The State of Trump's Trade War: Short- & Long-Run Consequences of Optics vs. Economics

Symbolism wins, technocracy bends: the public sees “tough,” firms get exemptions, and growth pays the tab. And then cycle repeats: unilateral tools plus attention incentives make escalation cheap...

Symbolism wins, technocracy bends: the public sees “tough,” firms get exemptions, and growth pays the tab. And then cycle repeats: unilateral tools plus attention incentives make escalation cheap and endless. And so in the long run China writes the rules of world trade and hogs the surplus from the globalized value-chain economy, while the U.S. suffers under the harrow of a BREXIT-like headwind to productivity growth…

Trump’s trade war runs on optics alone, not economics. Loud tariffs with quiet unwinding. That mix stabilizes the short run. But it likely seeds a decade of productivity drag. Foreign leaders have learned the script: flatter publicly, accommodate privately, and move on, while derisking from the United States. The result is political theater. But the real supply‑side costs to U.S. growth are likely to be substantial. And the real wealth and power benefits to China as the global-trade hegemon orchestrator and defender of multilateralism on its terms are likely to be substantial as well.

To start with, recognize that Richard Baldwin is right here:

Richard Baldwin: How Does the Trade War End? <https://rbaldwin.substack.com/p/how-does-the-trade-war-end> <https://www.linkedin.com/pulse/how-does-trade-war-end-richard-baldwin-mifye/>: ‘Trump’s approach to trade war is not economic; it is emotional…. To restore a sense of national strength, to assuage deep-rooted grievances and to end the sense of victimhood held by the President and America’s middle class…. But is that it? Are there no traditional goals?The President’s trade agenda also mentions more traditional goals like boosting manufacturing and raising middle class real incomes. But the actual conduct of trade policy suggests these are not driving the show. They are decorative, not directive…. Reindustrialisation is not a priority…. Boosting real wages is ornamental…. The true objective… [is not… economic transformation, but emotional restoration. A muscular performance of American dominance, of the humiliation of foreign leaders by getting them to kowtow to the President and accept his capriciousness, of retribution for perceived slights, and of the projection of unchallenged American power…. Trump’s trade war isn’t about fixing the economy. It’s about making MAGA America feel like it’s winning again.Importantly, the oddity of this goal is precisely what makes US trade policy so resilient politically. Almost any event can be spun as a win. A viral clip of the British PM picking up papers that President Trump dropped is an American triumph in this trade war…

And this means that there is a path toward, not sanity, but rather much less damage to the productivity of the globalized value-chain economy in the short run than we all thought back last spring:

Richard Baldwin: How Does the Trade War End? <https://rbaldwin.substack.com/p/how-does-the-trade-war-end> <https://www.linkedin.com/pulse/how-does-trade-war-end-richard-baldwin-mifye/>: ‘The US will likely continue bullying smaller trade partners because it can, and because its President loves that sort of thing. But… Trump is likely to keep most US tariffs at 10%… because, rhetorically, America has already won…. A climbdown spun into a chest-thump. And foreign governments, for their part, will have no interest in bursting this magical thinking bubble….

Foreign leaders have, by now, taken Trump’s measure. They understand that beneath the chaos lies a predictable logic…. Flattery and performative adulation is what works…. As Financial Times journalist Ben Hall put it: “optics are everything…. Trump can be persuaded to retreat or cooperate as long as the retreat looks like conquest… [with] quiet accommodations beneath a façade of mutual respect…. [All] can walk away declaring success according to their own playbooks…

But for foreign countries to do this their leaders need to be willing to (a) offer the public kowtow to the dominance of Trump, (b) be able to actually make credible threats of imposing real pain in some dimension that Trump or the Trumpists care about—for example, turning off the power in Ohio—and (c) not having too many vulnerabilities themselves that Trump, lashing out because he is angry or just because he wants a headline, can push on some 4 AM on Truth Social.

