Opinion: Opinion | Can You Really Trust Trump's 'Magic Potion'?

Anthony Scaramucci, a Wall Street stalwart, knows Donald Trump up close and personal. What stands out most to him is Trump's “cruel” nature. Yet, as he repeats ad nauseam in his podcasts, Trump has incredibly sharp political instincts. According to Scaramucci, Trump always follows his gut - something instilled in him by his mentor, the ultra-aggressive New York lawyer Roy Cohn. And Scaramucci should know - he briefly served as White House Director of Communications under Trump.

Still, as the world grapples with the fallout from Trump's April 2 announcement of sweeping reciprocal tariffs, one has to wonder: are Trump's instincts right this time? Trump has dominated American politics for the better part of a decade, but these new tariffs fly in the face of economic, business, and political logic. It's hard to see how they serve his political future.

Consider the context of Trump's self-declared “Liberation Day”. Here's what veteran Republican strategist Karl Rove wrote in The Wall Street Journal on April 3: “The problem for Republicans is that Mr. Trump was elected to stop inflation. A March 28 CBS News poll found that 64% of Americans already think Mr. Trump isn't focused enough on 'lowering prices', while 55% say he's focused too much on raising tariffs."

Rove added, "Most Americans believe Mr. Trump's economic policies are either making them 'financially worse off' (42%) or 'about the same' (35%). Fifty two percent feel his policies are making food and groceries prices go up, only 22% say go down. Fifty-one percent think his policies are making the stock market fall, compared with 23% saying his policies are making it rise. Only 33% believe his 'policies are making the US job market' create jobs, while 48% say they are making it 'lose jobs'...Americans are skittish about tariffs: 56% oppose them, with 72% believing they'll raise prices in the short run compared to 5% who think they'll reduce prices. Over the long term, only 29% say they'll lower prices. They'll certainly remember Mr. Trump saying he 'couldn't care less' if US automakers raised prices because they had to pay more for imported parts.”

Estimates suggest that under Trump's tariff regime, new car prices could rise anywhere from $2,500 to $20,000.

Popular Opinion Turning

And then there's the potential impact on American farmers—numerically small but among Trump's most loyal voters. In the last election, Trump won nearly 78% of the vote in the 444 counties where farming dominates. As The Atlantic put it, “Tariffs will indeed hurt farmers badly. Farm costs will rise. Farm incomes will drop. Under Trump's tariffs, farmers will pay more for fertilizer. They will pay more for farm equipment. They will pay more for the fuel to ship their products to market. When foreign countries retaliate, raising their own tariff barriers, American farmers will lose export markets. Their domestic sales will come under pressure too, because tariffs will shrink America disposable incomes: Consumers will have to cut back everywhere, including at the grocery store.”

Trump has long believed that both allies and adversaries have exploited the post-World War II trade regime - where the US promoted global prosperity with low import tariffs while enduring higher tariffs on its exports - to enrich themselves at America's expense. As two economists recently wrote in Foreign Affairs: “Trump possesses few consistent political ideologies but has promoted tariffs since the 1980s as a means to reduce trade deficits and spur US manufacturing, dismissing economists' warnings that they would raise prices and potentially stagnate the U.S. economy.” 'Make them pay for the privilege of selling to or being defended by the US' - whether NATO, Japan, or South Korea - is a core Trump and MAGA tenet.

Just 'A Little Disturbance'

Today, Trump sees tariffs as a cure-all for America's economic woes. Short-term pain - what Trump calls “a little disturbance” - is a price he seems willing to pay to fulfill this vision. He argues that the tariffs will restore American manufacturing and generate “trillions and trillions of dollars” in government revenue, which could be used to lower taxes and pay down the national debt. According to his team's projections, the announced tariffs would generate $6 trillion over a decade. Just the flat 10% tariff on all imports, they say, would alone create 2.8 million jobs by reshoring industries.

And there are signs, Trump's team claims, that his “America First” trade policy is already yielding results - namely increased domestic investment and early signs of reshoring. According to the White House press site, some two dozen post-inauguration investment decisions have been made by U.S. and global giants across sectors including IT, AI, automobiles, and pharmaceuticals. These commitments total well over $1 trillion, including:

• Apple: $500 billion; 20,000 jobs
• AI Infrastructure: $500 billion in private investment
• Nvidia: Hundreds of billions of dollars in U.S. investment
• TSMC: $100 billion investment in a new facility by the Taiwanese semiconductor giant

As Trump boasted to a group of blue-collar workers: “Empty, dead sites, factories that are falling down…will be knocked down, and they're going to have brand new factories built in their place. We're going to be an entirely different country.” He added the day after announcing the tariffs: “Every country's called us. That's the beauty of what we do. We're in the driver's seat.”

The Trump team hopes that the disruptive effects of tariffs, deportations, and spending cuts will fade, making way for the expected benefits: reshoring, cheaper energy, and lower taxes. “Let Donald Trump run the global economy,” Commerce Secretary Howard Lutnick told CNN. “He knows what he's doing. He's been talking about it for 35 years. You've got to trust Donald Trump in the White House.”

Against Post-WW2 Tenets 

But can you trust “The Trump Tariff Magic Potion” when it appears to ignore Economics 101? Can you, when it disregards the structural realities of both the US and global economies? Can you, when nearly a century of reduced tariffs - especially in the post-World War II era under GATT and later the WTO - has proven that a liberal trade regime is essential for embedding competitiveness and innovation, the twin engines of productivity, which is the surest path to long-term growth?

Economists argue that the US trade deficit is structural and inevitable: it stems from a low national savings rate paired with high consumption and investment. Foreign goods and capital are the economy's lifeblood. Yes, the US imports more goods than it exports - but it exports far more services than it imports. More than 40% of US imports are components for domestic production. Tariffs on them simply raise production costs.

