Free trade, RIP: Trump’s new tariffs are multi-warhead weapons

Donald Trump has long talked of his plans to impose a 10 per cent tariff on all imports, and a 60 per cent levy on imports from China, to protect American producers and workers. Now, he has grander plans for their use.
Exports to the US account for 31 per cent of Canada’s GDP and 28 per cent of Mexico’s, according to the Lindsey Group, the Washington-based economic advisory firm. Trump threatens to impose a day-one, 25 per cent tariff “until such time as drugs, in particular fentanyl, and all illegal aliens stop the invasion of our country”. Later, China will face an additional 10 per cent tariff until it halts “the massive amounts of drugs, in particular fentanyl, being sent into the United States”.
That’s not all. Trump has still other uses for tariffs: to increase government revenues without overtly raising taxes; and to shift the burden of taxation from income and wealth to consumption, a long-held goal of conservatives but too regressive to propose. The tariff revenues flowing to the Treasury could be used to lower taxes on tips, social security income and overtime earnings.
• Trump tariffs are a self-inflicted wound
That shift from taxing work to taxing consumption of imported stuff is a big reform of the fiscal structure, travelling in the disguise of a move to affect trade balances.
It is important to remember that it’s a long, long way from a Trump opening negotiating position to a deal. He already reports having a “wonderful … very productive conversation” with Mexican president Claudia Sheinbaum about “effectively closing our southern border”. Never mind that she denies agreeing to close the border.
Meanwhile, Russia is threatening to bar the export of vital items in America’s supply chain, and European Central Bank chief Christine Lagarde wants the EU “to buy certain things”, such as liquefied natural gas (LNG), from the US. The dealmaking has begun, with America’s massive market the Trump card.
Enter Scott Bessent, Trump’s nominee as Treasury secretary, a candidate now fully on board with the president-elect’s tariff policies. Unlike many of Trump’s cabinet picks, Bessent knows a thing or three about his job. He has made billions as a hedge fund operator and currency trader, and he understands the relationship between fiscal and monetary policy.
Elon Musk derided him as a “business-as-usual choice”, which financial markets saw as a comforting signal that an often reckless president will not take a wrecker’s ball to the financial system. The bond vigilantes holstered their weapons. The price of government IOUs rose, driving interest rates down. Investors were even more reassured when Trump nominated the well-regarded economist Kevin Hassett to lead the White House economic team.
In Bessent, Trump has a man who recognises that deficits and debt are ticking time bombs. His 3-3-3 economic plan calls for cutting the deficit from its current 7 per cent of GDP to 3 per cent; growing the economy at an annual rate of 3 per cent; and encouraging oil companies to produce three million additional barrels a day of oil equivalent, including the natural gas that Lagarde says the EU should buy.
The Bessent nomination, however, did not pacify powerful economic interests digging in to fight the Trump programme. Billionaires are not a monolithic political bloc. Those sequestered in Silicon Valley know that Brendan Carr, the president-elect’s choice to run the Federal Communications Commission, believes Facebook, Google, Apple, Microsoft and others have played a central role “in the censorship cartel [that] must be dismantled”. Cheers from Elon Musk and the free speech crowd. Dosh for lobbyists prepared to fight new regulations.
The hi-tech moguls are joined in what Trump inevitably sees as the disloyal opposition by “Big Ag” — Tyson Foods, John Deere, General Mills and other giant links in global food chains. Big Ag wants Trump to rein in Robert F Kennedy Jr’s plan to regulate what he calls the medical-pharmaceutical-agricultural complex. It fears that deporting millions of illegal immigrants will result in shortages of workers. It worries that tariffs will provoke retaliation by countries that are its constituents’ important markets.
With members of Congress already preparing to face voters less than two years hence, Big Ag’s lobbyists are again visiting their Ferrari dealers.
These economic actors are not the only constraints on what an impatient Trump wants to do on day one. There are also those pesky constitutional guardrails. So far, in the first head-to-head confrontation, it is the constitution/senators 1, Trump and Matt Gaetz (the withdrawn pick as attorney general) 0.
Add newer guardrails — Trump’s belief that stock markets define winners and the dreaded losers. Some years ago, he boasted: “The reason our stock market is so successful is because of me.” That need for share-price approbation might prove as binding a constraint as the constitution.
There you have it. Tariffs to control trade. Tariffs to reduce illegal immigration. Tariffs to reduce the flow of fentanyl. Tariffs to generate income to offset tax cuts. Tariffs to shift the tax burden from incomes to consumption. Tariffs as multi-warhead weapons in the hands of a president who knows how to use them and the associated power to grant exemptions to favoured importers — and will, for better or worse. With a wary eye on the stock market.
Free trade, RIP.
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Irwin Stelzer is a business adviser