Matthew Rose, an Opinion editorial director, hosted an online conversation with four economists about President Trump’s on-again, off-again tariff plan and the whirlwind it unleashed.
Matthew Rose: Well, that was a lot. Seven days after they were announced and less than one day after they went into effect, the Trump administration put on hold the broadest of its tariffs. I don’t know about you all, but my head is spinning. The most dramatic effort to remake the post-World War II trade system was underway — until it wasn’t.
Maybe it’s best to start with first principles. We still have a 10 percent tariff rate on all countries, a gargantuan trade standoff with China and the prospect that the other tariffs snap back in July. Oren, you wrote recently in a guest essay that the idea behind the policy was sound, even if the implementation was not. Why do you think these tariffs make sense?
Oren Cass: I would divide the regime into three elements. The 10 percent global tariff that remains is something I support because the United States has been running large trade deficits that have weakened domestic manufacturing. Second, when it comes to China, I don’t think it’s possible to have a constructive economic relationship with an authoritarian communist state, and so we need to decouple our economies. I wouldn’t do that overnight, but I think high and permanent tariffs are appropriate. Finally, when it comes to the paused reciprocal tariffs, I would classify them as “negotiating tariffs,” as the president confirmed on Wednesday. A good example of what he likely has in mind is what Reagan did with the Japanese in the early 1980s, forcing them to shift Toyota and Honda production to America. These tariffs would ideally remain as credible threats, rather than blanket and permanent.
Rose: Jason, in your own guest essay on tariffs, you described the reasoning behind reciprocal tariffs as “obviously absurd.” Where do you part ways with Oren?
Jason Furman: If you combine all the remaining tariffs, you’re still talking about an overall rate in the 20s, well above anything seen in the United States for over a century, or in any other major country in the world today. This has been unleashed by a misunderstanding of basic economics, which starts with imports. They’re good, not bad. They’re good for consumers who buy products we barely produce, like bananas. They’re good for industries that rely on imported parts to make their products. Any attempt to curb imports also reduces exports. And exports are also good because they let Americans work in higher-paid, more productive jobs.
One place I agree with Oren is the implementation has been a disaster. But let’s not make tariffs like communism, something people argued was good in theory but bad in practice. If you have a policy with an extremely narrow path to perfect implementation that goes awry, maybe blame the idea, not the implementer.
Lawrence H. Summers: It’s just wrong to think that trade barriers reduce trade deficits. Think of India before its recent reforms, or Argentina at many moments as examples of countries with high tariffs and, frequently, large trade deficits. Also, Oren and the president forget what Jason mentioned, that many imports contribute to our own exports, and so we hurt our competitiveness. Roughly 55 times more workers are employed in industries that use steel and aluminum to make other products, compared with those that produce it. Lastly, it’s essential to remember you can’t have much-needed foreign capital flow into our country without having a trade deficit.
Rebecca Patterson: I keep going back to President Trump’s goal of increasing jobs in American manufacturing. There are structural elements missing if he wants to succeed. American manufacturing businesses consistently point to a lack of qualified or available workers as a problem holding them back. We need to think about finding more manufacturing labor and training them for the jobs of tomorrow. We don’t have enough interested workers now. How will we have enough if and when jobs return to the United States? That needs to be part of the conversation.
Rose: One observation made about the president is his ability to pinpoint problems (leaving aside the quality of his solutions). In this case, it would be 40 years of trade policy that has disproportionately benefited Chinese workers over American ones, hollowed out industrial regions and contributed to gaping wealth inequalities. Does he have a point, especially now that China appears to be the primary target?
Cass: Yes, I think it’s an incredibly important point, and one that went overlooked by economists for too long. My starting point in these debates is to emphasize that making things matters, and so our trade policy has to be one that attempts to expand trade as much as possible while ensuring overall balance, so that we actually trade things we make here for things made in other places. That is the classical economic case for trade benefiting both sides, and a constraint we abandoned, especially in the case of China, when we adopted the approach that trade was just about maximizing consumption and that moving production abroad to get more cheap stuff was a good in and of itself.
