The Effect of Trump's Tariffs on The US
What is most idiotic about Trump's tariffs, from the standpoint of the US economy, and US capital, is that he intends to put these tariffs on all of the US's trading partners, with possibly the minor, and largely irrelevant, exception of the UK, primarily designed to put Starmer in a bind, in his relations with the EU. The immediate effect of that is not only to piss off all of those other countries, but is to effectively isolate the US economy form the rest of the global economy, other than its small lap dog in the UK. In other words, to reduce US trade with the rest of the world, but, in conditions where that, simultaneously, encourages the rest of the world to increase trade amongst themselves.
The US accounts for 15% of world GDP. The UK accounts for just 2%. The EU accounts for 14%, whilst China accounts for 19%, on a PPP basis, according to the IMF. Reducing US trade with the rest of the world, therefore, all else being equal, reduces world trade, and consequently world growth itself. However, its not as though that restriction of growth amounts to taking out the US in total. It will continue to trade, simply on a reduced scale as a result of the imposition of tariffs. Moreover, although the US remains significant in terms of the world economy, its significance has been much reduced, as the above figures show. That significance has been reduced, because the US, more than most other developed economies, has, for the last 40 years, attempted to live on the delusion that wealth can be created out of thin air, from the appreciation of financial assets, and so diverted profits from real capital accumulation, into financial and property speculation, of which Trump is the manifestation.
Moreover, it is not the case that all else remains equal. For example, the EU has imposed tariffs on Chinese E.V's largely under pressure from, and in alliance with, the US, as part of the global inter-imperialist competition between the US/NATO, and China. Similarly, the EU, again under pressure from the US/NATO, impeded its own trade and economy, by the imposition of the boycott and sanctions against Russian energy supplies. As I set out in my predictions for 2025, rationally, the EU has far better prospects for increasing its trade and economic growth by orienting towards China/Russia/Central Asia, with which it shares a land border, than it does with the US, which is more than 3,000 miles away, across the Atlantic Ocean.
If, the US slaps tariffs on the EU that makes trade with the US, even less attractive, and a pivot by the EU towards the East all the more inviting, opening up far greater scope for increased trade, reduced costs and so economic growth than is lost by a reduction in trade with a rapidly declining US. Germany already opposes the EU tariffs on Chinese EV's, because it rebounds on German luxury car exports to China. In addition, if Britain were to reverse Brexit, which the large majority of the population seek to do, that would undo much of the damage done to the UK economy over the last five years, and act as a spur to growth in the UK and EU. That is one reason that Trump is trying to drive a wedge between the two. It would be stupid of Britain to fall into that trap, but Starmer and Reeves may do so.
Suppose, A and B impose tariffs on each other, the effect of that is to increase costs, and, thereby, to reduce trade and economic activity for them both. But, if A also imposes tariffs on C, D, E and F, whilst B does not, A will also, further raise their own costs, and so reduce their economic activity, whilst B will not. If C, D, E and F impose their own reciprocal tariffs on A, but not on B, then, all else being equal, they will reduce their trade with A, but make up for it by increased trade amongst themselves, and with B. In a globalised economy that is what will happen, and the consequence is to damage the US economy, increase its costs, hit the profits of US companies, encouraging capital to move elsewhere, and to encourage increased trade and economic activity amongst all other countries, isolating the US. That is without specific actions being taken against the US, in the form of sanctions for its other actions in threatening invasion of Greenland, Panama and so on, and its support for genocide and war crimes in Gaza.
In the 1890's, William McKinley, carried out a policy like that now being pursued by Trump. He did so at a time, however, when the US was still a rising rather than declining power, when it was still in the process of modernising and industrialising, of accumulating real industrial capital, so as to challenge the established imperialist powers like Britain, France and Germany. McKinley also raised tariffs, but, even then, the consequence was to reduce US imports, to reduce US economic growth, and raise US costs and prices. The McKinley Tariff, was introduced when he was a Representative, in 1890. It imposed a 50% tariff on almost everything. That was part of the cause of the Republicans getting wiped out by the Democrats in 1890. McKinley, himself was assassinated, a point that Trump may want to bear in mind.
Yanis Varoufakis has said that the fall in US economic activity has to be considered in relation to the stagnation of economic activity across the globe, at that time. But that is wrong. The First Great Depression, to which he is referring ran from around 1870 to 1890. By the 1890's, a new global long-wave uptrend had begun, which ran until around 1914. It was the basis of the growth of labour movements across the globe.
Incidentally, its important to, also, note the error of Yanis Varoufakis, in this respect, when he says that the US will suck capital in from the rest of the world, as money flows into Wall Street. That money, what used to be called “hot money”, is not real capital, but simply money flowing in, speculatively, to buy up financial assets, i.e. fictitious capital. It does nothing to raise capital accumulation in the US, or to raise US output and profits. It does push up the Dollar, making US exports more expensive, and imports from elsewhere, cheaper, which itself is contrary to Trump's aim of reducing the trade deficit. But, its not clear, also, that this process, seen in the past, will continue. The hot money flows into US assets, was a “safe haven” flow, and its not at all clear that markets will see Trump's moronic behaviour as providing any such safe haven.
