Vivek Kaul: ‘Stupid, stupid, stupid’ is the only way to describe US tariffs

Indeed, like that cricket shot, ‘stupid, stupid, stupid’ is what best describes US President Donald Trump’s tariff economics. It raises several points.

Also Read: Trade war: Trump’s shock-and-awe tariffs only have a faint silver lining for India

First, many of Trump’s Make America Great Again (MAGA) supporters, possibly even him, seem to believe that tariffs will be paid by the countries exporting goods to the US. The fact is that tariffs are paid by importers, who then pass on the cost to end consumers—in this case, the American people.

Second, then why do this? Are tariffs a negotiating tactic? That may have been true for Trump’s first term, but it is a difficult argument to make now. Some countries might buckle and cut their tariffs, but many have counter-tariffs planned. Also, like Trump wants to appear strong to his supporters, politicians elsewhere too may not want to be seen as weak against his tariffs.

Also Read: Trump’s ‘Liberation Day’ tariffs will deal the Global South a hard blow

Third, it has also been suggested that Trump may be trying to engineer a recession and force the US Federal Reserve to cut interest rates. Lower rates will then drive economic growth and help the Republican Party in the 2026 midterm elections. But the economy is not like a car, whose speed can easily be controlled with an accelerator and a brake. It’s a complex system. If American tariffs stay, US retail inflation will go up, lowering the chances of rate cuts.

Fourth, this is not to say that countries haven’t used tariffs in the past. They have. But universal tariffs usually lead to bleak economic outcomes. The Tariff Act (or Smoot-Hawley Act) passed in June 1930 by the US was meant to protect its economy in the aftermath of the Great Depression, which started in 1929. It raised tariffs on 20,000 industrial and agricultural goods to record levels in a wave of protectionism, with other countries responding with their own tariffs. This hurt the global economy even more and prolonged the depression, with the situation finally changing once countries started spending money to first prepare and then fight World War II. This lesson has been forgotten by the US administration.

Also Read: Indira Rajaraman: US Liberation Day tariffs target the WTO’s playing field

Fifth, the S&P 500 Index has fallen by more than 12% (as of 3 April) from its all-time high on 19 February. This means a negative wealth effect may take hold, with people feeling poorer and hence spending less than they usually would, slowing consumer spending and economic growth. On 3 April, the Federal Reserve Bank of Atlanta estimated that the US economy contracted 2.8% in the quarter from January to March.

Sixth, the reciprocal tariff rates seem to have been arrived at by using a very crude formula. In India’s case, the reciprocal tariff is 26%. In 2024, the US ran a goods trade deficit of $45.7 billion with India, implying that US goods imports from India were higher than its goods exports to India by that much. US goods imports from India were $87.4 billion. So, the US deficit of $45.7 billion as a proportion of these imports of $87.4 billion comes to 52%. This rate, when halved, is 26%.

Also Read: Reciprocal tariffs: Should India respond to Trump’s move at all?

There are multiple problems here. One, for some reason, services trade hasn’t been considered. Two, all the talk about taking currency manipulation and non-trade barriers into account is just that—talk. Three, even if a country decides to lower its tariff barriers to US exports, the American trade deficit with that country may not come down simply because that would require the US to export more to that country. And exporting more is not just about a lower tariff rate. The US will first have to produce goods and do so at a price that might interest other countries.

Seventh, there is a school of thought which believes that if Trump is doing this, he must have thought it through. This reveals our biggest risk: the possibility that Trump may not know that he does not know. He seems to like attention and to project himself as being decisive, but that doesn’t necessarily mean policy gets much thought.

Eighth, Trump’s words indicate the belief that tariffs will force companies to manufacture in the US for the domestic market. But it won’t be as simple as that, given that producing in the US may be an expensive proposition, which is why companies moved out in the first place. Also, the current dynamics are not as simple as products being made overseas for shipment to the US. The supply chains of companies are so evolved that a product may cross US borders multiple times during its manufacturing process. Also, it’s possible that companies might just decide to wait out Trump’s second term.

Ninth, if Trump continues to double down on this strategy, it will only drive countries away from the US and chip away at the global order that emerged after World War II, with the US dollar at the heart of it.

Now that calls for another detailed piece, but if one were to summarize the broader argument in one line, it’s like Graham Greene wrote in his 1978 novel The Human Factor: “The day may come when we need the Chinese."

Vivek Kaul is the author of ‘Bad Money’.