Many economists have expressed alarm at the adverse economic consequences from the surge in tariffs. These arguments rightly emphasize the reduced volume of international trade, which is costly primarily because of shifts in global production toward goods and services in which countries have comparatively low efficiency.
President Trump and his primary advisors argue instead that economic costs derive from trade imbalances on a bilateral basis across countries. Based apparently on arithmetic without economic analysis, an excess of U.S. imports over exports with each country is supposed to subtract from U.S. real GDP. That is why a country with a large trade surplus with the U.S., such as Vietnam, is characterized as taking advantage of us. In fact, the overall U.S. trade balance represents our excess of investment over saving and corresponds to the inflow of capital to the United States (including foreign purchases of U.S. government bonds). In the long run, this overall balance might tend to zero but not if the rest of the world wants continually to accumulate holdings of U.S. assets. On a bilateral basis, there is never any particular reason for the trade balance to be zero. That is, it makes no sense to blame Vietnam when the desirable goods and services that we buy from them exceeds the amount that we sell.
Trump and his advisors sometimes acknowledge costs from tariffs but regard them as analogous to painful medicine taken to assure long-term health. If this perspective were accurate it would show up as improvements in indicators of long-term U.S. economic performance, for which the stock market is imperfect but the best measure available. As is well-known, the overall U.S. stock-market value has declined sharply—by nearly 20%—since the end of February. This outcome is the market’s signal that the costs of the tariff crisis will be long-lasting and severe.
To put things in perspective, the recent stock-market crash has subtracted around $9 trillion from U.S. wealth. The crash also falls into the range of the worst stock-market collapses in U.S. history. The largest of these declines associates with the Great Depression, including the fall by 31% in the Great Crash of October-November 1929 but cumulating to 85% by June 1932. Other major short-term declines are 23% for the Lehman collapse in October-November 2008, 22% for the largely unexplained Black Monday event in October 1987, 20% for the COVID crisis in February-March 2020, and 15% for the Russian financial crisis in August 1998. Thus, the current tariff crisis falls into exclusive and scary company.
The U.S. economy is now almost surely in a recession. The Atlanta Fed’s GDPnow estimate on April 3 for real GDP in the first quarter of 2025 shows a decrease by 3%. Given the tariffs and the stock-market collapse, a larger GDP decline for the second quarter is highly likely, pretty much ensuring that the National Bureau of Economic Research will declare a recession for the first half of 2025.
One useful change would be for the U.S. Congress to restrict the President’s authority to enact tariffs on his own. The adverse economic effects from the tariffs—actual and threatened—should be enough to get Congress to act but a further incentive for Republicans is the growing likelihood of a rout in the 2026 midterm elections. For comparison, Congress (joined by a hesitant President Herbert Hoover) enacted the notorious Smoot-Hawley tariff in 1930. Smoot-Hawley has received a lot of recent attention because it is the closest parallel to Trump’s ongoing tariff exercise. In 1929, the U.S. Senate was decidedly Republican, 54-39. This advantage declined to 48-47 in 1931 and to a sharp deficit, 36-58, in 1933. Fittingly, Senator Reed Smoot, a Republican from Utah, lost reelection in 1932 (as did Congressman Willis Hawley, a Republican from Oregon). Although Smoot-Hawley was only one of several reasons for the Great Depression and, thereby, for the loss of Republican political power, it should serve as a legitimate warning for today’s Republicans in Congress.
By way of personal confession, I should acknowledge that I voted for Donald Trump (for the first time) last November. I had two main reasons—first, the Democrats were so leftist and so harmful, and second, I thought that Trump would be less crazy than in his first term. Specifically, I thought his economic policies would focus on his good ideas—cutting regulations and wasteful government spending and expanding tax reform—and at most to a minor extent on his fetich with tariffs. But now, it seems that tariffs are the main thing, causing great damage directly and also endangering progress in other areas.
