Damaging Effects of Trump’s Economic Policies on U.S. Markets

This interview was conducted between Cameron Abadi, Deputy Editor of the Foreign Policy section of Foreign Policy magazine, as the interviewer, and Adam Tooze, columnist for Foreign Policy and Director of the “European Institute” at Columbia University, as the interviewee.

According to Foreign Policy, the Trump administration’s trade tariffs have generated about $152 billion in revenue for the U.S. Treasury in the current year alone — a figure expected to increase soon, as a new and more comprehensive round of tariffs came into effect this week. Under the new policy, the minimum base tariff for goods imported into the United States is set at 10%, with significantly higher rates for certain countries. Such changes not only transform Washington’s trade relations with its main partners but also compel the entire world — from policymakers and business leaders to prominent trade economists — to reassess the meaning of an emerging new order in global commerce.

Cameron Abadi: Economists had previously warned that Trump’s tariffs would cause a surge in inflation in the United States; some also predicted inevitable product shortages as a consequence. Yet, so far, such effects have not materialized in a tangible way. The question now is whether America’s current experience with tariffs has challenged the assumptions of conventional economics, offering a new lesson for theorists and policymakers?

Adam Tooze: I have no doubt that economists and economic logic were correct in predicting the general direction, but the precise timing is difficult to forecast. All indicators point to the return of inflation in the U.S. economy. Prices have begun rising again, and the Federal Reserve — closely monitoring these developments — has refrained from lowering interest rates, partly due to its concern over this very inflationary trend. The price increases have occurred exactly where expected: in the “goods sector.” Goods are traded on the global market, and international competition usually drives their prices down; yet in this cycle, the opposite has occurred.

Warning signs are present, but as monetary economists remind us, “lags are long and variable”; in other words, it can take months or even a year for the full effects of tariffs to be felt in the economy, particularly in sectors where navigating complex supply chains takes time.

In the meantime, the element of “bargaining power” plays a significant role — something the Trump administration has consistently emphasized. Officials frequently repeat the slogan: “No, foreigners will pay the tariff.” By this they mean exporters to the U.S. market face two options: either pass the tariff cost on to final prices, risking the loss of part or all of their market share since American consumers may not be willing to buy more expensive Mexican, Brazilian, or Chinese products; or absorb part of the cost themselves by reducing their profit margins. Ultimately, suppliers must decide whether remaining in the U.S. market is worth it.

This process takes time to fully reveal its effects, but many experts are convinced the final outcome will be negative. One analyst compared it to Brexit: “The sky did not fall immediately, but in the medium term, the impact on the British economy was severely damaging.” Likewise, it is unlikely that Trump’s tariffs will come without cost. Forecasts suggest that in the end, these policies will have a negative — and some say even disastrous — effect on the U.S. economy, with the burden falling most heavily on consumers, particularly low-income groups.

This experience also highlights that economics itself resembles an “orthodoxy” — a firmly established intellectual system that reacts with indignation and apocalyptic predictions whenever challenged. Perhaps no “sacred cow” is more revered than free trade. There is scarcely any other subject on which economists agree more broadly than on the view that the type of tariffs imposed by Donald Trump are neither prudent nor beneficial. Nonetheless, many economists believe their reasoning for this position is strong, grounded in long and tested experience — and that it is merely a matter of waiting for the results to become clear.

Cameron Abadi: The Trump administration has also offered its own predictions, claiming these tariffs will bring manufacturing back to U.S. soil. Have American manufacturers in any way benefited from the tariffs so far?

Adam Tooze: I believe this issue should be considered at three levels.

The first notable effect is the direct price impact of tariffs. However, it is still too early for a definitive conclusion, as these tariffs have been imposed in a piecemeal fashion without a coherent plan. The main target of this policy is “investment,” and investment — especially on a large scale — is a medium- or long-term decision. In an environment where trade policy has been unstable and unpredictable since the start of Trump’s presidency, only a risk-tolerant or reckless investor would make a major decision based on such conditions. The only certainty for business leaders is that the likelihood of tariffs increasing is high — but no one can say how far that increase will go.

Furthermore, the effects of the heavy tariffs Trump imposed on steel and aluminum are inherently ambiguous for the entire U.S. manufacturing sector. The simple reason is that the number of consumers of these metals in the United States far exceeds the number of producers. When tariffs drive up steel and aluminum prices in the industrial states of the Midwest, the main result is reduced competitiveness for American industries, even if a handful of domestic producers of these metals enjoy windfall profits. Even the German automotive industry cannot say with certainty whether it has lost out from the tariff deal with Europe or benefited from the fact that its American competitors are forced to purchase more expensive steel and aluminum. In short, the ultimate impact of this policy remains shrouded in uncertainty.

