Apologists for the US administration claim that it is seeking to ‘disrupt’ existing geopolitical and economic norms for the good. Yet the last 17 months have made a convincing case for the nostalgic advantages of status quo. Inverting Shakespeare’s Polonius, if the Trump administration’s measures be method, there is madness in it.
The administration wants lower inflation, but wars, tariffs, trade restrictions and sanctions are pushing up costs and increasing price pressures. It wants lower energy prices, but initiating hostilities in the Gulf, which reduced oil and gas supplies, was unhelpful for that aim. While war is good for US energy exporters, it overlooks that the US imports certain oil products. American prices have actually gone up at a higher rate than in other countries because they have greater flexibility to manage rises—for example, by reducing fuel taxes.
The Trump administration is talking up the prospects of increasing US oil production. But shale oil producers, the main source of new supply, have proved reluctant, wanting greater certainty about future prices. They require a price between $60 and $80 a barrel to drill profitably. Given Trump’s desire to get prices down to reverse sliding approval ratings and assist the Republicans in the upcoming mid-term elections, producers have chosen not to invest and use the windfall profits to reduce their debt or reward shareholders.
Trump expects the Gulf Cooperation Council members to invest in the US and finance his Peace Board. But the war and lower oil prices, if they hold, are damaging to their economies and reduce available surpluses. The US is also pursuing an intermittent trade war with Mexico and Canada, its largest sources of crude imports, ignoring that US refineries are set up to process these grades and would need alternative suppliers or costly retooling its operations.
The ‘build-in-America’ campaign seeks to replace cheaper foreign supply with more expensive domestic production across a range of items. Given the evolution of supply chains over decades, this is proving difficult.
De-industrialisation of the US means shortages of workers with the required skills. The attempt to onshore chip production has seen lengthy delays, cost overruns, exposed cultural and regulatory differences and ultimately required the use of foreign workers. The plants will not produce state-of-the-art chips or use the latest technology. Higher tariffs, President Trump’s favoured non-kinetic weapon, means more resources directed to producing lower-end essential goods, which could be imported at cheaper prices, reducing available capacity for more advanced manufacturing activity resulting in higher prices and disruptions of supply chains.
The administration’s actions on fiscal and monetary policy are revelatory. The proposed tax cuts are illusory, being a continuation of the expiring regime and will be offset by the rising inflation. Channelling the sentiment of Lewis Carroll’s Humpty Dumpty—“when I use a word… it means just what I choose it to mean”—the White House spokesperson stated tariffs are “a tax cut for the American people”, something new to economic theory.
The tariffs, even if they are implemented as they were deemed illegal, will not help correct America’s growing budget deficit. The revenue from tariffs cannot replace individual and corporate tax receipts of over $2 trillion. Given the base amount of imports of $3.4 trillion, it would require a punitive tariff rate that, if levied, would reduce imports by making them prohibitively expensive, limiting the revenue raised. During Trump 1.0, 92 percent of revenues from agricultural tariffs ended up funding subsidies to unhappy farmers.
Instead, the tax cuts, eliminating taxes on social security, tips and overtime as well as reinstating state and local tax deductions will reduce revenues by around $900 billion a year. Over the next decade, the deficit is projected to rise from $2 trillion to $3.1 trillion mainly due to rising payouts for social security and healthcare. In conjunction with the costs of the Iran “excursion”, this will feed into higher public debt and interest costs which, at 4.7 percent of GDP (the highest in the G20), is already the second largest budget expense after social security. The objective of lower interest rates is incompatible with the inflationary pressures of wars, tariffs and loose fiscal policy.
The administration simultaneously wants to devalue the dollar, keep it strong and protect its reserve currency status. It does not acknowledge that tariffs are driving a strong currency because of their effect on trade deficits. A weaker dollar will increase price pressures. In Trump 1.0, a higher dollar helped offset the price effects of tariffs. A lower dollar will discourage foreign investment into the US, which is promoted.
Immigration roll-backs, including deporting green-card holders on flimsy excuses, are reducing the inflow of skilled talent and cheap labour. It reduces tax revenues and demand while aggravating workforce shortages and wage pressures. Immigration would help address an ageing population. Where once five workers financially supported every retiree, it is now three, and will shortly be two.
Cutbacks in education and research damage workforce skills and productivity. Treatment of foreigners at borders is discouraging tourism. Given that the sector accounts for about 11 percent of jobs and contributed $2.4 trillion to the economy in 2024, any dampening of the numbers—the World Cup notwithstanding—will affect a range of economic activities.
The administration’s expansive exercise of executive power, aggressive interpretation of statutes, disdain for the law and wilful disregard of judicial authority may lead to a constitutional crisis. Erosion of legal rights and reneging on or re-trade and security agreements are making foreigners cautious about investing in or partnering with America.
US actions perversely encourage foreign self-sufficiency isolating America. European efforts to re-build defence capabilities with local suppliers will damage American armament exports. Over time, foreign competitors will improve capabilities and market share. Modest savings from cancelling foreign aid will be exceeded by large losses of leverage.
MAGA risks MEEGA—Make Everyone Else Great Again. A line often ascribed to Mark Twain asks whether “the world is being run by smart people who are putting us on, or by imbeciles who really mean it”. One could ask that about the Trump administration’s incoherent policy agenda.
Satyajit Das | Former banker and author of A Banquet of Consequences
(Views are personal)