President Trump’s on-again off-again tariff policy will have a negative impact on the U.S economy. It will reduce trade and international investment, stifling U.S. business activity.
The effects of trade policy are transmitted through two channels. First, higher tariffs directly reduce trade in goods and services. Second, uncertainty over trade policy discourages trade plus foreign investment into the U.S. The President needs a stable and more predictable trade policy if he wants to “Make America Great Again.”
Selling your product and investing abroad is an inherently risky endeavor. Economic conditions can quickly change. A project that looked profitable in the planning stage can turn out to be a loss.
U.S. policy unpredictability adds to the uncertainty problem. It makes the profitability of expanding sales and investing in the U.S. less certain. Expected profits from sales and investing in America will fall. As a result, as uncertainty from U.S. economic conditions and policy rises, foreign businesses postpone projects in the U.S.
Economists Scott Baker, Nicholas Bloom, and Steven Davis have constructed an index that measures economic policy uncertainty, and sub-policy categories like international trade. They count the number of newspaper articles that deal with uncertainty over economic policy, or international trade. They use this information to construct an index. The higher the index, the higher the level of policy uncertainty.
Just before the 2024 election, the trade policy uncertainty index value was 194.6. In January 2025, the index value was 1507.95. This represents almost an eight-fold increase since the election. In the last nine presidential elections, the average change in trade policy uncertainty index was -9.34. Trade policy uncertainty modestly declined after each election.
Research has shown that higher levels of economic and trade-policy uncertainty reduce trade and international investment, which slows economic activity. My own research shows that a one-standard deviation increase in trade policy uncertainty can reduce exports or imports by .32 to 1.35 percent after one year. The negative impact on foreign investment into the U.S. is estimated to range from 9 and 11 percent. Using the most recent data from the third quarter of last year, the quarterly decline in foreign investment can be as much as $37 billion. Higher policy uncertainty can also make foreign investment inflows more volatile.
Other research shows higher levels of general economic policy uncertainty increases exchange-rate volatility. This makes international trade and investment more costly. As uncertainty over the exchange rate increases, businesses have a strong incentive to protect themselves by hedging. Businesses end up using more costly forward contracts or options to hedge.
The President’s policies, and the way he implements them, work against his economic policy goals. His unpredictable way of making policy reduces international trade. Both imports and exports fall. While the President may be happy about the decline in imports, he will not be thrilled by falling exports. Furthermore, the large decline in investment flows into the U.S. works against his desire for foreign businesses to locate in the U.S. While his unpredictable style may have served him well in his private business dealings, it does not work in the policy world.
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