Down the rabbit hole: How extensive will Trump's tariffs be, how will they impact the world?

British author E.M. Forster famously said, “How do I know what I think if I can’t see what I say?” I welcome the opportunity to learn what I think about Trump’s tariffs by reading what I write. For once, I suspect that my profession, economics, has something useful to contribute.

On April 2, President Trump’s Executive Order imposed tariffs on a large number of countries. The rates varied from 17% (Israel), 20% (European Union), to 30% (South Africa) and 34% (China). China retaliated and was hit by a massive 104% tariff.

The average Trump tariff rate is 23% – higher than the previous record high tariff under the Smoot-Hawley Tariff Act of 1930. That act virtually wiped out global foreign trade when trading partners retaliated, deepening the Great Depression.

Apparently, the US took each country’s trade balance with the United States (exports to the US minus imports from the US), divided by the amount of the imports, and then divided by two. Media accounts suggest this is the formula that the artificial intelligence program ChatGPT provides when asked to compute a tariff rate. It has no basis in economic theory.

There are several. First, to “reshore” – that is, to bring offshore manufacturing back to the mainland United States. US manufacturing fell from about 25% of GDP in the 1950s to about 10% today.

Note that these three goals are internally contradictory. If imports continue to flood into the US despite the tariffs, they will generate large revenues for US coffers; but by definition, no new factories will spring up, nor new manufacturing jobs. Trump doggedly asserts that all three goals will occur. It is not possible.

What is Trump’s core argument regarding the tariffs?

It is simple. Let me try to put it as Trump would. The United States has imported more than it exported since 1970. The US posted a record trade deficit of $131.4 billion in January alone – a single month, or an annual rate of well over $1 trillion. This proves that other countries are ripping off the US, selling more to it than they buy. They do this with tariffs on US goods and non-tariff barriers. I, Trump, will put a stop to this by making imports expensive via tariffs. I, Trump, will level the playing field.

This sounds logical. What’s wrong with Trump’s reasoning? What is the historical background to Trump’s wrecking ball?

This will take a rather convoluted answer. Sorry.

In July 1944, with World War II raging, the US convened a gathering of experts at the Mount Washington Hotel in Bretton Woods, New Hampshire. In just 10 days, they rebuilt the architecture of the post-war world economy, based on the free flow of goods, services, capital, people, and technology.

At the time, the US economy comprised 75% of the world economy because much of Europe and Asia was in ruins. By buying from other countries, the US spurred record global economic growth. From 1950 to 2023, in three generations, global gross domestic product (GDP) grew by 1,320 %!

But did the US benefit as well? Hugely.

The US dollar became the key world currency. By selling more to the US than they bought, foreign countries earned piles of dollars, which they used to buy US bonds, stocks, and invest in the US. In short, they lent Americans the money to buy their goods – and the US went on a binge of consumption for three generations, on borrowed money.

Imagine that you and I try to spend 10% or 20% more than our income for 75 years. Would the banks, credit card companies, anyone, be willing to lend us the money to do it forever and ever? Not a chance.

Americans did it. And still do.

Americans spend all their income. Net saving as a percentage of gross national income was 0.40% in July of 2024, according to the United States Federal Reserve. In contrast, China’s national saving rate is over 30%.

True, half of all Americans have IRAs (independent retirement accounts), much of which is invested in the stock market. The S&P 500 stock index rose from 330.82 in December 1945 to 5,768.21 in December 2024 (pre-Trump tariff). Stock prices doubled four times.

In 1950, the average price for a home was $79,063 (in 2020 dollars). In 2020, it was four times higher, at $336.900. And two-thirds of Americans own their own homes. Stocks and housing costs have soared, giving those owning shares and homes the illusion of saving. Those who don’t? They were left behind – and many voted for Trump.

Illusion because stocks and housing costs can drop precipitously, and stocks indeed have fallen sharply. The S&P 500 stock index fell by over 10% after Trump’s tariff announcement, its worst performance since the end of WW II, rivaled by the 1987 stock market rout, the 2008 global financial crisis, and the 2020 COVID shock.

And at one point, in the wake of the Trump tariffs, the stock market fell by just over 20% before bouncing back a bit – the official definition of a “bear market.”

In short, Americans enjoyed a high standard of living, buying goods from abroad, at the expense of saving and investing in industry and infrastructure, such as factories. The US has crumbling airports, creaky trains, and terrible public transportation.

Meanwhile, other nations, especially China, saved huge amounts of money and invested in modern factories to make quality goods for American buyers. For example, Walmart at one point had 5,000 individual Chinese suppliers. “Made in China” replaced “Made in the USA.”

President Trump sees the US import surplus as weakness. Most economists see it as a consequence of strength – a strong dollar. Money flows into the US. And it came in large measure from Asia.

Japan alone holds about $1.06 trillion of US government bonds, while China holds $759 billion. All together, Asia holds nearly $3 trillion worth of US. debt. Asia saved, invested, grew, exported, and prospered.

There is, however, lose-lose. Win-lose quickly turns into lose-lose when trading partners retaliate with their own tariffs. High tariffs, when reciprocated in tit-for-tat trade wars, will quickly smash the global Bretton Woods system that doubled global GDP several times. It will be lose-lose.

To restore its manufacturing, Americans need to save far more than 0.4%, to modernize their industry and crumbling infrastructure.

