MW Trump's trade policy is a mess. Time is running out to get it right.

By Ian Fletcher

We need tariffs - but not like this: Why 'liberation day' won't free the U.S. from its trade troubles.

The economy will be stuck in a suboptimal state for years if Trump's trade policy endures.

I wrote Free Trade Doesn't Work in 2010 and doubled down in favor of trade tariffs by co-authoring Industrial Policy for the United States with Marc Fasteau earlier this year. So, while I am not a supporter of President Donald Trump on other issues, I am the last person to reflexively oppose what the president claims to be trying to do with the tariffs announced on April 2. But Trump's trade policy is a mess, and I cannot support it in its present form.

For a start, it is all far too sudden. Economies never respond well to shocks of any kind. Tariffs on this scale should be imposed over at least a five-year timespan. Market economies work because they respond rationally to circumstances, but companies cannot rebuild factories and relocate supply chains overnight. As a result, the economy will be stuck in a suboptimal state for years if this policy endures. The right policy would have been a pre-announced schedule of rising tariffs, which would enable businesses to plan investments and could indeed serve as the basis for a reindustrialization boom.

Inflation arguably is what did in Joe Biden's presidency, so Trump is playing with fire here.

Second, Trump evidently believes, presumably based on the experience of his first term, that tariffs are not inflationary. And in the long term, they shouldn't be. In Trump's first term, the average U.S. tariff rose to 3% from 2%, and the average tariff on China alone to 19% from 3%.

This was a very moderate policy, and its short-run inflationary impact, as U.S. Federal Reserve research eventually showed, was zero or trivial. But these newest tariffs are much bigger, so they will be inflationary, as Federal Reserve Chair Jerome Powell has already noted. Inflation arguably is what did in Joe Biden's presidency, so Trump is playing with fire here.

Third, these tariffs are not industry-specific. Only automobiles, aluminum, steel and a few other goods - dealt with in a separate initiative - are treated on an industry basis. But for America to run a deficit in advanced manufactured goods such as semiconductors is much worse than running one in, say, T-shirts. Tariff policy should reflect this. Some industries are capable of the high value-added per man-hour needed to support high wages, while some are not. And this doesn't even factor in the national-security implications of losing certain parts of the U.S. civilian industrial base.

Fourth, Trump's tariffs have no supporting industrial policy. Reindustrialization of the U.S. today is not only held back by cheap imports, but by myriad other factors ranging from a mostly short-term focused financial system to government's underinvestment in technology development to weak vocational training to local NIMBY zoning laws.

All of these shortcomings need to be addressed. But Trump seems to think, as epitomized by his desire to scrap the CHIPS Act in favor of a "tariffs only" approach to reshoring the semiconductor industry, that tariffs alone are enough. The worldwide history of industrial policy shows that single-policy approaches rarely work, whether that single policy is tariffs, subsidies, a bet on some innovative technology, or whatever.

Dazed by the dollar

The U.S. should impose a moderate, variable tax on private capital flows that are a leading cause of the dollar's overvaluation.

Lastly, Trump has embraced no proactive measures against the overvalued U.S. dollar (DX00). Tariffs are essential for industry-specific and country-specific policy, and the claim that tariffs have no ability to reduce deficits is wrong. But America still can't zero out its deficit without bringing down the dollar. Indeed, leaving it unmanaged risks watching the dollar offset much of these very tariff increases by gaining strength.

Although the dollar is weakening because Trump has temporarily rattled confidence in its safe-haven status, it rose 7% in 2024. The U.S. needs a permanent fix, imposed by credible policy measures - not mere jawboning - politically secured by explicitly tying the policy to the very reasonable goal of balancing America's total worldwide trade.

A more competitive dollar would both cut imports and boost exports. Unlike with tariffs, no treaty commitments impede the dollar, and unlike with free trade, there is no entrenched academic theory favoring a floating currency.

