The Letter That Shook Global Trade

In a provocative action that's shaking the U.S. markets and global trade, former President Donald Trump has resurrected one of his most unpopular economic strategies: tariffs. Branded "Tariff Man" in his first term, Trump is again wielding tariffs as a primary policy mechanism—this time with even more intensity.

What Happened?

Trump has also imposed a historic new series of tariffs, on a wide range of imports, directly from China. They extend to such products as Chinese-imported electric cars, steel, and aluminum, etc.

They are so stringent that some liken them to what was implemented under the Smoot-Hawley Tariff Act of the 1930s, which most historians think helped prolong the Great Depression.

This is not simply a matter of attempting to save American jobs or industries—it's all part of a far larger plan. Trump is employing tariffs not only as a means of affecting the economy, but of affecting global politics and trade relationships.

What's the Strategy Behind It?

One of the key aspects of Trump's strategy is what economists call "strategic ambiguity." That's diplomat language for saying he keeps other governments and businesses in the dark.He doesn't always tell them what he's going to do on trade, and that creates a tremendous amount of uncertainty.

Yes, some would say it's clever negotiating, but it also makes it harder for businesses to make plans.Let's say you're an automaker or run a supply chain reliant on Chinese components. All of a sudden, there's this huge new tariff, and your costs skyrocket.

If you don't know whether that tariff is going to be there next month, increase, or disappear, it's very hard to make long-term decisions. That kind of uncertainty has a way of making businesses more cautious and generally, more expensive.The Economic Cost: Higher Prices and Job Loss. These new tariffs inflict ruinous economic damage, experts warn.

The Peterson Institute for International Economics, a well-respected research organization, has simulated what occurs if all of Trump's trade policy endeavors take effect. And their results aren't heartening: they simulate job loss in major industries, most prominently those relying on exports or using foreign inputs.

And consumers might feel the squeeze as well. If tariffs make imported goods more expensive, companies prefer to pass the increased cost along to consumers. That would tend to increase the price of everything from automobiles to electronics to household appliances.

So while tariffs are marketed as a way of "bringing back jobs" or "punishing unfair trade," they do the reverse and trigger inflation—when everyone's standard of living rises.

Why It Matters to the Rest of the World

It is not solely an American issue. Trump's approach can redefine global trade as it has been practiced for decades. He is saying to the world, in effect, that America will get tough, even if that requires breaking away from the traditional trade norms. This kind of policy can harm relations with both allies and trading partners. Countries like Canada, Mexico, and members of the European Union would certainly respond by slapping tariffs on U.S. goods. This tit-for-tat game is how trade wars start—and no one really wins a trade war.

And worse yet, such a strategy would Balkanize the global economy. Instead of one giant, unified system of commerce, we could have separate, rival groups of nations that trade primarily among themselves within each bloc. That's a lower-order world economy and one that would have the effect of slicing global growth.

A Political Power Play

Apart from economics, it is a highly political move too. Trump is using tariffs to show that he's tough on China and to appeal to voters who've been left behind by globalization. He's doing so at the cost of U.S. economic policy diverging from global cooperation and further in the direction of national self-interest.

It's a message that resonates with many who've seen factories close in their towns or who worry the U.S. is too dependent on other countries. But the trap is that the policies can hurt the very people they're trying to help, through lost export-sector jobs and higher domestic prices.

What's Next?

For as long as Trump is on the campaign trail and setting the Republican Party's economic policy agenda, this "weaponized" trade policy will be under the microscope. Its resurrection as policy depends on the 2024 election and on Congress and American business acceptance of these proposals.

In the meantime, investors, managers, and leaders of the world hold their collective breath. If the U.S. once more turned to its belligerent use of tariffs, it could lead to a new era of doubt—not just in American markets, but worldwide.