The effect of Trump's tariffs will be to increase the cost of goods imported to the US, be those goods finished products such as cars, or components, such as car engines. The situation with finished goods is fairly straightforward. For every $100,000, Trump's Tariffs, increase that to $125,000 that the US consumer must pay, be it for a car, or whatever. Moreover, although it might be thought that this simply benefits US car producers, or US producers of other such finished products, things are not that simple. Firstly, if the price of cars rises by 25%, what do you think US car producers will do? Will they keep their prices the same? Of course not.
One reason that cars and other goods are imported, is that the imported cars are cheaper than the domestically produced equivalent. But, given the large amount of cars that the US imports, a 25% increase in their price, resulting from Trump's tariffs, will simply give US producers head room to raise their own prices to match, and so, in the short-term, boost their profits. They may not increase prices by that full 25%, but by say 20%, so as to be able to undercut the foreign producers, and increase their market share, but, it will still mean a huge rise in the price of cars that US consumers will have to pay. That is what has always happened in such conditions.
I heard one economist, say that the consequence of this will be more on US economic growth than on inflation, because the rise in prices, is just a one-off event. But, that is wrong. The increased costs of inputs such as energy, materials and components certainly acts to depress economic activity, and also to reduce the rate of profit of US companies. It, also, involves a tie-up of capital, for those companies. But, its not true that this increase in costs ends up as just a one-off event. Firstly, as prices of end products rise in the US, workers, in current conditions of labour shortages, which did not exist in the first Trump Presidency, will demand higher wages to compensate, and even without that, the higher value of labour-power, will cause wages to rise, as firms compete for labour.
Higher wages, in turn, reduce profits. As Marx set out, that does not cause the value of commodities to rise, just a different distribution of the new value between capital and labour. But, the experience of the 20th century shows that one function of central banks is to ensure that firms are cushioned from that drop in profits from higher wages, by increasing liquidity, devaluing the currency/standard of prices, and so enabling firms to raise the nominal prices of their commodities. Indeed, that is what happened in the 1970's, and also in the aftermath of lockdowns. So, in this way, a price-wage spiral is set in motion.
The rise in US production costs, and of US prices of finished goods, resulting from Trump's Tariffs, will cause wages to rise to compensate, causing the Federal Reserve to increase liquidity so that US profit margins are protected, causing US prices to rise once again, leading to wages rising to compensate, and so on. Otherwise, the US nominal rate of profit, and mass of profit will fall, and capital will migrate from the US to elsewhere in the globe, where the rate of profit is higher. Not the result that Trump promised, but, also, what has been seen as a result of Brexit, in relation to Britain.
Indeed, as with Brexit, and the reality of the global division of labour, it is not just a question of a simple import of goods, in relation to this supposed one-off cost. The US, like Britain, in relation to the EU, sees components move back and forth across its borders, on average, around seven times, before the end product enters the market. Suppose the US imports raw material from Canada for the production of steel, That raw material now becomes 25% more expensive for the US steel producer, as a result of Trump's Tariffs. The US steel producer raises their prices to compensate, and, now, sells this more costly steel back to Canada, assuming, of course, that Canada does not source its steel, then, from China instead, as China would, then, be able to undercut the US steel, whose price has risen due to Trump's Tariffs. Indeed, as Canada has responded to Trump's Tariffs, by imposing its own, reciprocal tariffs on US imports, that would be even more likely, as the US steel, now becomes a further 25% more expensive to import, driving Canadian importers into the arms of Chinese steel exporters.
But, assuming out of some misplaced sense of kinship with the US, Canada buys this more expensive US steel, and Canadian auto-parts manufacturers use it to produce components. These components see their own cost rise, as a result of the increased cost of the steel. So, the price of those components, as they enter the US, will already have risen significantly, as a result of Trump's Tariffs, and the Canadian Tariffs imposed in response to them. But, now, these more costly components, as they enter the US again, face another 25% Trump Tariff. The components might be used by say, a US gearbox manufacturer, whose costs have now been raised massively. But, with an average of seven such crossings across the border, that is just the start of the increasing costs before the gearbox is installed in the US produced motor car, and its will not just be for the gearbox that this would be the case, but for the engine, and other parts of the car.
So, the effects of Trump's Tariffs on raising US production costs, prices, and wages would be prolonged, and form part of an upward spiral. Moreover, as a result of these processes and effects on profits, the demand for money-capital would rise, causing market rates of interest to rise. With rising prices, the Federal Reserve, having facilitated those rising prices, via increased liquidity, will seek to dampen economic activity (i.e. raise unemployment) by increasing its policy rates of interest. Already, even though markets seem to want to delude themselves into the belief that Trump will not follow through on this crazy behaviour, US bonds have sold off, causing bond yields to rise.
As Deepseek illustrated that China is catching up and overtaking the US, even in the realm of AI, and high tech, already being ahead in terms of EV development, and green energy technology, the bubble in US technology shares began to burst. The effect of the announcement of Trump's Tariffs caused another big fall in US stock markets, temporarily sending money from stocks to bonds. Trump was forced to back down in his threats of immediate tariffs on Canada and Mexico. But, when Trump does follow through, they will sell off even more, and that will have a consequent effect on all other asset prices, be it shares, or property.
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