The main cause of the dollar's overvaluation is private capital-flows drawn to the depth, sophistication, security and returns of U.S. capital markets. Therefore, the U.S. should impose a moderate, variable tax on these private capital flows, a so-called Market Access Charge $(MAC)$ such as outlined in the Baldwin-Hawley bill of 2019. Countervailing currency intervention $(CCI)$ should be used to push back against outright manipulation. (The U.S. will still need tariffs for nations, quintessentially China, whose currency is not sufficiently internationally traded for this program to work.)

Both U.S. Treasury Secretary Scott Bessent and Chairman of the Council of Economic Advisers Stephen Miran have spoken about the need to bring down the dollar, as Trump himself has also (inconsistently) done. So it's plausible then that Trump may be threatening tariff Armageddon so that when he later offers dollar depreciation as a (partial) alternative, Wall Street will welcome it, rather than push back against limits on its ability to move capital freely around the world, which could prevent the policy's adoption. Foreign fears of protectionist pressures in Congress were, after all, part of what induced foreign assent to the 1985 Plaza Accord.

Talk of a so-called Mar-a-Lago Accord is misguided because that 1985 agreement was reached when then-Fed Chair Paul Volcker's high interest rates, which had pushed the dollar up in the first place, had already receded. Results required nothing more than U.S. central-bank intervention in the currency markets. No capital controls were imposed, and there was no attempt to create a permanent solution. And, of course, the U.S. was dealing only with geopolitical allies.

How China can trump Trump

Putting the U.S. in a position where it, not China, had to roll back its policy would make Washington, not Beijing, appear the humiliated party.

Speaking of China, Beijing's best move now is, paradoxically, to refuse to cut tariffs in response to Trump's 104% counter-retaliation threat - but publicly announce (and keep the promise) that if Trump goes through with it, China will not respond in kind.

This would instantly win the propaganda war in all foreign nations where opinion is still up for grabs. Second, China's imports of American goods (only about a third of the reverse) are already so tightly restricted to things China needs, rather than wants, that a 104% tariff would cause serious domestic pain. Third, China can probably bet that such a tariff on Chinese goods would cause so much pain in the U.S. that the levy would immediately start being nibbled away at with exemptions and would eventually be partly or entirely stood down.

Political pressures on the Trump administration to unwind would be increased, of course, by the very fact of China's non-retaliation. Putting the U.S. in a position where it, not China, had to roll back its policy would make Washington, not Beijing, appear the humiliated party. At least on an emotional level, this is something China's leadership cares about a lot, and as a practical matter, forcing this outcome would enhance Chinese President Xi Jinping's domestic popularity, which, like all authoritarians, he cares about.

Tariffs have often been a useful policy for successful economies. It is an urgent one for the U.S. right now.

At this point, the real negotiations, presumably secret, would begin. Both sides would have realized they could not overpower each other and that their rational goal should therefore be the least-costly deal sufficiently acceptable to each side. Even letting China be, at least on paper, the "winner," with an ongoing $50 billion-a-year surplus or whatever, would serve both sides domestically: Xi could crow about having won, and Trump could use the result to mollify America's remaining free-traders.

This is, of course, speculation: although history offers no precedents of actual trade wars (Smoot-Hawley is a myth), the worst-case scenario cannot be ruled out absolutely. I believe, provisionally, that Trump does have a tactical vision of what he's doing and is not just blindly thrashing about. So I hope that his "liberation day" tariffs are just an opening gambit, designed to shock the world and make people grateful for the more reasonable ultimate policy outcome. If I am wrong, and they represent instead a settled policy model that Trump will now defend regardless of cost, he risks discrediting the entire concept of protectionism. Although sometimes misused, tariffs have often been a useful policy for successful economies. It is an urgent one for the U.S. right now.

Ian Fletcher is an economist serving on the advisory board of the Coalition for a Prosperous America. He is the co-author of "Industrial Policy for the United States: Winning the Competition for Good Jobs and High-Value Industries," (Cambridge University Press, 2025).

More: Peter Navarro is the architect of Trump's tariff policy. Elon Musk is not impressed.

Also read: Why Trump's China tariffs are a 'Category 5 price storm' for U.S. consumers

-Ian Fletcher

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April 09, 2025 07:30 ET (11:30 GMT)

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