Trump's tariffs announcements immediately made me start looking for what his deeper play is here. Clearly, the tariffs themselves don't directly benefit the stock market and don't reduce the trade deficit, which seems to be a key goal of Trump's. Now, while I don't doubt that Trump isn't the smartest – he isn't quite stupid enough to think that these tariffs were going to suddenly create a boom in the economy. So why do it? Plans within plans. First, I'm going to give a quick analysis as to the short-term negative impact this is going to have on the average American, but I'll then go into detail about why I think Trump is doing this. A lot of my analysis has been inspired by popular leftist thinker, Yanis Varoufakis, who discusses the tariffs in a video found here. I highly recommend.
Regardless of Trump's longer-term goals with these tariffs, it is also important to highlight the problems it looks to be causing in the short-term for consumers. The general economic motivation behind tariffs is to generate tax revenue from imports and to promote the consumption of domestically-produced goods and services as opposed to foreign ones in order to boost the domestic economy. In the case of the US and much of the Western world, imported goods are often cheaper due to their lower production costs e.g. much lower wages paid to employees in the global south in manufacturing. Large corporations utilise the cheap labour of developing countries to offer goods and services at much lower prices than domestic products. As wages and other production costs are higher in the US, so are consumer prices – so consumers, acting rationally, go for the cheaper, foreign products.
By raising tariffs though, the costs to importers are usually just passed onto consumers through price increases. So will this encourage people to buy American? Not really... The prices of domestically-produced goods are already high, so consumers are just going to have less affordable options. Due to the existing significant wealth inequalities in the US and globally, especially since Covid, consumers are already in a tough spot when it comes to affordability. So, the continuing rise in prices is not exactly welcome.
Also, as prices rise, real-terms wages are supposed to as well, matching the inflation in prices and growing the economy steadily. Whether this works in practice or not (hasn't in recent years), the price shock caused by the tariffs would not give real-terms wages the time to rise alongside inflation ANYWAY. As a result, we are likely to see a sharp rise in prices in the US, and globally, as a result of these tariffs, worsening consumer conditions. Ultimately, Trump is not worried about those in society who are struggling to put food on the table and so is happy to use these tariffs to further his own economic interests, which I'll get into now.
Right so what's Trump's actual move here? As far as I can see, the tariffs are only the first phase of a wider plan to reduce the US' trade deficit.
Around the world, the central banks of different countries and regions hold significant amounts of US dollars (USD) because of its value and strength. For example, the global exchange of crude oil uses USD (or petrodollars). By having one currency pinned to such a valuable commodity, many central banks will wish to hold it in reserve. For example, China holds approximately $3 trillion in reserve and Japan holds approximately $1 trillion. By having significant amounts of USD in reserve then, other central banks are able to make their currency stronger, because it is backed by USD, hence its value to foreign countries. This is a unique privilege enjoyed by the US – so inevitably, Trump loves it. Because of this, USD remains strong despite the US' colossal trade deficit.
However, while Trump enjoys this value of the dollar, he perceives other central banks owning it to strengthen their currencies as an exploitation of USD, disadvantaging US exporters and advantaging foreign importers into the US by reducing their costs. So how does Trump intend to change this?
While prices will see a shock rise due to the initial implementation of tariffs, USD will also eventually appreciate in value and after some time consumer prices will become slightly more affordable. In order to deal with the inflation and recessionary effects of the tariffs though, foreign central banks are likely to cut interest rates, encouraging consumer spending and the borrowing of money, in turn, boosting the economy. In fact, the European Central Bank has already done this, cutting its central interest rate from 2.75% to 2.5% on 6th March 2025. As a result, foreign currencies such as the Euro are likely to weaken, increasing the costs of US tariffs to foreign countries and regions like the EU.
Not only does this (in Trump's view) stop foreign countries from exploiting USD, it also generates more treasury revenue for the US through tariffs. This treasury revenue is crucial for Trump, as he can spend it more freely than regular Government funds which are overseen by Congress. With a slim majority and at times flagging support from the Senate and the House, Trump will relish any funding vehicle he can access that does not require Congressional approval. So there's one clear win for Trump from the tariffs already.
From here, I expect that Trump will give his tariff victims some form of ultimatum – akin to Reagan's tariff approach to Japan. The theory goes that Trump will force foreign central banks to either sell off a chunk of their dollars, further devaluing their own currencies – further raising the costs of US tariffs for them, or to swap debts – giving cheaper debts to the US and reducing the cost of its existing trade deficit. If foreign governments refuse, Trump will simply persist with tariffs on them, weakening their currencies and economies.
This is a very aggressive economic strategy, and one that only the US could really pull off. This is of course all speculative and heavily inspired by the video I referenced at the start of this piece, but I think it's a pretty viable prediction.