Globalisation has cost the US over five million manufacturing jobs, but thanks to its comparative advantage in tech-driven services - think Apple and Nvidia - the US growth rate has consistently outperformed other Western economies. The US still generates about 25% of global GDP. Many American companies have invested hundreds of billions in global supply chains that cannot easily be unwound. Roughly 41% of S&P 500 revenues come from overseas. And US manufacturing, focused as it is on high-tech products, lacks domestic sources for many basic materials and components.

The shift in the US economy from manufacturing to services tells a clear story. Over the past 30 years, manufacturing's share of GDP has fallen from 16% to 10%, with employment dropping from nearly 18 million to 10 million in a 168 million-strong workforce. In contrast, the services sector has grown dramatically: the number of workers has risen from 84 million to 133 million, jobs now account for 80% of employment (up from 70%), and the sector's GDP share has climbed from 70% to 75%. Over the last decade, US service exports have grown at a compound annual growth rate of nearly 4%, amounting to a total increase of almost 50%.

'Flat-Out Nonsense'

The Wall Street Journal editorialised the day after the tariff announcement: “Mr. Trump is making a deliberate decision to transfer wealth from consumers to businesses and workers protected from competition behind high tariff walls. Over time, this will mean the gradual erosion of US competitiveness. Tariffs that blunt competition invite monopoly profits while reducing the need to innovate.”

The Economist was even more blunt: “On economics, Mr Trump's assertions are flat-out nonsense. The president says tariffs are needed to close America's trade deficit, which he sees as a transfer of wealth to foreigners. Yet as any of the president's economists could have told him, this long-running reality has not stopped its economy from outpacing the rest of the G7 for over three decades. Insisting on balanced trade with every trading partner individually is bonkers - like suggesting that Texas would be richer if it insisted on balanced trade with each of the other 49 states, or asking a company to ensure that each of its suppliers is also a customer.”

Until recently, the weighted average tariff rate on US imports stood at just 2%. Under Trump's new tariff regime - dubbed the 'Trump Potion' - that figure is projected to surge to somewhere between 24% and 27%. If that seems implausibly high and suggests this might be merely an opening gambit in broader negotiations, there's evidence from within the Trump camp that it may indeed be just that.

As The New Yorker reported: “In a paper published immediately after last year's election, Stephen Miran - a Harvard-trained economist who was then working at a hedge fund and is now chair of the Council of Economic Advisers - tied Trump's tariff proposals to his America First foreign policy. He suggested they could be part of a grand strategy to reduce the US trade deficit while pressuring allies to share the burden of America's defense commitments and national debt.”

Miran argued that the tariffs would primarily serve as bargaining chips, giving Trump leverage to push for a devaluation of the dollar - making US exports more competitive - and for a refinancing of the national debt. His proposed mechanism: foreign holders of U.S. Treasuries (of which there are many) would exchange them for a new kind of security - century-long bonds carrying extremely low interest rates - thereby making it cheaper for the US government to borrow.

Why would other countries accept such a lopsided deal? Miran didn't fully explain, but the implication was clear: they wouldn't have much choice if they wanted continued access to the US market and its military protection. Miran even dubbed this potential restructuring of the global trade system the "Mar-a-Lago Accord".

Is Trump Overestimating US Influence?

But this strategy appears to rest on an overestimation of US influence in global trade. While America dominates global finance and military spending, its share of global imports is around 15%. As the US weakens the rule-based WTO system, a complex and expanding web of bilateral and regional trade agreements is reshaping global commerce. These deals - many centered around the EU, Indo-Pacific, and Gulf regions - are increasingly weighted toward the world's fastest-growing economies.

Today, the EU, the 12 members of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), South Korea, and small but open economies like Norway together account for 34% of global import demand.

Warning Lights

Meanwhile, warning lights are flashing for Trump across key political and economic indicators. His approval rating on Real Clear Politics has dropped by three points since January, while his disapproval rating has jumped by five.

Financial markets have reacted sharply. The S&P 500 is down nearly 10% since its February peak. On the day the tariffs were announced, the market shed $3.1 trillion, a 4.8% drop. Inflation, which had been trending down to 2%, is expected to rebound to 4%. Moody's has warned that a recession is inevitable if the proposed trade policies are fully implemented.

Even the political ground is shifting. On the day the tariffs were announced, a high-profile Republican nominee lost a Wisconsin Supreme Court race to a liberal challenger - despite Elon Musk personally investing $25 million and his own clout in the contest. While Republican turnout rose, even more Democrats showed up to vote. That same day, four GOP Senators broke ranks, joining Democrats to pass a resolution aimed at overturning Trump's 25% tariff on Canadian imports.

Trump faces a major short-term political challenge: the tariffs are likely to hurt two key constituencies of the GOP - business leaders and working-class MAGA voters. But perhaps Trump understands these groups better than we think. Business leaders abhor uncertainty, yes, but they may tolerate it if rewarded with deregulation and tax cuts.

And the MAGA faithful? A revealing vignette from The New York Times captured the sentiment at the Rose Garden tariff announcement. After Trump returned to the White House, a few men in hard hats and reflective vests lingered among cabinet secretaries and lawmakers, stunned they had been invited at all. “It's just so great,” said Danny Hess, a 62-year-old coal miner from Russell County, Virginia. But what if critics are right, and the tariffs plunge the country into recession? “We'll just have to wait and see,” Hess shrugged. Asked whether he was worried, he replied, “Not really—because things have been so disastrous for so long anyway.”

(Ajay Kumar is a senior journalist. He is former Managing Editor, Business Standard, and former Executive Editor, The Economic Times.)

Disclaimer: These are the personal opinions of the author

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