Donald Trump’s second-term trade policy has unleashed the largest tariff escalation in modern U.S. history, with average effective tariff rates at one point exceeding 11 times their 2024 levels. The Yale Budget Lab estimates that the country’s effective tariff rate now stands at 17.9 percent.

Despite these disruptive trade escalations by President Trump, in the short term, most major economies are continuing to seek accommodation with the United States. This is due to many countries being heavily reliant on the U.S. market. Just recently we saw an example of this with the EU-US "trade deal". The most destructive part of the deal being a tariff of 15% on European exports to America which is more than nine times higher than the rate in place before Trump returned to office.

To be free, you need to be feared. We were not feared enough. (Emmanuel Macro, July 30th)

Since World War II, American power has relied more on cooperation than coercion. The Trump team disregards this history, assumes the benefits of a cooperative approach will endure, and fails to imagine a future where other nations abandon the U.S.-led order or create a rival one hostile to American interests. Yet the administration’s actions are accelerating exactly those possibilities.

The Economic Inefficiency of Tariffs

For a long time now there has been a consensus among most economists that tariffs are self-defeating and have a negative effect on economic growth and economic welfare, while free trade and a goal of reducing trade barriers such as tariffs has a positive effect on a countries economic outcome.

The graph below illustrates how tariffs create economic inefficiency by raising the market price from the Usual Price to the Tariff Price. At the higher tariff price, domestic producers gain additional Domestic Producer Surplus (green area) because they can sell more at a higher price, but this comes at the expense of consumers, who now face reduced purchasing power and higher costs. The government collects Revenue (blue rectangle) from the tariff, yet this gain does not offset the total loss to society. The Dead Weight Loss (red triangles) represents transactions that no longer occur due to the tariff: on the left, consumers who would have bought at the lower price are excluded, and on the right, resources are inefficiently diverted to higher-cost domestic production rather than cheaper imports. These lost trades reduce total economic welfare, meaning that while tariffs may benefit certain domestic producers and provide some government income, they shrink the overall size of the economic pie, making them an inefficient policy choice. Why then, do politicians so often succumb to this inefficient policy? Politics. It is politically popular to bend the knee to less competitive, domestic producers and unions.

The wild swings in U.S. tariff policy have put companies in a bind. With tariffs imposed at historic highs, firms now face tough choices about structuring supply chains or investing in production tailored to this new landscape. But the unpredictable nature of U.S. policy, and the very real chance that a future democrat administration could abruptly repeal these tariffs, means any company that retools to take advantage of current protections risks being left holding the bag. Should the tariffs vanish overnight, those same firms could find themselves saddled with higher costs, inefficient operations, and competitors suddenly able to import at much lower prices, erasing any intended gains.

It's also worth pointing out the the disproportionately negative effect tariffs have on poor people. The lowest income decile has lost over 3.5% of disposable income, while higher-income groups face smaller, though still significant, reductions. This regressive impact shows how the brunt of higher prices from tariffs falls on those least able to absorb them.

Don't Shoot the Messenger

According to Goldman Sachs Global Investment Research's latest analysis of tariff effects, foreign exporters absorbed just 14 percent of US tariffs, US companies 64 percent and consumers 22 percent. It didn't take long for Trump to call for Goldman Sachs to replace their top economist over these predictions. Of course, the independence of any economic institution, is a phenomenon that has quickly and silently been forgotten since Trump took office. Calls for chairman of the Federal Reserve, Jerome Powell, to lower interest rates, including threats if he doesn't do his bidding, have become commonplace.

The firings and reshufflings inside U.S. economic institutions are becoming as consequential as the tariffs themselves. Earlier this summer, President Trump abruptly dismissed the Commissioner of the Bureau of Labor Statistics (BLS), reportedly over disagreements on the reporting of inflation-adjusted wage growth. The commissioner had resisted White House pressure to “recalculate” figures in a manner more favorable to the administration’s narrative of a jobs boom. The new commissioner, a little-known political loyalist with no history of experience in labor economics, has already drawn criticism for delays in key data releases and inconsistencies in seasonal adjustments. Economists warn that the credibility of official statistics, long regarded as apolitical and empirical, is now at risk of being seen as just another political weapon. Business leaders and markets, which rely heavily on consistent labor and inflation data, may start to lose confidence in U.S. economic numbers.

The politicization is spilling into monetary policy as well. Trump’s latest appointment to the Federal Reserve Board marked his first major vote by siding with the president’s demand for an immediate 50-basis-point interest rate cut. The decision put him in a minority, as most Fed officials, including Chair Jerome Powell, argued for holding rates more steady due to still-strong consumer demand and sticky inflation. While the single dovish vote did not carry the policy, its significance lies in the clear precedent being set: Trump is embedding loyalists inside any and every institution that he can.

A Confusing Degrowth Mindset

Maybe the children will have two dolls instead of 30 dolls, you know? And maybe the two dolls will cost a couple of bucks more than they would normally.

Not typically words you would imagine uttered by the democratically elected president of the United States.

Roughly half of global trade and nearly 90 percent of foreign exchange transactions occur in U.S. dollars, giving Washington an unparalleled store of value and the ability to run deficits that would be untenable elsewhere. Unlike most developed nations, the United States enjoys a growing prime-age workforce. It has abundant natural resources, peaceful neighbors, world-class universities and companies that attract top talent, strong social and economic mobility that ease ethnic and religious tensions, and a political system well suited to a diverse society. On all fronts, the United States seems poised to continue its economic decoupling in terms of growth from a relatively slow and stagnant European Union. So why does Trump seem so eager to stop this from happening?

It's not uncommon to see a degrowth mindset coupled with a staunch focus on conservation of the environment and human survival in a changing ecosystem, like with famous activist Greta Thunberg, however, with the presidents repeated push for "beautiful clean coal" and the expected elimination of 1.6 million green-energy jobs with the "Big Beautiful Bill", that seems unlikely to be the case.

The President's harsh crackdown on nearly every pathway to citizenship also comes at an unfortunate time as the country is in an ever increasing dire need for more highly skilled, higher education labor and immigration. Just this week, the Trump Administration has announced that it will be asking companies to pay $100,000 per year for H-1B worker visas.

The change could deal a big blow to the technology sector that relies heavily on skilled workers from India and China. (Reuters)

Trump’s proposed 2026 budget would starve U.S. science, it includes cutting the budget of the National Institutes of Health by about 40 percent and that of the National Science Foundation by roughly 57 percent. Meanwhile, countries like China are continuing to push for more funding in these areas, with an announcement earlier this year of a 10 percent increase to its central government science and technology spending and an increased focus on basic research.

With all this being said, it's unclear whether Trump's degrowth mindset stems from an ill-informed, good faith belief that this will be what moves the country towards a brighter future, or if there are ulterior motives at play.

Beyond Economics

Beyond economics, these trade policies are accelerating the erosion of the U.S.’s role as a global hegemon. Since World War II, America’s leadership rested not only on military strength but also on the stability of its alliances and the openness of its markets. Trump’s "punitive" tariffs on key allies such as Japan, South Korea, and European states, while simultaneously insulting their leaders, signal that the U.S. is no longer a reliable partner.

In a world increasingly reliant on strong international cooperation, Trump's trade policy represents a return to a form of power politics in which might makes right.

Further reading / watching:

• Why U.S. farmers rely on soy (and why they're in trouble)

• The Age of Tariffs

• The World That Tariffs Will Make

• Economic data face imminent threats