Three Emoji Theory of Trump's Tariff Policy

With DOGE taking aim at Social Security, growing concern over the disbanding of committees that produce government data, and policy uncertainty (especially around tariffs) roiling financial markets, I’ve been fielding a larger than usual volume of press/media inquiries.

Last night, I agreed to squeeze in one last interview, speaking to a European television audience about “Trump’s trade war.” The problem with trying to explain any of this is that the Trump administration’s own story about what the tariffs are supposed to accomplish is often naive, disingenuous, or internally inconsistent. I don’t know a single economist who feels like they’ve got a good handle on what, exactly, the president hopes to accomplish with all of these tariffs.

I also don’t know anyone who agrees with White House press secretary Karoline Leavitt, who is out there claiming that tariffs are a tax hike on foreign countries and a tax cut for the American people. Like, what?

I’m sure you can find someone with an econ degree running around saying this kind of stuff, but I’m not aware of any serious economist who thinks tariffs work like tax cuts. Wall Street economists certainly know better.

Here’s what Goldman Sachs thinks Trump’s tariffs will mean for American consumers. According to their estimates, foreigners pay 15%, U.S. importers/intermediaries pay 15%, and U.S. consumers bear 70% of the burden of the tariffs in the form of higher prices. Even worse, once you take into account how much domestic prices are likely to increase in response to more expensive imports, Goldman says the cost to U.S. consumers equals 100% of the tariff. So let’s stop with the nonsense about tariffs working like tax cuts. American companies are literally telling us that they’re raising prices—right now—because of the tariffs.

So why is Trump doing this? We’ve been told it has something to do with stopping the flow of fentanyl into the United States.¹ We’ve heard that it’s a cudgel to stop illegal immigration and protect our national security. It’s also about “fairness” because the U.S. is “subsidizing” Canada and all of our trading partners are “ripping us off.” The Trump administration wants a manufacturing renaissance, so the tariffs are about bringing good jobs back to America. Sometimes, we’re told that tariffs are just a negotiating tool, a way to bend other countries to our will, like making Canada the 51st state. But they have to be more than just a negotiating tool if they’re going to bring in trillions and trillions of dollars to help “pay for” tax cuts and potentially replace the income tax altogether, which is also something the Trump administration has talked about.

So, what are the tariffs really about? As Trump recently said with respect to crypto, “Who the hell knows, right?”

All I know is that when it comes to Canada, the U.S. has a trade surplus in agriculture, manufacturing, and autos. The entire trade deficit with Canada comes from energy. By the way, the U.S. and Canada have traded electricity for more than a century, and Canada helps power Michigan, New York, and New England. When Canada threatened to retaliate by shutting off electricity to parts of the U.S., Trump complained:

You shouldn’t be playing with electricity. It affects people's lives. Actually, their life, it can depending on weather, it can affect their life so we can't do that. It doesn't make sense that our country allows electricity to be made in another country and sold to us. Who did that deal for the United States?

I’ll give you one guess.

The decision to maintain the free flow of energy across the borders was part of the United States-Mexico-Canada Agreement [USMCA] and negotiated by Trump in November 2018 during his first term. It was signed into law [by President Trump] in January 2020.

The whole trade fight with Mexico and Canada is basically President Trump saying he doesn’t like the trade deal that he negotiated! As CNBC’s Steve Liesman put it, the Trump administration’s trade policies are completely “insane”.

Just this week, Trump announced that he was increasing tariffs on global steel and aluminum imports to 25%. Canada retaliated with 25% tariffs on more than $20 billion of US goods, which will hurt American producers. And then Europe got in on the fun, responding with tariffs on $28 billion worth of US products. Not to be outdone, China slapped heavier tariffs on American farm products. It’s a global trade war, and it’s going to cost the U.S. consumer a bundle.

How much?

The Peterson Institute estimates that the steel tariffs alone will cost US consumers and businesses (in aggregate) $900,000 per year for every 1 job that is saved or created in the steel industry. How will the broader tariffs impact the average American family? Kimberly Clausing of the Peterson Institute says they could cost the typical family as much as $2,000 per year. On the revenue side, she thinks it’s naive to believe the tariffs will bring in $1.5 trillion over the next 10 years. That’s because some of the more optimistic estimates don’t factor in the risks of an economic slowdown.

And remember, republicans are trying to extend the 2017 tax breaks and push through some additional tax cuts. If you think those tax cuts will deliver a windfall that will more than offsets the high cost of the tariffs for most Americans, think again. The Institute on Taxation and Economic Policy (ITEP) estimates that only those in the top 5% of the income distribution will actually come out ahead.

For more on the political and economic impacts of the tariffs, you can listen to Clausing’s conversation with Ezra Klein, which I found thoughtful and engaging (though missing the MMT lens on trade).

Near the end of the episode, they grapple with the question: Why is Trump doing this? Clausing described the tariffs as “misguided.” Ezra called them “dumb.” Liesman says they’re “insane.” It doesn’t really work on television, but I can sum up my stance on the trade war in three emojis.

1. In fiscal year 2024, the U.S. seized 43 pounds of fentanyl at the northern border and 21,000 pounds at the southern border. That makes Canada “responsible” for 0.2% of the North American supply problem. Of course, that problem has a counterpart on the U.S. demand side, which is somehow not even part of the conversation.