Get ready for Immiseration Day on April 2

The Trump tax will punish US consumers and weaken the global economy

On April 2, the US is set to announce a new round of tariffs on the rest of the world. “Liberation Day” is what President Trump calls it, but Immiseration Day (from a word meaning economic impoverishment) is what it will be in practice.

Stock markets are not perfect indicators of the economic outlook, but the recent trend shows clearly that investors are more worried about being immiserated than liberated. In the first quarter, US stocks have had their worst performance, relative to the rest of the world since 2002, when the WorldCom and Tyco scandals shook investors’ faith in US corporate governance.

It is not just that the tariffs, or Trump tax as they should rightly be called, will be punitive. It is that they are being applied arbitrarily and inconsistently. Are the tariffs designed to punish countries for the failure to stop the arrival of immigrants and fentanyl in the US? Are they designed to raise revenue? Are they aimed at countries with a current account surplus with the US? Are they designed to punish countries that oppose US foreign policy, even in a minor way? Or if they have taxes, like VAT, that Trump dislikes? The answer to all these questions seems to be yes, at certain times, but perhaps not at others.

The overall philosophy might be dubbed mercantilism, an economic approach Adam Smith thoroughly debunked back in 1776. So Trump and his advisers are only 250 years behind the times. Mercantilists thought in terms of precious metals, which were then the basis of currencies. Run a trade deficit, they argued, and the nation’s stock of precious metals would fall (since they would be used to buy imports).

This time round, the argument seems to be that any country that has a trade surplus with the US is cheating in some way (via its own tariffs or other trade barriers). By imposing the Trump tax, other countries will either change policies, or Americans will switch to buying home-made products. Either way, this will be good for manufacturing jobs in America.

There are many problems with this reasoning. First, the decline in manufacturing jobs is long-running and has more to do with technological change than with trade. Germany runs persistent current account surpluses but has still lost 400,000 manufacturing jobs since 2019. China has certainly grabbed a big share of global manufacturing but mostly at the low-skilled, low-cost end of the industry. If those products were made in America they would either be made by workers on very low wages, or the costs to consumers would soar.

And this brings us back to the other insight of Adam Smith. Trade allows specialisation. Scotland could grow bananas or grapes if it invested in heated greenhouses, but that would be extremely costly. It is very good at making whisky, and can make more than enough to pay for the bananas and grapes it needs.

When trade is free, producers can source ingredients, or components, where they are made most efficiently or cheaply. In the case of complex manufactured goods like cars, they have supply chains across the world, in which components may cross borders several times before the product is completed. These cannot be transformed overnight. The process might take years and manufacturers might hesitate to start, since Trump might change his mind, or be replaced by someone more sensible in 2029.

In any case, the reason that US manufacturers source components abroad is that they are cheaper. So if they have to source at home, their costs will go up. And they could go up substantially since there won’t be enough capacity to meet their needs. Even if US consumers don’t buy foreign cars, they will pay more.

And this brings us to another of Adam Smith’s insights; tariffs, or other trade barriers, are a conspiracy against the consumer. In many countries, producers lobby governments to impose them. But this is not the case in the US, where the main enthusiasm comes (misguidedly) from the auto unions. In the case of the Trump tax, there will be many losers but few gainers. This is an odd combination for a supposedly “populist” government to pursue.

Already, we have seen a glimpse of the future with 600 layoffs at Cleveland Cliffs, a company that supplies steel to the car industry (remember that steel is already subject to the Trump tax). Overall, there were 172,000 job cuts in the US in February, the highest monthly total in four years. Even if one excludes the 62,000 jobs shed by the government (driven by Musk’s chainsaw vandalism), the layoffs were well ahead of the 84,600 recorded in February 2024. There was a big jump in retail layoffs, hardly surprising given the recent decline in consumer confidence. Goldman Sachs have just downgraded their US growth forecast for the year (technically Q4 vs Q4 2024) to just 1%, and increased their core inflation forecast to 3.5%. They now estimate the chances of a recession at 35%. Make America Stagflate Again.

And for what? Trump’s adviser, Peter Navarro, claims that tariffs will raise $6 trillion over 10 years. That huge Trump tax may be offset by tax cuts elsewhere but the latter reductions will benefit the wealthy. Not only is that, again, a combination that makes nonsense of the idea of a “populist” government, but it will hit demand. Poorer people spend most of their income; the wealthy save more. Furthermore, if the tariffs are set to raise so much money, that suggests people will keep buying imports and the supposed benefits of a lower current account deficit and more manufacturing jobs will not occur.

To sum up, the Trump tax is a nonsense idea that recalls the beggar-thy-neighbour economics of the 1930s, which were so bad that the US and its allies resolved to reduce trade barriers after 1945. Three decades of great prosperity ensued. The current approach will make the global economy weaker, just to satisfy an old man’s prejudices and vanity.