Trump’s trade war and the persistence of magical thinking

WASHINGTON policymakers have a habit of doubling down on failed strategies, repackaging them with new rhetoric, and expecting different results.

US President Donald Trump’s escalating tariff regime represents a textbook case of this phenomenon – a triumph of political theatre over economic reality, where the costs are borne by American businesses and consumers while the promised benefits remain stubbornly theoretical.

The numbers tell a sobering story

Nearly a year into Trump’s second-term tariff escalation, the evidence is clear enough for anyone willing to look beyond the White House fact sheets.

The average US tariff rate has skyrocketed from about 2.5 per cent in January to more than 20 per cent by mid-year, the highest level in over a century. Tariff revenues have surged past US$30 billion monthly, compared to under US$10 billion before the policy shift. These are unprecedented numbers in modern American trade policy.

But here’s what the administration doesn’t emphasise: Who is actually paying these tariffs? Despite Trump’s repeated assurances that foreign countries would bear the cost, the data through mid-2025 shows US businesses absorbing the vast majority of tariff expenses.

Import prices paid to foreign sellers have barely budged, declining by at most 2.5 per cent, while retail prices for imported goods rose only about 2 per cent through August. The gap between a 13 per cent effective tariff rate and a 2 per cent price increase tells us everything we need to know: American importers are eating the costs, for now.

The Penn Wharton Budget Model projects that Trump’s tariff policies will reduce long-run gross domestic product by around 6 per cent and wages by 5 per cent, imposing a lifetime loss of roughly US$22,000 on middle-income households.

These losses, the model suggests, are twice as economically damaging as a revenue-equivalent corporate tax increase. Even if we take the more conservative estimates, we’re looking at significant economic drag for dubious strategic gains.

The steel and aluminium mirage

The administration points to steel and aluminium as success stories from Trump’s first term. And there’s a grain of truth here – these sectors did see investment and some job gains when tariffs were first imposed. But context matters.

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Steel capacity utilisation briefly touched 80 per cent in 2021, only to fall back to 75.3 per cent by 2023. Aluminium capacity utilisation rose from 40 to 61 per cent between 2017 and 2019, then declined to 55 per cent by 2023. These are hardly the signs of a revitalised, sustainably competitive industry.

What the tariffs created was not global competitiveness but protective market share – a distinction that matters enormously. When protection becomes the business model, industries lose the incentive to innovate and become genuinely competitive.

Meanwhile, downstream industries that use steel and aluminium as inputs face higher costs, undermining their competitiveness. A January 2024 study found that Trump’s 2018 to 2019 tariffs had no significant positive employment effects in newly protected sectors, while foreign retaliation clearly damaged agriculture.

The revenue fantasy

Perhaps most revealing is the administration’s claim that tariff revenues could eventually replace income taxes. The mathematics are simply not serious.

Federal income tax generated about US$2.4 trillion in 2024. Trump’s second-term tariffs have brought in about US$167 billion so far this year, according to PolitiFact. That’s roughly 7 per cent of income tax revenue.

To close this gap, tariff rates would need to exceed 60 per cent across the board – a level that would devastate trade volumes, radically distort the economy, and likely trigger a global depression.

Here’s the paradox the administration won’t acknowledge: The more successful tariffs are at achieving their stated goal of reshoring production, the less revenue they generate.

If Apple were to manufacture all its iPhones domestically, as Trump encourages, those iPhones would generate zero tariff revenue. You cannot simultaneously use tariffs to reshape production patterns and count on them as a stable revenue source. It’s economic magical thinking.

The real costs: visible and hidden

By September, the economic damage was becoming undeniable. JPMorgan projects a 35 per cent probability of a US and global recession in 2026. Both Canada and Mexico, the US’ largest trading partners, have faced significant economic slowdowns. The Tax Policy Center estimated that tariffs would impose an average burden of about US$2,100 per household in 2026 alone.

The Court of International Trade ruled in May 2025 that tariffs imposed under the International Emergency Economic Powers Act were unlawful, potentially invalidating a significant portion of the tariff regime. The administration’s response has been to explore alternative legal authorities, suggesting that the policy commitment to tariffs supersedes any particular legal or economic rationale.

In a way, what’s most troubling is not that the administration is using tariffs – trade policy has always been a legitimate tool of statecraft – but that it’s using them so poorly. Effective economic coercion requires clear objectives, careful targeting, coalition building, and realistic expectations about costs and benefits. Trump’s approach features none of these elements.

The tariffs are simultaneously too broad and too narrow. They’re too broad in that they hit allies and adversaries alike, undermining potential coalitions. They’re too narrow in that they don’t address the fundamental structural issues in the global trading system – intellectual property theft, technology transfer requirements or currency manipulation by major powers.

Moreover, the administration seems unable to articulate what “success” would look like. Is the goal to reshape global supply chains? Generate revenue? Punish China? Revive manufacturing? Reduce trade deficits? These are different objectives requiring different strategies, yet they’re all jumbled together in a policy stew flavoured primarily by political expediency.

The path forward

The irony is that there are legitimate concerns about America’s economic relationship with China, about supply chain vulnerabilities exposed during Covid-19, and about the hollowing out of US manufacturing. These problems deserve serious policy responses.

But serious policy requires acknowledging trade-offs, building coalitions, and accepting that reshoring high-value manufacturing is a long-term project with investment in education, infrastructure and research – not just tariff walls.

The evidence suggests Trump’s tariffs have been effective at one thing: generating political theatre while imposing measurable costs on American households and businesses. They’ve been far less effective at achieving any of their stated economic or strategic objectives.

The sad reality is that once you’ve invested this much political capital in a policy, admitting failure becomes nearly impossible – so more of the same can be expected, regardless of the mounting evidence of ineffectiveness.

This is how nations decline: not through dramatic crises, but through the accumulation of poor choices defended by increasingly implausible rhetoric, while the real costs are distributed across millions of households too diffuse to mobilise politically. Trump’s tariff regime offers us a case study in this process, dressed up in the language of economic nationalism and US revival.

The question facing policymakers who come after Trump is not whether to abandon trade policy as a strategic tool, but whether they can develop a more sophisticated approach – one that acknowledges economic realities, builds on America’s genuine strengths, and doesn’t require citizens to accept increasingly absurd claims about who’s paying the bill.