A Reorganization of World Trade
What if other trading blocks leaves the US to stew in its own juices..
Summary
Nasdaq is down 4% (at the time of writing) after Trump’s big announcement after stocks have already been on a rocky ride since the start of the year on policy and tariff uncertainty.
The uncertainty itself is paralyzing a host of spending decisions, most notably business investment, as these need a predictable environment and the knowledge that a trade deal (like the North American trade deal that was renegotiated under Trump 1 is actually worth the paper that it’s written on.
The tariffs are bigger than the worst expectations, hence the violent market reaction.
They are going to do significant damage to the US and world economy, there might very well be a recession, although that’s not a given.
If protectionism would work, Argentina would still be one of the richest countries in the world, as it was a century ago. The protectionism isn’t likely to lead to a US manufacturing renaissance after the initial impact on trade settles.
The US Administration’s estimates of foreign tariffs on US goods are way off, often by an order of magnitude as the way they calculated that is, quite frankly, bogus.
Most other governments are not going to take this lying down, there will be retaliation and efforts to increase trade ties bypassing the US, which are already underway.
We’ll have articles on these topics, some come from behind a paywall so we have to do that as well (sorry!). Two come from Paul Krugman, we realize some readers will take offense at that for his political views.
Our apologies for that but Krugman got his 2008 Nobel Prize for his work on trade theory, he’s one of the world’s premier experts on trade, and while his tone is harsh (again, our apologies), he’s not factually incorrect and sums things up concisely.
Here is Krugman from this morning (the bold is mine):
Will Malignant Stupidity Kill the World Economy?
Trump’s tariffs are a disaster. His policy process is worse.
By Paul Krugman
Apr 03, 2025 07:30 AM
A quick thank you to my readers. When I struck out on my own, I wasn’t sure if anyone would follow. But I just passed 300K subscribers. I’ll try to be worthy of your support.
America created the modern world trading system. The rules governing tariffs and the negotiating process that brought those tariffs down over time grew out of the Reciprocal Trade Agreements Act, devised by FDR in 1934. The growth in international trade under that system had some negative aspects but was on balance very good for America and the world. It was, in fact, one of our greatest policy achievements.
Yesterday Donald Trump burned it all down. Here’s what just happened to the average U.S. tariff rate:
Source: USITC and Yale Budget Lab
The tariffs Trump announced were higher than almost anyone expected. This is a much bigger shock to the economy than the infamous Smoot-Hawley tariff of 1930, especially when you bear in mind that international trade is about three times as important now as it was then.
The size of the tariffs, however, wasn’t the only shocking thing about the Rose Garden announcement. Arguably what we learned about how the Trump team arrived at those tariff rates — the sheer malignant stupidity of the whole thing — was even worse.
You might be tempted to dismiss complaints about the policy process as elitist snobbery. But credibility is a crucial part of policymaking. Businesses can’t plan if they have no idea what to expect next. Foreign governments won’t make policies that help America if they don’t expect us to respond rationally.
So what do we know about how the Trumpists arrived at their tariff plan? Trump claimed that the tariff rates imposed on different countries reflected their policies, but James Surowiecki soon noted that the tariffs applied to each country appeared to be derived from a crude formula based on the U.S. trade deficit with that country. Trump officials denied this, while at the same time the Office of the U.S. Trade Representative released a note confirming Surowiecki’s guess. Here’s their explanation:
Source: USTR
Ignore the Greek letters, which cancel each other out. This says that the assumed level of a country’s protectionism is equal to its trade surplus with America divided by its exports to America.
Trump also set minimum tariffs of 10 percent on everyone, which means among other things imposing tariffs on uninhabited islands.
There’s so much wrong with this approach that it’s hard to know where to start. But one easy thing to point out is that the Trump calculation only considers trade in goods, while ignoring trade in services. This is a big omission. Notably, the European Union runs a substantial surplus with us if you only look at trade in goods — but this is largely offset by an EU deficit in services trade:
Source: European Commission
So if Trump’s people had plugged all trade with the EU, not just trade in physical goods, into their formula they would have concluded that Europe is hardly protectionist at all.
Where is this stuff coming from? One of these days we’ll probably get the full story, but it looks to me like something thrown together by a junior staffer with only a couple of hours’ notice. That USTR note, in particular, reads like something written by a student who hasn’t done the reading and is trying to bullshit their way through an exam.
But it may be even worse than that. The Trump formula is apparently what you get if you ask ChatGPT and other AI models to make tariff policy:
In my post immediately following the Trump announcement I speculated that Elon Musk’s Dunning-Kruger kids might be responsible for those tariff numbers. That now looks like a distinct possibility.
Who makes policy this way? The key point is that Trump isn’t really trying to accomplish economic goals. This should all be seen as a dominance display, intended to shock and awe people and make them grovel, rather than policy in the normal sense.
Again, I’m not being snobbish here. When the fate of the world economy is on the line, the malignant stupidity of the policy process is arguably as important as the policies themselves. How can anyone, whether they’re businesspeople or foreign governments, trust anything coming out of an administration that behaves like this?
Next thing you’ll be telling me that Trump’s people are planning military actions over insecure channels and accidentally sharing those plans with journalists. Oh, wait.
I’d like to imagine that Trump will admit that he messed up, cancel the whole thing, and start over. But he won’t, because that would spoil the dominance display. Ignorant irresponsibility is part of the message.
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The above doesn't make clear that the way they calculated the tariffs other countries put on US imports is off, way off. Here is a part from his previous post:
Basically, he’s claiming that the rest of the world is placing very high tariffs on U.S. products, and that he’s imposing “reciprocal” tariffs that are only half what they impose on us. Here’s the chart he showed:
The left column show the tariffs others are supposedly charging on US products — and it’s completely crazy. Focus on the European Union. The EU, like the United States, has generally low tariffs; the average tariff it charges on US goods is less than 3 percent.
So where does this 39 percent number come from? I have no idea. Many people speculated that Trump would count value-added taxes as tariffs, even though they aren’t — European producers selling to the EU market pay the same VAT as US producers, so it doesn’t discriminate and therefore isn’t protectionist. But even if you get that wrong, EU VAT rates are in the vicinity of 20 percent, so you still can’t get anywhere close to 39 percent...
But you know that having once claimed that Europe charges tariffs more than 10 times as high as reality, Trump will never drop that claim. I don’t know how many people noticed, but he’s still claiming that we’re subsidizing Canada by $200 billion a year. Aside from the basic mistake of claiming that a Canadian trade surplus means that we’re somehow subsidizing Canada, he’s inflating the actual trade surplus by a factor of three. Many, many people have pointed out the error, but Trump is sticking with it
Below are two articles from behind a paywall:
The first explains efforts underway to bypass the US, mostly in Asia (China, Japan, South Korea) but making overtures to the EU as well. It comes from Evans-Pritchard, the lead economic commentator of The Telegraph, a distinctly right-wing (‘anti-woke’) UK newspaper (to make up for Krugman).
The second is an article explaining why even in the longer run these trade policies are unlikely to produce a US manufacturing renaissance.