Summers: The problem is that protectionism creates, for example, textile jobs at the expense of high-tech manufacturing jobs. The problem is also that this mindless flailing creates recessions, which hurt almost all of Oren’s objectives. If the Trump administration were even half coherent about Oren’s objectives, it would be cheering for the CHIPS and Science Act, not opposing it. Yes, we should be doing all kinds of things to promote creation of good jobs in places that are struggling. Declaring economic war on the world and setting off a once-every-two-decade-level financial turmoil is not one of them.
Cass: Obviously, we agree on that. I just think it’s very important to speak accurately about what free trade has and has not accomplished. The pitch was absolutely: China will compete for some low-wage jobs with Americans. And its market will provide jobs for higher-wage, more skilled people. And that’s a bargain for us, to quote the economist Robert Solow. I have not seen much of a reckoning among economists that this simply did not happen as promised, or to the extent it did, those “more skilled people” were very different people than the ones left behind.
Patterson: I think we have to acknowledge the timing and political challenges of this policy approach. For most businesses with global supply chains, building new plants in America is a very expensive proposition and a multiyear process. It’s not taken lightly and won’t provide tangible employment results quickly. If companies think that a new administration could reverse these tariffs in a few years, reshoring may not be worth the cost. I worry we won’t see as much return on this policy investment as some hope for the workers in question.
Furman: There is also a danger in overstating the problems in the economy, which was in the premise of Matthew’s question. First, the issues with manufacturing are not new — Billy Joel sang “We’re living here in Allentown and they’re closing all the factories down” in 1982, long before NAFTA or the rise of China. The main issue then, as it is now, is that technology was rapidly improving, which meant we could produce more with fewer workers. Also, even allowing for the hit from inflation, incomes have been rising reasonably robustly in the United States for the past decade. In fact, wage inequality has been narrowing as the lowest-wage workers get bigger raises than their high-wage counterparts. So we should not think we were living in a hellscape that needed radical change.
There is something to small-c conservatism, because if you make big, radical changes, you might get lucky and improve things, but you can also break something, which is what we’re seeing now.
Rose: So let’s spin this forward a little. In 90 days, let’s assume the more dramatic tariffs swing back into play. Where does that leave the United States in a year? In four years?
Summers: Unemployment will be well above 6 percent. Business investment will have collapsed. There will be serious breakdowns somewhere in financial markets, and markets will fall at least 25 percent from where they are today. Sledgehammers and delicate machinery are a very bad combination. We will get the trade deficit down with the same basic economic force that Venezuela uses, by making ourselves very unattractive as a place to put capital. That will undo much of the relative progress of the economy over the past generation.
Patterson: If we have tariffs anywhere like these at the end of President Trump’s term, one thing I would be confident about is that our global alliances will be weaker, which will hurt us over time in material ways. Foreign direct investment creates millions of American jobs. And our economic statecraft, such as sanctions on Russia, is more effective if we work with overseas partners. We risk losing global trust.
Furman: I agree, Rebecca. Four years from now we’ll have a new president. But no matter who it is or what that person does, the world will not have forgotten how dramatically American international economic policies can change. In the meantime, China is aggressively marketing itself as the stable, predictable, reliable international partner. We will be remaking the global economy, but not to our liking.
Rose: What about now? Are there costs from this rapid reversal of what was supposed to be a permanent change to the global order?
Cass: I think it’s a mistake to interpret the suspension of reciprocal tariffs as a reversal of something that was supposed to be permanent. My hope was they would be used as a backstop for negotiations rather than kicking in from the start, because I do believe in the broader project and want it to work. This is exactly what the president did. It’s OK to acknowledge when he takes a positive step.
Patterson: I’m not so sure. Near term, the continuing lack of clarity around the ultimate tariff rates could keep investors skittish and businesses cautious. Longer term, other countries are getting the message they need to rethink their reliance on the United States. I don’t mean abandoning America — after all, it’s the world’s biggest consumer market. But we could see other alliances forming that chip away at its geoeconomic leverage.
Furman: Reversal is not the word I would use. It was a partial reversal on about 70 countries, but a dramatic escalation on China. Of course, that China tariff could well fall in the future — we’ll see. More important, as Rebecca mentioned, the biggest economic problem now is uncertainty. There is the possibility that tariffs rise again in 90 days — or really, whenever Mr. Trump posts on social media. It goes both ways, too. Jaguar suspended exports to the United States because it is betting that tariffs might actually fall in the future. It is hard to contain that.