As Richard says, the political-economy dynamic is fascinating. It generates a large degree of short-run stability. The parties most visible to the public and the ones most embedded in the policy apparatus pursue different, complementary goals. On the one hand, a president can claim a symbolic win—announcing “tough” measures and declaring victory—at relatively modest tariff levels that are high enough to satisfy performative politics but low enough to avoid major macroeconomic disruption. On the other hand, the Commerce and Treasury technocracy—nudged by exporters needing foreign market access and importers dependent on global supply chains—quietly works to reopen channels, craft exemptions, and recalibrate enforcement so that, in substance, trade flows revert toward the status quo ante. This asymmetry matters a lot: large rhetorical moves are cheap to manufacture, while large substantive reversals are costly; so the system equilibrates with loud symbolism paired to incremental, bureaucratic unwinding. In effect, the public hears about toughness; the firms get continuity; and nearly the “pre‑April” regime’s practical essence returns under a new banner.

This is why, in the near term, such conflicts don’t escalate: optics do the heavy lifting while policy plumbing cushions the economy.

I wish I could say that that is the end of the story, and that Trump’s Trade Tariffs are:

but a walking shadow, a poor player
That struts and frets his hour upon the stage
And then is heard no more. It is a tale
Told by an idiot, full of sound and fury,
Signifying nothing…

But there is a medium run, and a long run.

The problem for the medium- and long-runs is this: The dynamic is self-perpetuating: It never stops. It is never over.

Every month brings a fresh tantrum and a new threat, because the political technology of symbolic confrontation is cheap, rewarding, and continuously available. As long as attention economics dominate and unilateral executive instruments—tariffs, designations, export controls—can be toggled at will, the cycle repeats. The risk is not a single rupture but cumulative sclerosis: episodic shocks to planning horizons, discount rates, and cross‑border trust that compound over time. The process continues until the capacity for real‑time performative escalation wanes—whether through institutional constraint, market backlash, or simple loss of operational focus. Or, more likely, until Trump’s mental deterioration progresses so far that he can no longer find his phone.

Remember: Canada and Mexico thought that they had appeased Trump by cheerfully renegotiating NAFTA in his first term. But that get them nothing—less than nothing, in fact. Canada and Mexico misread Trump: renegotiating NAFTA didn’t buy protection or stability. Transactional leverage—not policy content—drives his trade behavior. USMCA delivered photo-op revisions and modest rule tweaks, but it didn’t alter the core dynamic: discretion concentrated in the White House via tariffs, threats, and episodic enforcement.

Appeasement failed because the instrument was the threat itself; once you concede, you confirm the power of future threats.

Historically, this mirrors bargaining with leaders who prize spectacle over institutional reciprocity. Without credible constraints—Congressional guardrails, binding dispute resolution, or economic costs he internalizes—partners remain exposed. Thus, “less than nothing”: they paid with concessions, validated his approach, and still faced ongoing uncertainty about auto rules, steel and aluminum, and the next tariff volley.

The lesson is structural: anchor commitments in institutions that outlast personalities; otherwise, you’re negotiating with volatility, not a trade regime.

Thus every country—and every firm—by now understands that life is easier when, after some Trump tantrum, their first response can be: “this is regrettable, but we have other markets/other suppliers, so please draft a communique we can issue that will get Trump to forget about this issue”. Both countries and firms are now under very strong evolutionary pressure to adapt to the volatility of Trump by building redundancy to shrug off the shock. Diversification lowers leverage. Ritual statements absorb the tantrum’s energy.

But at the level of trade-policy substance, and of global economic growth, it is the inversion of Obama’s TPP plans. Post‑Obama, the trajectory has flipped: instead of a U.S.-led bloc using agreements like TPP to discipline and rebalance China’s trade practices, China has maneuvered toward a WTO-centered multilateral order where the U.S. is no longer pivotal, and where China is the dominant actor without a counterweight. Thus China is likely to be able fo leverage scale, supply-chain centrality, and rule-lawyering to shape outcomes while the U.S. becomes “non-essential”—present but not structurally necessary, or influential on the substance, or possessing much ability to redirect surplus towards itself. The U.S. remains essential and dominant in global finance, yes. But in global trade the era of Chinese hegemony is likely to begin.

