3 April 2025 - 10:00am
When regimes end, they end in phases. Communism died over a period of 10 years, starting with the strike at the Gdansk shipyard in 1980. The fall of the Berlin Wall in 1989 was the great symbolic moment, and the 1991 coup against Mikhail Gorbachev completed the process. The world of globalization did not end yesterday. But yesterday was its Gorbachev moment. Trump’s first term was Gdansk, the canary in the coal mine.
Yesterday’s tariffs came in at the upper end in terms of their expected short-term macroeconomic impact, but at the lower end for some sectors. Perhaps the biggest positive surprise is that the car tariffs are not additive, so auto imports will face a levy of 25% rather than 45%. Pharmaceuticals will be exempted from this particular category of tariffs, as will steel and aluminum. But both fall under Section 232 of the 1962 Trade Expansion Act, which gives the president the right to impose tariffs in the name of national security. Trump already did this for steel and aluminum, while pharmaceuticals are currently subject to a Section 232 investigation. It is the single largest sector in EU-US exports.
International macroeconomists were busy digging out their Project Fear models with which they spectacularly misdiagnosed the economic consequences of Brexit, or the sanctions against Russia. But, really, tariffs are better viewed in terms of longer cycles, as is the case in politics. In the very short run, they constitute a price and output shock, with some characteristics of the economic impact of Covid. The tariffs will raise substantial revenues for the US government this year and next, with industrial relocation playing a progressively more important role in the following two years.
When Tesla invested in Germany, there were two years between the announcement and production actually beginning. But the initial announcement was itself preceded by a year of evaluation and negotiations. Companies with existing plants are best placed to expand production quickly. Taking stock after three or four years is the preferable way to judge this, and the obsession with year-one effects is the reason why people are misjudging trade-related policy decisions.
Will Trump get what he wants from these tariffs? In terms of reshoring manufacturing, the answer is likely yes. For the largest trading partners, such as China and Germany, this will be a massive shock because of what it implies for the sustainability of the current economic models. Contrary to predictions, there has not been a compensating dollar revaluation, which open macro models would predict as a market response to tariffs. The unwinding of the globalization Ponzi scheme, which brought increasing capital flows into the US markets, is now clearly the bigger factor.
Politically, these tariffs will work for Trump. Foreign manufacturers are already declaring that they will step up investments in the US. The old manufacturing jobs won’t come back, but new ones will be created. There is a risk of a US recession this year if Trump fails to get his tax policies through Congress. The Republicans may lose the midterm elections. But if the goal is to raise external revenues, reduce the budget deficit, and reshore manufacturing, those tariffs will work — so long as one remembers that they cannot do everything at the same time.
Europeans in particular should be wary of wishful thinking. There were plenty of gleeful projections of a more severe impact for the US than for Europe. In the short term, these tariffs will have a negative consequence for the American economy, as they are a huge tax on US consumers. The global consequences, meanwhile, will depend on how the rest of the world reacts.
This is an edited version of an article which originally appeared in the Eurointelligence newsletter.
