Trump Is Losing All His Trade Wars, Badly
Rhetorical claims of trade-war victory are entirely hollow. The costs of the new Trumpist Tariff régime fall overwhelmingly on Americans, the benefits of spurring productive reindustrialization are...
Rhetorical claims of trade-war victory are entirely hollow. The costs of the new Trumpist Tariff régime fall overwhelmingly on Americans, the benefits of spurring productive reindustrialization are less than zero, and the fiscal revenue benefits are almost surely more than zeroed out by the lower-pressure economy required to contain tariff supply-shock inflationary pressures. The Trump Tariff crusade that produces headlines so pleasing to Trump is indeed rewriting the rules of global trade, but not in America’s favor or for America’s benefit. With allies hedging and rivals regrouping, the costs of economic bravado are mounting fast…
The effective U.S. tariff rate has surged from 2.3% at the end of 2024 to nearly 16% in August 2025, with projections as high as 20% if all sectoral and country-specific tariffs are implemented, marking the highest levels since the interwar period. These tariffs are already depressing U.S. export volumes and raising domestic prices, with the negative impact on U.S. real GDP expected to far outweigh any short-term fiscal gains from tariff revenue. In particular, new 15% U.S. tariff on most EU imports, coupled with 50% rates on steel and aluminum, is likely to squeeze EU exporters’ margins initially but will ultimately fall on U.S. importers and consumers unless U.S. producers can rapidly scale up to replace imports.
Tariffs are being implemented in a gradual, sectoral fashion. So far this has muted immediate supply-chain disruptions. But is creating pervasive uncertainty, dampening business investment, and imposing chaos-monkey uncertainty costs that are likely to be a multiple of the direct costs of throwing so much sand in the gears of world international trade. The reason? Tariffs imposed in this Globalized Value Chain age have a greatly amplifed economic drag, as intermediate goods cross borders multiple times, compounding cost increases and stifling innovation.
It is a very basic principle of trade wars that one “wins” them by not fighting—That it is a game that is, as the computer says in the 1983 movie “Wargames”, a very strange game, in which the only way to win is not to play. Yes, the U.S. will collect revenue from foreigners for the tariffs, and Trump thinks that makes them better than taxes that fall entirely on Americans. But the share of those tariffs that falls on foreigners does not neutralize the fact that tariffs have an amplified depressing effect on economic activity vis-à-vis other taxes. Especially in this Neoliberal-Order Age of the Globalized Value-Chain Economy, that amplified drag on the economy is very large. Back when I was running the detailed models for the U.S. Treasury during the NAFTA and Uruguay Round policy wars, I was amazed at how when you ran a model with virtually any scale effects at all, the Laffer Curve argument actually worked for tariff reductions and market access-barrier removals.
Matthew Klein sees things for what they are, and tells John Auther to get a clue:
Matthew Klein: The U.S. Is Not "Winning the Trade War" <https://theovershoot.co/p/the-us-is-not-winning-the-trade-war>: ‘Unilaterally raising costs for Americans can harm people in the rest of the world… [as does] any other policy that reduces the purchasing power of the U.S…. The normally sensible John Authers (a former colleague of mine) wrote a note with the risible headline “Trump Wins the Hulkmania Tariffs Brawl He Started”…. That is not… accurate…. The main losers… are Americans…. Foreigners [only suffer] collateral damage… to the extent… American purchasing power falls…. It is entirely possible, given difficulties substituting [for] many specific foreign-made goods…that the entire burden… will fall on Americans…. Tariffs are taxes, and that it is always better not to pay…. The question that matters is: who is the least able to avoid paying?… The specific distribution… depends on a wide range of factors…
The Bloomberg Editorial Board also sees what is going on clearly:
Bloomberg Editorial Board: The US Will Be the Biggest Loser From Trade ‘Wins’ <https://www.bloomberg.com/opinion/articles/2025-07-30/us-will-be-biggest-loser-from-trade-wins-over-europe-and-japan>: ‘In due course, new duties will slow down innovation and depress US living standards. And that’s if the tariff wars stop now…. The White House is trumpeting its new trade deal with the European Union, following a similar agreement with Japan…. [But] in truth, there’s nothing to celebrate. Both deals are lose-lose…. The best that can be hoped for is that the administration now moves on to other priorities before more damage is done…. Imports will be more expensive. US producers of rival products will face less pressure to… innovate…. They will raise their prices… [and] depress US living standards…. The biggest loser from tariffs is… the country imposing them…. Strength through disruption is a self-defeating strategy. Sooner or later, that will become painfully obvious…
Laura Tyson notes the asymmetry: Under Trump, the U.S. is doing its best to break all of its international economic production-network ties, while other countries can strengthen ties with each other that remain to offset the destruction wrought by Trump’s chaos-monkey policies:
Laura Tyson: Who Really Wins in the US-EU Trade Deal? <https://www.project-syndicate.org/commentary/us-eu-trade-deal-who-really-wins-by-laura-tyson-and-george-papaconstantinou-2025-08?>: ‘The vague, non-binding “agreements”… are an obfuscation…. The average US tariff rate now stands at 18.6%, the highest since… Smoot-Hawley…. Gone are the principles of national treatment… and most favored nation…. Gone, too, is American credibility.….. The EU…. The investment commitment is not enforceable…. Still, the $600 billion target is reachable, considering that EU companies invested about $605 billion in the US over the last three years. The energy commitment, however, is delusional… [and] is sure to fail, as did the 2019-21 US-China energy deal.… Many see the… the US… extract[ing] favorable terms…. [But] the tariffs will raise prices for US consumers and increase costs for US producers… slowing the economy…. Disruption… [will] slow growth in the EU, too, but by considerably less…. The EU can counter the negative effects of the tariffs by diversifying its trading partners and negotiating new trade agreements with them. US tariffs are already encouraging… [that. This] should not undermine its main goal: achieving “open strategic autonomy” with an integrated defense industrial base, a differentiated trade profile that reflects its commitment to multilateralism, and policies to promote sustainable competitiveness and innovation…
This last point from Laura is very important.
