This is Brad DeLong's Grasping Reality—my attempt to make myself, and all of you out there in SubStackLand, smarter by writing where I have Value Above Replacement and shutting up where I do not… Trump Is Losing All His Trade Wars, BadlyRhetorical 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:
The Bloomberg Editorial Board also sees what is going on clearly:
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:
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:
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. If reading this gets you Value Above Replacement, then become a free subscriber to this newsletter. And forward it! And if your VAR from this newsletter is in the three digits or more each year, please become a paid subscriber! I am trying to make you readers—and myself—smarter. Please tell me if I succeed, or how I fail…#on-how-trump-is-losing-all-his-trade-wars-badlyPlease forward the email & otherwise share it to everyone you think would appreciate it…
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Trump Is Losing All His Trade Wars, Badly
Thursday, 21 August 2025
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