Tariffs are paid by the United States
Whether Donald Trump ignores or faints to ignore the reality, his statement that the United States are going to be richer thanks to the tariffs paid by foreign countries who have “abused” the United States shows the depth of his stupidity. It is the US that pays that supplement.
International Trade is critical to the United States
The narrative of the White House is particularly misleading.
This Chart shows the reality: The United States are exporting $ 3.2 trillion of goods and services. It represents 12% of its Gross Domestic Product. Interestingly 2.1 is in goods and 1.1 is in services. What this tells us is that attempts to impose tariffs as blindly as the administration would like to do it, might face a severe retaliation of exports on the United States.
The tariff number is meaningless
One of the old illusions about tariffs is that the basis of calculation will remain stable.
Besides tariffs, there are other parameters that play a role in measuring these impacts.
1. The uniqueness of the products: the example of the pharmaceutical industry is patent. Drugs are discovered and distributed by large US and European Companies. Prescription drugs are needed on both sides of the Atlantic and distributed worldwide. Does a BMW compete with a GM car?
2. The currency of the sale: this administration wants the dollar to be the currency of the world. As Robert Triffin demonstrated in the Triffin Dilemma “If the United States stopped running balance of payments deficits, the international community would lose its largest source of additions to reserves. The resulting shortage of liquidity could pull the world economy into a contractionary spiral, leading to instability.[1]” Donald Trump warned BRICS against replacing U.S. dollar with tariffs threat[2]. Over the next years, there might be reasons for the dollar getting stronger or weaker, and foreign currencies could do the same. If foreign countries were to be weakened by heavy tariffs, their currencies would also decrease, compensation of the tariffs.
3. The price of the goods: nothing tells us that prices will become unchanged after the imposition of tariffs. The exporter might be willing to reduce its price to compensate for the tariffs, and the importer could decrease its prices. It is the elasticity of prices of the goods that will ultimately determine the effect of the tariffs on the price for the purchaser, and ultimately for the consumer.
There is no way the United States can win this trade war
If Donald Trump were smart enough to refine its strategy, it would look at the impact of its measures. Claiming that the world is taking advantage of the United States is collective paranoia without evidence.
The experience of foreign countries with the United States -politically or economically- is definitely dominated by a sentiment of superiority. The United States are powerful and feared: their military and economic power dominates the global economy.
Since the diagnostic is wrong, the medication is too. How do consumers fit in? It is unclear that the cost of a Mercedes or Toyota will deter buyers. The impact for the automotive industry will not be limited to foreign cars: the US car industry is a huge importer of components that are substantially cheaper.
Will US consumers blink at the price of wine, cheese, fruits, vegetables to the point that they might not buy them? Those are a small fraction of the budget of a household and already produced and bought locally. Inflation will increase and so will interest rates… and the 4-month budget deficit already exceeds the 2024 number by $ 360 billion!
Computer equipment is increasingly produced outside of the United States, and imports are necessary to the US computer industry. Whatever the cost.
The inflationary impact of tariffs
We know the story. It has been played again and again.
Statements by the administration that their tariffs will not be inflationary are misguided. Morgan Stanley economists estimate that tariffs will raise inflation, as measured by the Personal Morgan Consumption Expenditures index, by as much as 0.6 percentage points and depress real consumer spending by as much as two percentage points.[3] This strategy will hurt consumption. What is the engine of growth? Consumption.
This twin effect will deplete the growth of the US economy, make low income households poorer and eventually affect their savings with the long awaited correction of the financial markets.
[1] https://www.imf.org/external/np/exr/center/mm/eng/mm_sc_03.htm
[2] https://www.reuters.com/markets/currencies/trump-repeats-tariffs-threat-dissuade-brics-nations-replacing-us-dollar-2025-01-31/
[3] https://www.nytimes.com/2025/02/27/business/trump-tariffs-spending-cuts-economy.html#:~:text=Morgan%20Stanley%20economists%20estimate%20that,much%20as%20two%20percentage%20points.
