The unspoken cost of Trump's chaos tariffs

Traditional measurements of tariff costs to the importing country focus on price, output and employment impacts in affected markets for a given set of specific product tariffs. These economic effects are almost always negative, but they do provide a cost ledger to compare with the purported benefits of tariffs in supporting the specific industries and workers being protected.

The big difference with Trump’s tariffs is that it is virtually impossible to predict their economic impact, since the size of the tariffs, their timing and the countries against which the tariffs will apply are unknown. Your

In fact Trump has signaled that different countries will face different tariffs on the same product, for different reasons, and that he may change tariff levels over time, all at his discretion. He can also “adjust” his reasons for imposing them at will. We are now in the age of chaos tariffs.

Since World War II tariffs have certainly existed, but countries agreed in 1947 to negotiate their tariff schedules with each other, based on consensus. The negotiations allowed the U.S., like every other country, to bargain for higher tariffs for some of their industries against lower ones demanded by others. The negotiated results required ratification by the legislatures of all the countries, creating a global trading system.

Among the system’s benefits is the rule of non-discrimination: Each country’s tariffs apply equally to all its trading partners unless they form preferential agreements like the North American Free Trade Agreement and the European Union. This has prevented countries from undercutting some trading partners through special deals with others.

Another big benefit was “tariff binding,” allowing everyone’s industries to proceed with their trade strategies without fearing that countries could arbitrarily increase tariffs to cut off foreign or domestic market access to them.

The system was, in other words, set up to ensure predictability for those engaged in trading activity. Import and export trading is an expensive enterprise, requiring specific investments in productive capacity and shipping, and in warehousing, foreign distribution, product certifications, etc., specific to its foreign markets.

If a country could raise or threaten tariffs unexpectedly, then foreign companies would stand to lose the value of their trade investments, especially those tied to that country’s market, and often would not make the investments at all.

Donald Trump, the self-proclaimed “Tariff Man” who has been called the “disrupter in chief,” has concocted a tariff policy designed to be unpredictable and even chaotic. Aside from the regular tariff costs, his non-transparent tariff plan increases costs even without implementing them. His “reciprocal tariffs” can set different duties on each of 13,000 U.S. import products from 200 trading partners, a total of 2.6 million tariff lines.

Therefore, non-discrimination and tariff binding are out, so foreign exporters cannot predict what tariff they face, or how much they might increase in the future. Domestic exporting and import-using industries, with their trade-related investments, are also left in the dark about possible retaliation.

Trump has shown that he will not abide even by this “reciprocal” scheme. He signed a U.S. trade agreement with Canada and Mexico in 2019, setting zero reciprocal tariffs on most products among the three countries. Now he has replaced the zero tariffs with 25 percent tariffs on steel and aluminum and threatens to increase them even more, and to all other goods.

He also has no intention of abiding by his reciprocal tariff scheme with countries whose tariffs are lower than U.S. tariffs, since he reserves the right to set “corrective” tariffs on any product, for any other reason he deems appropriate.

In this regard, Trump’s tariff unpredictability is fueled by all his disparate trade and non-trade grievances. He justifies tariffs on insufficient cooperation on immigration and fentanyl interdiction (Canada, Mexico), failure to accept a planeload of deported immigrants (Colombia), plans to use non-U.S. dollar currencies in trade (BRICS countries) and “cheating” trade imbalances (most countries). Satisfying any of his demands does not protect against the whims of his new grievances.

Ironically, Trump’s additional goal of “reshoring” manufacturing to the U.S. is undercut by his own tariff unpredictability. Both domestic and foreign investors are loath to invest in reshored or new U.S. industries when there is no way to know what the specific tariffs will be for each product and each country.

And how long does Trump expect it to take to repatriate all the factories to the U.S.? For autos he announced he expects it in 30 days.

Economists have studied the impact of trade policy uncertainty during Trump’s first term, based principally on his steel and aluminum tariffs, and concluded that the uncertainty alone accounted for a decrease in annual U.S. investment by about $40 billion. Considering the potential expansion of new and even higher tariffs to cover all imports from all countries, the cost of lost investment could be several times higher.

Finally, Trump’s unpredictability is reinforced by his delusion that foreigners pay the tariffs, which thereby represent “tax cuts” for U.S. citizens. He proceeds as if the tariffs cause no harm to the nation’s economy and will lead to a golden age of U.S. manufacturing supremacy.

Prostrated Republicans, fearful that Elon Musk will finance rival primary campaigns if there are any dissenters in the ranks, has abandoned all efforts at oversight over Trump's policies. This leaves the rest of us to wonder what one man, driven by grievance, power and revenge, has in store for unilateral trade restrictions over the next four years.

Kent Jones is a professor emeritus of Economics at Babson College.

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