There is little question that Trump’s tariff plan makes no economic sense. However, by poking holes in it, one starts the see a pattern that may actually be the game he is playing.
As an economist who specializes in international trade, I’m used to nobody really caring what I think. It’s ok, I’m used to it. Today, however, is different. You see, I’m an American trade economist living in Ireland and Mr. Trump has declared a tariff war against, well, everybody. Even the lady who grooms my dog wants me to make sense of this. The problem is, I can’t.
Without getting into a bunch of math (although I’d love to), let me explain why. Let’s start with what Trump said. Looking out at the world, he sees the US running trade deficits with many countries, meaning the US imports more from them than what it exports to them. He thinks this is unfair and a rip-off caused by them keeping American goods out with things like tariffs, safety standards, and pollution taxes. In retaliation, he’s going to get back to a zero trade deficit by using a tariff on what those countries sell to America.
A problem with this is that America’s persistent trade deficit is actually due to its persistent budget deficit. When the government spends money, that is funded from either taxes on its own people or borrowing from abroad. Part of overseas borrowing shows up as imports (like borrowing a friend’s car rather than money to rent one). So a higher budget deficit means a higher trade deficit. But Trump wants to cut taxes not raise them, so let’s ignore that and talk about why trade deficits are bad.
Except trade deficits are actually good. Why? What I give you is your import. If you could take from me and not pay for it, wouldn’t you? You only export because I expect payment. So if you run a trade deficit and get more than you give, you’re the one ripping me off.
But let’s not get stuck in details. Instead, look at calculation of the planned tariffs where again the goal is, on a country-by-country basis, to eliminate the gap between exports and imports. The problem is, bilateral trade balances don’t mean much, especially with global supply chains. When you make steel in China, use that in a Japanese engine, and put that in a car in America which you sell in Norway, there’s no separating out one country from another — a Norwegian export means a Japanese import. But complexity isn’t fun, so let’s move on.
Instead, let’s look at those deficits again. An odd thing about Trump’s math, however, is that he only counted trade in goods – tangible things that cross borders. Trade in services is a major part of the global economy making up 30% of US exports and 17% of their imports. So that trade deficit used to calculate the tariff? It’s far too big.
Fine, so the number is off, but the important thing is to cut that deficit. Funny thing though, the analysis assumes that tariffs impact only imports. That feels natural since tariffs are on what comes into a country, not what it sends out. Except that supply chains tell us that exports are in part made from imports. So when tariffs increase the cost of Japanese engines, “American” cars do too, lowering exports. Since imported input are roughly 45% of total US imports, tariffs make it harder to close the trade gap.
Questionable economics however mean little in a trade war. The funny thing about wars though is that your enemy tends to strike back. Every country hit by US tariffs is planning their response. In normal times, this dispute would go to the World Trade Organization for settlement. These US tariffs, however, vary across countries — a violation of the WTO rule of non-discrimination. Thus, this plan is essentially the US abandonment of the WTO.
And maybe that is what actually explains what is happening. These tariffs are intended to upend the entire system of international checks and balances. When chaos reigns, the one at the centre of the storm calls the shots. This plan creates a world where individual firms, industries, and countries will line up to ask Trump for special treatment. His goal clearly isn’t global or even national stability, but rather to create a world where everyone begs him for special favours. And in the end, it doesn’t take a trade economist to guess what those favours will ultimately cost you.
Opinion piece by Ronald B. Davies, first published in Norwegian by the Norwegian daily newspaper Dagens Næringsliv on 04 April 2025 in a slightly edited version.
