How successful are Trump’s measures at making America great again?
War is destructive. It destroys lives, it destroys loved ones and it destroys economies. The victors’ economies suffer because a conquest is not as valuable as the rhetoric portrays and any gains go to only a select few. Even countries which are not invaded suffer because of the sacrifices they make. Those sacrifices may include lives but there are also economic ones. The GDP of a war economy typically rises as all underutilised resources are commandeered but because of the diversion of production into warfare activities – much production simply gets blown up – private consumption does not rise and usually falls.
Donald Trump is not a fan of guns-blazing warfare perhaps because, like many of his generation, he was appalled by the body-bags returning from Vietnam. As commander of the biggest military force in the world, he is happy to use its might to pursue his MAGA ends providing it does not result in too many American deaths. That limits his ability to invade with troops on the ground.
He even seems keen to attack those who thought they were the US’s allies and friends, prosecuting his warfare by other means such as tariffs. But it is still warfare, which means there are economic costs and, as we shall see, many of those costs are borne domestically. While Americans may be largely avoiding body-bags under Trump, they are sacrificing wellbeing.
Trump argues that the cost of a US tariff – a charge on its imports – will be paid by exporters. Both theory and evidence conclude that is not entirely true.
To illustrate, suppose New Zealand were to slap a 50 percent tariff on US exports to it (just kidding). The US exporters would pay the tariff when their product crossed the border. Trump’s NZ equivalent would point to the government revenue it generated. However, the exporter would typically pass the additional cost onto the consumer who would be indirectly paying the tariff; the tariff is an indirect tax levied on things local consumers buy.
There are numerous complications. First, the US exporters may reroute their product through Australia, say, thereby avoiding the tariff. It is not always easy to prevent that subterfuge.
Second, consumers might turn to sourcing the product, say an EV, from elsewhere, say, China. Presumably, the alternative source is more expensive so consumers end up paying more, but there is no additional government revenue.
Exporters dislike such favouring of other suppliers for it cuts into their markets. Hence the grumbling at Trump setting different tariff rates for different countries, especially as the settings seem arbitrary. (By April the US Supreme Court may, or may not, have ruled Trump’s tariff regime as illegal. He seems to be imposing taxes without legitimate authority; the last time that happened in the US, it caused a revolution.)
The third major complication is that consumers may turn to purchasing alternative products. Those products may be made locally or sourced from elsewhere. Consumers would be worse off because they would prefer what they could buy before the tariff was imposed.
The above analysis also applies to US tariffs. The quantitative balance of these effects is not predicted by the theory. It has to be measured. The effective tariff rate on US imports has risen from 2.5 percent to about 13 percent, lower than what Trump announces because of numerous exemptions from his nominal rates. (These estimates do not include the impact of the quotas which many New Zealand food exports face.) A couple of research studies using different methods, both concluded that at least 90 percent of the tariff is paid by US importers and consumer. (Here and here.) The burden of the tariff war is being carried mainly by American consumers.
The burden of the tariffs appears as higher prices. Paul Krugman provides three guesstimates from three independent data sets. All three agree that US prices have risen by about 0.8 percentage points from the Trump tariff regime introduced last April (and repeatedly modified since).
You may think that a 0.8 percent price lift is not significant. But suppose our Minister of Finance was advised that the price level was actually 0.8 percent lower than we thought. She – any MoF – would make sure that the news was on the front pages and batter us right through to the election with the statistic, going on that a median-wage worker would have an extra $9 a week or so in the hand.
(She would expect the RBNZ to reduce interest rates because of lower inflation. But strictly the rise/fall is for one year only. Economists are cautious about what the figure would say about future inflation but note that it may affect inflationary expectations.)
Distancing ourselves, we can take Trump’s tariff policy as an experiment with outcomes yet to be fully worked through. In the interim we can assess it against his predictions. Recall his ‘April 2, 2025, will forever be remembered as the day American industry was reborn, the day America's destiny was reclaimed and the day that we began to make America wealthy again.’
It has increased the US government’s revenue but by much less than Trump promised. It makes a small contribution to reducing the fiscal deficit which his ‘Big Beautiful Bill’ is generating, by increasing indirect taxes on ordinary Americans to fund major income tax reductions which benefit the rich. (The macroeconomic effects of the BBB are yet to come through; generally economists expect them to be inflationary and to undermine the integrity of the US monetary system. They expect it will result in higher nominal interest rates, another way in which many ordinary Americans will be paying for the tax cuts which benefit the rich.)
Trump promised more manufacturing jobs. There has been a long-term decline in the US with some stabilisation in numbers in recent years. However, since Trump’s ‘Liberation Day’ tariff package, the decline seems to have recommenced.
Is Trump making America great again? It seems likely that the tariff and other measures Trump has taken has diminished America’s long-term (already diminishing) authority in the world, as countries turn away from the US. As well as being costly to Americans, the economic warfare is failing.
But at least there are no body-bags.