Economically, this inversion affects surplus division from global trade. Under a bloc strategy, surplus could be redistributed via standards on subsidies, state-owned enterprise behavior, data, and labor—raising the terms of trade for the coalition. Under the WTO-first mosaic, enforcement dilutes, disputes atomize, and the default is accommodation to the gravity of China’s market. Growth continues, but rule-writing tilts the enormous surplus from the global division of labor toward the actor with scale and patience. And that is China.

How much damage will this do to American productivity and growth? I do look forward very much to reading the dissertations twenty-five years hence that will definitively nail this down. But, meanwhile, we are staring at a fog bank. The honest answer is that we don’t yet have workhorse models or well-specified counterfactuals for how all this translates into measured productivity, capital deepening, and labor reallocation over a ten‑ to twenty‑year horizon. The damage—if that’s the right word—will depend on three interacting margins. The dissertations I want to read in twenty‑five years will trace those three arcs: the organizational reengineering timeline; the policy regime’s role in compressing diffusion lags; and the extent to which measured productivity caught up to frontier capabilities. That, finally, will let us say how much damage there was—and whether it was the price of laying rails for a larger, later boom.

Right now, however, the anchor point to my guesses right now is that the damage will be “BREXIT-like”: a 1%-point per year compounding reduction in American economic growth for the decade it will take to make America optional in every globalized value-chain. The economy would then end up roughly 9–10% smaller than it otherwise would be. Making America “optional” in global value chains massively multiplies supply-side frictions: re-routing procurement, duplicating compliance regimes, thicker borders for data, capital, and goods, plus reduced agglomeration spillovers. The wedge could be smaller if firms reconfigure efficiently. The wedge would be much larger if policy amplifies fragmentation through export controls, investment screening, and retaliatory measures that depress productivity, TFP diffusion, and scale economies.

Historically, trade dis-integration raises prices, trims investment, and slows firm dynamism; the growth hit shows up primarily via productivity rather than employment. The Brexit analogy works as a heuristic: long-lived, mostly invisible micro-frictions that accrete into a meaningful macro gap in the level of income, not a dramatic crisis. The key question is whether the policy path settles into stable, rules-based openness—or remains volatile. Volatility would tend to make the reality “way high,” because firms over-build redundancy and under-invest in frontier technologies when the policy environment cannot be trusted.

Any chance of reversing this headwind to America’s economic growth over the next decade"? I do not see any. My judgement is thus a fatalistic one. Only mitigation at the margins, unless politics totally realigns to reject the DNA of Donald Trump the same way that New Deal America rejected the DNA of Herbert Hoover. And that looks very unlikely to happen.

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References:

• Baldwin, Richard. 2025. “How Does the Trade War End?” Factful Friday. June 29. <https://www.linkedin.com/pulse/how-does-trade-war-end-richard-baldwin-mifye/>.

• Baldwin, Richard. 2025. “How Does the Trade War End?” Richard Baldwin SubStack. October 26. <https://rbaldwin.substack.com/p/how-does-the-trade-war-end>

• DeLong, J. Bradford. 2025. “The State of Trump’s Trade War: Short- & Long-Run Consequences of Optics vs. Economics”. DeLong’s Grasping Reality. October 26. <https://braddelong.substack.com/p/the-state-of-trumps-trade-war-short>.

• Hall. Ben. 2025. Financial Times. June 28. <https://www.ft.com/content/7980509c-f6b3-4f22-bff4-d4727a193019>.

• Shakespeare, William. 1623. “MacBeth” In Mr. William Shakespeares Comedies, Histories, & Tragedies. Ed. John Heminges & Henry Condell. London: Isaac Jaggard & Edward Blount. <https://archive.org/details/firstfolio>.

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