The second level involves a collection of scattered but high-profile investment announcements by major corporations, which the Trump administration highlights on the White House website — a strategy previously employed by the Biden administration. This is more of a publicity spectacle than a coherent economic trend: inviting senior corporate executives to the White House, direct presidential phone calls to them, and efforts to persuade or pressure them into making large-scale investments in the United States. The figures are staggering: the “Stargate” project valued at $500 billion; Apple’s investment of the same amount in the U.S., plus an additional $100 billion announced this week; Nvidia with a similar $500 billion commitment; Micron Technology at $200 billion; and IBM at $150 billion. However, these pledges are not necessarily linked directly to tariff policy and are more the product of a presidential call saying: “Believe me, this is where you should invest.” Executives usually find it prudent to say “yes” and announce an impressive number. What these commitments will eventually become? The only logical answer is: we must wait and see.

The third level is where one must look at the macroeconomic statistics of the U.S. economy: the real domestic investment of companies as recorded in GDP data. So far, these figures have not performed poorly, but they show no sign of a dramatic surge or a fundamental shift compared to the rapid investment growth seen during Biden’s term. Over the long term, it is hard to imagine how such instability and uncertainty could be beneficial for business investment.

Cameron Abadi: How should these tariff threats be assessed as a geopolitical tool? How do they work in other cases? I am thinking specifically of India, which has recently been in the spotlight of the administration.

Adam Tooze: This is also an interesting question from a geopolitical perspective, and if one were to point to an example where Trump’s tariffs have had the greatest impact, it would probably be Europe. The roots of this go back to Trump’s underlying worldview, which differs from classical realism. Trump views international politics in a way that might be called the “Gulliver’s Travels” model. In this image, the United States is a sleeping giant, bound to the ground by strings of exploitative relationships maintained by a collection of smaller countries, none of which equals America’s power. In his view, these countries have taken advantage of Washington’s “liberal and foolish” leadership for decades — a narrative he has repeated relentlessly since the 1980s.

In this mental framework, all the small powers of the world act as a united front to extract economic surplus from the United States. From Trump’s perspective, restoring global order is not particularly difficult: the “American giant” merely needs to awaken, flex its muscles, and within weeks — perhaps even days or hours — all these countries will realize where the real power lies. In this scenario, they will line up, strike deals with Washington, and a massive flow of resources — which Trump believes has been unjustly taken from America for years — will once again flow toward it.

In the case of Europe, one might partially apply Trump’s “Gulliver model”: a collection of small and medium-sized countries that, in his view, have systematically exploited America — through trade surpluses or in the defense sector — for years, and can be brought into line through pressure. But this pattern is not realistic or effective when it comes to powers such as China, Russia, India, and Brazil. India, in particular, is an interesting example. In New Delhi, officials were likely surprised by Trump’s accusations that it was buying oil from Russia, because behind the scenes, it was widely understood that the overall design of the anti-Russia sanctions during Biden’s term was crafted precisely to allow India to purchase Russian oil at steep discounts.

Prime Minister Narendra Modi could not behave as though he were intimidated by Washington and obediently join its camp; New Delhi needed oil. The idea was to set a price cap so that India could extract concessions from Russia in practice. That was the overall plan, and the Indians acted accordingly. Yet, surprisingly, it seems someone in the Trump administration suddenly realized this mechanism and reacted — something even seasoned observers found puzzling.

From Modi’s perspective, India was meant to serve as a key piece in America’s strategic puzzle against China — a role that partly involved relocating Apple’s smartphone production to India. The original plan was for New Delhi to become a platform for Apple’s exit from China. But now, increasing pressure is being placed on the company to move all production to the U.S. — a move inconsistent with the initial strategy. Then Trump steps in and says: “Actually, what I really need is for you to open India’s food market to American agribusiness.” Modi, inwardly, might wryly think: “Do whatever you like with American farmers.”

Donald Trump does not show much coherence in these areas and lacks a deep understanding of the subtleties of policy. Narendra Modi, however, understands very well; he is a professional and seasoned politician within a mass democracy and knows that the livelihoods of hundreds of millions of Indians depend on smallholder agriculture. For this reason, Modi firmly tells Trump: “I will defend India’s farmers against the aggressive capitalism of American agribusiness.” This stance, which Trump inadvertently enabled, will most likely bring Modi a significant political gain domestically.