But don’t hold your breath. US businesses’ profits, a form of saving that funds capital investment, are largely parked offshore, to avoid taxes. [Apple CFO Luca Maestri said recently that $230.2 billion of its cash – 94% of it – was being held overseas.]

The US federal government has a massive deficit, which is dis-saving, and it is growing in the face of proposed Trump tax cuts. And the American people? Will they suddenly discover the future and save like the Chinese? Don’t count on it.

The Chinese save because China has virtually no social security. Americans don’t save, partly because they rely on their social security for retirement. This may be risky because the declining US birth rate and the aging population have endangered the financial stability of social security funds.

The average hourly wage in Bangladesh is $1.25. In the US, it is $28.16. That means that in order to compete with Bangladesh clothing factories, American workers need to be 22 times more productive. I have visited Asian factories and seen line workers firsthand. They are diligent, hard-working, productive, efficient, and happy to work for wages that no American would consider.

It will take more than down-the-rabbit-hole tariffs to restore US factories. A lot more. It will take radical surgery to change the spend-borrow DNA of Americans. A far better-educated labor force. And yes, migrant workers to do the jobs Americans shun.

Sorry, but there just has to be a deeper rationale for the Trump tariffs.

As a maven in finance, Lutnick might claim that the tariffs are designed to weaken the dollar, driving its value down relative to other currencies. This makes all US imports more expensive and all US exports cheaper.

If Trump tariffs significantly weaken the dollar, that may have a bigger impact on the US trade deficit than all his tariffs combined. But it will incur much higher inflation. Does the world really want the linchpin of global financial markets, the dollar, to crumble when there is no other strong reliable currency to replace it? In the long run, a collapsing dollar will benefit no one.

How will the 17% Trump tariffs impact Israel?

Badly. A third of Israel’s exports go to the US. The Manufacturers Association of Israel says that between 18,000 and 26,000 Israelis could lose their jobs. And if Trump expands the tariffs to include pharmaceuticals and chips (silicon, not French fries), this could cost Israel $3 billion in lost exports. The areas likely to be hit hardest are hi-tech, which includes biotech, plastic, metals, chemicals and fuels, robotics and electronic components.

The US is Israel’s biggest trade partner. In 2024, the US imported over $13.5 billion worth of goods from Israel – electronics, machinery, pharmaceuticals, diamonds. Since 1985, Israel and the US have been joined in a free trade agreement. Currently, Israel’s tariffs on US goods were at most 1%. Finance Minister Bezalel Smotrich removed even those tariffs, hastily. But it didn’t help.

On Monday, April 7, Prime Minister Benjamin Netanyahu met with President Trump in Washington. Trump announced that Netanyahu had agreed to “zero” the US trade deficit with Israel – and fast. In 2024, Israel exported $7.4 billion more in goods to the US than it bought in imports. So, what will Israel buy from the US to balance its trade? Soy beans? Chevy Impalas? Netflix series?

Truth be told, the US trade deficit with Israel cannot be zeroed quickly. Netanyahu’s hasty promise has no basis in reality. Pundits predicted that Trump would cut a deal with Netanyahu. But instead, Trump picked his pockets.

Columnist, frankly, I want to hear the opinion of a real expert, such as Paul Krugman, Nobel laureate in economics in 2008, and perhaps the world expert on the economics of trade. Trump motivated his tariffs partly based on safeguarding America’s national security. Krugman recently spoke about this to The New York Times’ Ezra Klein.

Krugman: “…If you go back to how we ended up with the trading system that Trump is demolishing, it was partly about economic efficiency. But it was also very much about a kind of enlightened broad view of national security.

“Go back all the way to Cordell Hull, president Franklin D. Roosevelt’s secretary of state. He viewed enhanced economic linkages across the free world as a way to draw us closer together, as a way to create greater solidarity among democracies against the threat of Stalinism.

“So what we’re doing is tearing up – partially in the name of national security – a policy that was intended to enhance national security. There’s no question that the US is alienating its allies – or its worthwhile allies – by doing all of this. And in some cases, it is making common cause with our potential enemies.”

Economists disagree about everything – even the time of day. Is there anything they agree on?

Yes. On the benefits of free trade. A leading economist, William Poole, asserts: “The consensus among mainstream economists on the desirability of free trade remains almost universal.”

The European Union – conceived only “to screw America,” according to Trump – was designed to end bloody wars within Europe, and it succeeded brilliantly; it began with a free trade agreement, the Treaty of Rome, in 1960.

As France, Germany, and Europe as a whole grew wealthy together, it became unthinkable they would ever again go to war.

America’s Bretton Woods vision was that as countries engaged in free trade with one another, they would become democratic and friends of the US. This largely became reality.

The Trump tariffs are taking Israel, the US, and the world down a scary rabbit hole. The world economy grew faster than at any other period in history, from 1945 through 2025. The engine of growth was trade. And the General Agreement on Tariffs and Trade built an ecosystem of cooperation and peace.

The Trump tariffs are rapidly dismantling it.

“Down, down, down. Would the fall never come to an end?” asks Alice in Wonderland as she tumbles down the rabbit hole.

As Israel, the US, and the world tumble down the rabbit hole, will the disastrous Trump tariffs ever be removed?

Postscript: On Wednesday, April 9, President Trump did a sharp U-turn and announced that he is postponing the draconic tariffs (leaving in place only the 10% base rate on all countries and the astronomical tariffs on China) for 90 days. In response, stock markets rose sharply.