That 70s Show

Trump’s economic war on the world has resulted in the slow-motion disaster many predicted but it is worth revisiting the supposedly valid economic theories that were provided as justifications for it. The primary idea was that higher tariffs would encourage both onshoring of productive capacity by US firms and investments in productive capacity inside the US by foreign firms. While there was at least some grudging admission that higher tariffs would fuel inflation, that would not only be offset by a stronger dollar which would make imports cheaper but also by tariff revenue that would create fiscal room for tax cuts. The already strong dollar would become an even more attractive option as investors sought the comparatively higher US interest rates driven by the inflationary tariffs as well as the traditional safe haven of the dollar amidst economic uncertainty.

Unsurprisingly, that theory has been contradicted by reality, abetted by the shoddy and erratic implementation typical of the Trump administration. Trump’s broad, across-the-board, and excessive tariffs raised inflation expectations faster and more firmly than any kind of reshoring of capacity can counter, even ignoring the fact that we are not capable of producing items like coffee and bananas. His wildly erratic changes to tariff rates and exceptions to them kill any hope of real foreign investment. Traditionally, even when the US creates military instability with its projection of power, it is still viewed as a safe haven because of its determination to maintain economic stability, both a responsibility and a job made easier…