“To me,” United States President Donald Trump has famously said, “tariff is the most beautiful word in the dictionary”. Mr Trump has shown that he means it. By imposing tariffs of varying degrees on a wide range of countries, he has initiated a trade war, the likes of which the world has not seen since the Second World War.
Following turbulence in the American bond market, Mr. Trump has announced a 90-day pause on tariffs on all countries except China. Hardly anybody thinks that Mr Trump will back off from tariffs for fear of visiting serious dislocation on the U.S. economy and the world at large. Trumponomics is a mission to fundamentally remake the American economy. It deserves to be taken seriously if only because the world will need to adjust to it.
First, the propositions
Trumponomics rests on a few key propositions. The first is that America needs to bring back manufacturing, lost to China and other economies over the past several decades. It needs to do so for several reasons.
Globalisation and the offshoring of manufacturing in the U.S. have meant the loss of millions of jobs. Estimates of jobs losses in manufacturing vary. Stephen Miran, Chair, Council of Economic Advisers, The White House, cites a study that estimates jobs lost in manufacturing between 2000 and 2011 at two million (Stephen Miran, A User’s Guide to Restructuring the Global Trading System). Robert E. Lighthizer, who was the U.S. Trade Representative in Mr. Trump’s first term, says five million manufacturing jobs were lost in the period 2000-09.
Job losses have been concentrated in particular areas. Thriving industrial centres have been reduced to ghost towns and whole communities hollowed out. There are other social costs: homelessness, rising crime, drug abuse, and broken families. America’s services sector has absorbed a portion of those who lost jobs in manufacturing. But these are low-wage jobs. For the vast majority of American adults, manufacturing remains the sole route to a high-wage job.
Trumponomics argues that America also needs manufacturing for the purpose of national security. It cannot afford to have its defence sector rely heavily on imports of steel, aluminium, and semi-conductors. In a crisis, American military capabilities could be seriously compromised. As Mr. Trump puts it, “If you don’t have steel, you don’t have a country”.
A second key proposition of Trumponomics is that free trade is not necessarily fair trade. Imports from China are cheaper because China provides subsidies to its firms in various forms, uses slave labour to drive down costs, invests funds in state-owned technology companies, and indulges in industrial espionage and theft of intellectual property. It makes no sense to have American companies wiped out by competitors that do not adhere to the rules of a free market economy.
The third proposition is that America’s chronic trade deficits are unaffordable as the flip side is foreigners using their trade surpluses to acquire more and more American assets. In recent years, trade deficits have been of the order of $500 billion to $1 trillion a year.
Trade deficits are said to be self-correcting. When a country runs a trade deficit, the exchange rate of its currency is expected to depreciate. Exports will then rise and imports will fall, leading to a reduction in the trade deficit. Mr. Miran argues that the principle does not apply to the U.S. economy because the dollar happens to be the world’s reserve currency. Nations park much of their foreign exchange reserves in U.S. government securities. This results in an overvalued dollar.
An overvalued dollar means more imports, less exports and hence a persistent trade deficit. As Mr. Miran puts it, America runs a trade deficit not because it imports more; it imports more because it is the provider of reserve currency to the world.
Impetus for domestic manufacturing
How to restore manufacturing to the U.S. and reduce America’s trade deficit when faced with “unfair” trade and an overvalued dollar? Enter tariffs on imports. Tariffs will raise the cost of imports and cause imports to fall, thereby reducing the trade deficit. They will spur domestic manufacturing by protecting American manufacturers from import competition.
Economists fret that tariffs run counter to the principle of economic efficiency. Tariffs, they say, will spell higher costs for American consumers, an increase in the inflation rate and an inefficient manufacturing sector. Trumponomics says these concerns are based on first-round effects. Look farther and the outcomes change.
By raising the cost of imports, tariffs will result in fewer imports. A fall in imports will result in an appreciation of the dollar. If the “currency offset” to tariffs is perfect — say, a 10% tariff is offset by a 10% appreciation in the dollar — the dollar price of imports after tariffs will remain unchanged. The American consumer does not pay anything extra. Since the exporting country’s currency has weakened, it earns fewer dollars than it did earlier.
Mr. Trump has been ridiculed widely for saying that the exporting nation, and not the American consumer, will pay for U.S. tariffs. Once you take into account the currency offset to tariffs, Mr. Trump’s statement makes more sense. To be sure, if the currency offset is not perfect, there will be costs to the American consumer and an increase in the inflation rate. Mr. Miran estimates a one-time impact on the inflation rate of about 0.3-0.6 percentage points, an impact that is eminently bearable. This assumes there are no retaliatory tariffs.
Tariffs can lead on to other favourable second-round effects. As input costs rise, American manufacturers will look for ways to enhance efficiency and lower costs. Tariffs will compel American and foreign companies to move operations to the U.S. and this will enhance efficiency and output in the U.S. economy. There are signs that major U.S. companies are already making such a move.
The other ‘Trump cards’
More importantly, tariffs are but one of four elements in Trumponomics. There are three other elements: tax cuts, deregulation and more drilling of oil. Tax cuts, made possible by tariff revenues, will compensate companies for the higher costs of imports. Deregulation will drastically reduce compliance and operational costs. More drilling of oil will help lower oil prices and counter the inflationary effects of tariffs. Taken together, the four elements constitute a plausible alternative to the current economic model.
Trumponomics is driven by the principle that efficiency cannot be the sole or even overriding consideration in economic policy-making, a principle that India’s policymakers had wisely embraced decades ago. Mr. Trump’s detractors believe that he has embarked on Mission Impossible. Well, Mr. Trump does not think so. He is determined to pursue his vision of MAGA (Make America Great Again) regardless of the short-term cost to the U.S. As for the rest of the world, Mr. Trump does not particularly care.
T.T. Ram Mohan is a former Professor at IIM Ahmedabad. Email: [email protected]
Published – April 18, 2025 12:16 am IST