A Self-Inflicted Wound: Donald Trump’s “Liberation Day” tariffs are bad economics, worse politics, and dangerous for the global economy

It is rare for a single policy announcement to rattle equity markets, alienate allies, inflame adversaries and baffle economists in equal measure. However, Donald Trump’s newly unveiled “Liberation Day” tariffs have managed all four. With characteristic bluster, the former (and possibly future) president declared the tariffs, 10% on all imports, with country-specific hikes up to 54%, a “Declaration of Economic Independence.” Markets promptly declared their verdict, too: the Dow dropped 1,500 points in a day.

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What Mr Trump sees as a liberation is, in fact, a shackle. The tariffs, which aim to punish countries for trade deficits with the United States, are neither reciprocal nor rational. Instead, they are rooted in an economically naive formula that reads more like a schoolroom exercise than a trade policy. The administration divided America’s bilateral trade deficit with each country by the total value of imports, then halved it, thus producing an arbitrary set of tariffs bearing no resemblance to actual protectionism abroad.

China, the primary target, now faces a 54% tariff on all exports to America. Others, including Vietnam (46%), the EU (20%) and Cambodia (49%), are similarly punished. Countries like Canada and Mexico were spared, perhaps for their geography, not their trade behaviour. Meanwhile, U.S. consumers and firms are set to pay the price, quite literally.

Brent Neiman, an economist whose work was cited in defence of the policy, called the use of his research “profoundly misleading.” Trade deficits, he noted, are not simple evidence of unfair practices but reflect complex macroeconomic conditions. “This approach has no foundation in sound economics,” said Kimberly Clausing of the Peterson Institute for International Economics. “It is the largest tax increase on American consumers in decades.”

The global response has been swift and severe. China retaliated with symmetrical tariffs and restrictions on the export of rare earth elements vital to high-tech industries. It also filed a case with the World Trade Organisation. European leaders, uncharacteristically blunt, accused Washington of "economic vandalism." Japan warned of heightened instability in the Indo-Pacific. Britain, careful not to antagonise its closest partner, called for “calm and cool heads.”

Markets have taken note. A global selloff is underway, driven by fears of a new trade war. Goldman Sachs revised its recession forecast for the United States upward, warning that inflation, financial tightening and collapsing trade flows could tip the country into contraction. Others fear a broader unravelling of the post-war trading order.

Economists have not missed the historical rhyme. The Smoot-Hawley Tariff Act of 1930, a well-intentioned attempt to protect American jobs, triggered a cascade of global reprisals and deepened the Great Depression. The “Liberation Day” tariffs are more sweeping, and the world economy today is more integrated, and thus, more vulnerable.

Protectionism has political appeal, especially in an election year. But there is a reason it fell out of fashion. Tariffs are a blunt instrument that often achieves the opposite of their stated aim. They raise prices, distort supply chains, invite retaliation, and seldom revive domestic industries in a meaningful way. As firms face higher input costs, they may offshore more, not less. As partners turn elsewhere for trade, American influence may wane.

The deeper worry is not just economic but geopolitical. If America signals that it can no longer be trusted to lead a rules-based trading system, others will step into the vacuum. China, for all its faults, will gladly promote its own vision of trade—one less liberal, less transparent, and less friendly to Western interests.

Mr Trump’s tariffs may generate applause at campaign rallies. But they will not bring jobs back from Guangzhou or spark a renaissance in Detroit. They may, however, help accelerate the erosion of a liberal economic order painstakingly built over decades. The cost of such “liberation” is one the world can ill afford.