The rest of the world is large enough and diverse enough to reap most of the potential benefits from globalized value-chain production networks without U.S. participation. The U.S., a single rich country, is not. To the extent that U.S. producers now start with two strikes against them as they step up to bat to gain opportunities to participate in win-win globalized value-chain production networks, U.S. workers and owners will be substantial losers from the Trump tariffs, with the uncertainty and the chaos-monkey chaos doing more damage in the long run than the direct tariff costs imposed themselves:
Inu Manak: No, Trump is not ushering in a new global trading order <https://www.ft.com/content/7514ce1b-14e7-4c2d-9aa6-252c6b6ed35a>: ‘The US is simply denying itself the benefits of the system that already exists…. US GDP would have been $2.6tn lower without the current system…. This unpredictable policy will raise costs for American families and businesses and will probably do little to support the manufacturing renaissance Greer is hoping for. Nor will it elicit the type of global co-operation necessary to address persistent economic challenges such as macroeconomic imbalances and unfair subsidies…. The unravelling of US trade policy does not mark the beginning of a new global trading system, but rather the closing of the American market from the rest of the world…. The US can simply will a new order into existence when it hasn’t convinced anyone of the merits of its self-harming approach. A bit of humility is in order. America is not presiding over the creation of a new trade system, but rather is denying itself the benefits of the existing one…
It is true. There can be benefits to be reaped from reorienting patterns of trade. If you can do it so that your country gets a high share of sticky externality-generating activities that promote the growth and depth of economic complexity and of communities of engineering practice, you can win.
There has been, over the past two generations, considerable thought among economists about how to actually and effectively do this, for successfully and effectively doing this has been a substantial component of East Asia’s successive economic miracles.
None of that thought has gone into the Trump Tariffs. None. Zero. Nada. Null. ноль. 零. صفر. शून्य. sifuri. μηδέν, 영. אפס. Không. Zero.
The absence of meaningful retaliation from major U.S. trading partners is portrayed by people—even people who very much know better—as some form of “winning”. It is not. It is not “winning” anything.
Instead, it reflects a—very wise—strategic calculation to bet at favorable odds on “waiting out” current U.S. policy. It is not a recognition of its legitimacy. There are thus big questions about the durability of any tariff and market access-barrier configuration, which are themselves amplified by the fact that everyone now knows that Trump’s word isn’t good, and that he loves the headlines. The longer tariffs persist, the greater the risk that firms and countries will “learn” to operate without the U.S. market, eroding American influence and reducing the future gains available from any eventual liberalization.
The Trump administration has been reduced to the fiscal rationale for tariffs—using revenue to particularly offset budget deficits. But that ignores the broader supply-side macroeconomic costs of imposing high deadweight-loss taxes: slower growth, higher consumer prices, and a likely erosion of U.S. competitiveness in tradable sectors.
History does not repeat itself, but it does rhyme. History teaches that weaponizing trade policy for short-term leverage only works in the context of an extremely competent and professional technocratic developmental state focused on technology catch-up. It often backfires even there. And it succeeds nowhere else.
I agree with all the points that you and those you have quoted have made, and would like to make one more.
America is pretty close to full employment. In order to replace foreign-source supply chains with domestic production, some amount of labour will have to be shifted from whatever it is doing now into the replacement supply chains. Therefore, the baseline for measuring the economic activity of these new supply chains is not zero, but the opportunity cost of lost production by the shifted labour. It seems likely that this will net out to a negative number; that is precisely why the stuff that is currently being done abroad is being done abroad and the stuff that is currently being done domestically is being done domestically. And of course, in real terms you have to forego the production that is bloodlessly wrapped up in that "opportunity cost"; that is, make do with less.
Oh yes, and it doesn't help that America is actively shrinking its workforce ...
Of course this is obvious to even those of us who are not economists. What is more troubling is his wanton destruction of the great American research enterprise with the cutbacks in scientific research. The feckless Supreme Court seems to have no problem with any of this at all. Chief Justice Roberts may end up being regarded as no better than Roger Taney whose court authored the Dred Scott decision.