low corporate tax rate. In this case, I suspect that a lot of the supposed trade imbalance comes from fictitiously high prices charged by the Irish subsidiaries of pharmaceutical companies. (Technology companies also shift profits to Ireland, but mainly by playing games with intellectual property.)

Which brings me to another way in which Trump’s policies have been hurting our economic future. Freezes and ideological purges have brought much of America’s biomedical research to a dead halt. This is, above all, a human tragedy. But it will also have major economic consequences. America’s biopharmaceutical sector, which ultimately depends on the research base Trump is destroying, is substantially bigger than steel and aluminum combined:

Source: Statista and Bureau of Economic Analysis

And in reality it’s even bigger than the official numbers say, because thanks to “leprechaun economics” (a term I invented!) tax shenanigans cause a substantial amount of value actually created in America to show up in the GDP of Ireland and other tax havens instead.

For the moment full-scale trade war is on hold. But Trump’s policies are going to make us poorer, in ways we’re only beginning to realize.

MUSICAL CODA

Well, I did mention Ireland. Although I suspect this song will be banned as part of the crusade against DEI