Donald Trump’s allies tell us that tariffs are principally a negotiating tool rather than a tax on consumers: If you threaten America’s trade partners with new duties, they’ll immediately cave and provide more favorable terms for the exports we produce domestically and sell into their markets.
Key to that logic is the idea that the U.S. has all the leverage, and that just isn’t true in the current macroeconomic environment.
When Trump fired his first shot in the 2018 trade war with China, core inflation was running at around 2.3% and 30-year mortgage rates were around 3 percentage points lower than today. That meant Trump had sufficient cushion to pursue his goals without unduly punishing American households and sacrificing political support. This time, the U.S. is coming off the worst inflation in 40 years and still struggling with mortgage rates that have rendered housing unaffordable. Our trade counterparts know that the U.S. has a limited tolerance for additional economic pain.
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