Summers: I agree with Jason. By any standard except “Liberation Day,” the tariffs remaining are massive. The core idea of tariffs as a device to extort concessions remains. Even if none of the suspended tariffs are ever put in place, we are still above Smoot-Hawley levels, and that will meaningfully increase inflation and unemployment. What is especially troubling about this episode is that the boundaries of possible trade policy have been widened to include degrees of protectionism and policy variability that would have been unthinkable even during the first Trump administration.
Rose: Let’s talk about the market gyrations. In a crisis, investors typically would rush to put their money into Treasuries or the dollar, because they’re considered safe. And before the tariffs were lifted, the opposite was happening. The dollar was getting weaker when it should be getting stronger, and interest rates on longer-term bonds were rising sharply when they should have been falling. Rebecca, you’ve written about the dangers to America’s economic exceptionalism, especially its low borrowing costs. How worried should we be today?
Patterson: The past few days, before the pause, felt like a dash for cash as much as anything. Investors were selling what they could to have liquidity. What concerns me more now is the increasing potential for U.S. Treasury yields to settle at a higher level, because of our fiscal picture even more than the trade war. Higher Treasury yields create higher borrowing costs, which are felt across financial markets and the economy. My mortgage and auto loan rates go up. It costs more to borrow to grow my business.
Summers: I hope, Rebecca, you are right about what happened. Almost all the moments of dramatic stock price declines and Treasury market drama have had pretty disastrous sequels: the 1987 crash, the 2008 financial crisis, the pandemic. At least they were not caused by the U.S. government. I’d guess somehow things will get back to OK. But I think there is a real chance that Mr. Trump’s trade policies will be to the dollar what the 1956 Suez crisis was to the British pound — a dramatic break that ultimately portends higher borrowing costs, less investment and more stagnation. Just on Wednesday the dollar fell dramatically.
Rose: At the same time, you hear from parts of the administration that driving down the dollar’s value is in fact a goal, because it makes American exports more competitive.
Cass: That’s because the dollar’s status as an overvalued reserve currency has been a mixed blessing at best, and at this point has become more of a burden. That said, disruption has costs, especially with a transformation of this magnitude. It’s important to act in a way that minimizes the costs where possible (clear communication, gradual phase-ins) and maximizes the potential benefits (certainty on long-term policy environment, trading relationships).
Patterson: Oren, I agree with you that the dollar today is overvalued. But when I look at some of the proposals from Washington to make the currency more competitive, they have some pretty material potential costs. Further, the dollar has been strong because the United States has been exceptional — our growth has been much faster than most other countries, our companies more attractive. Foreigners buying our stocks have created household wealth and pushed down borrowing costs for Americans. Of course, not everyone has benefited from those wealth gains equally, and that is something the government can help address, but overall, it’s still a good thing.
Furman: I agree with Oren that the dollar’s strong value is mixed — good for American consumers, but does result in fewer exports. On balance, I would take that deal — plus the lower borrowing costs we get from what was (at least until recently) our exorbitant privilege. Anyone who wants to change it needs to level with people that this adjustment would lower a living standard for the majority of Americans that is currently being enabled by the stronger dollar.
Summers: It may be that the dollar is too strong, but actively trying to make it go down is very dangerous in an economy already having confidence issues. Policy can’t control the dollar except in the very limited sense of being able to crash it by causing a confidence crisis, which no one sane would suggest. The dollar-down advocates would do well to study the antecedents of the 1987 crash, where sparring of this kind between the United States and West Germany in the week before Oct. 19 is often regarded as an important causal factor.
Rose: Is one possible explanation — and it’s early for sure — that investors simply have less faith in the long-term viability of the U.S. economy or the ability of the political system to steward it? And that the back and forth over tariffs underscores their concerns?
Furman: Yes. There has been an across-the-board re-evaluation of President Trump. If he didn’t care about markets on this, then he might not on other issues, such as the independence of the Federal Reserve. Dropping some tariffs has helped a little but won’t fully solve the problem. In 2022, Prime Minister Liz Truss of Britain caused a market meltdown with her minibudget proposal. Even after she retracted it, markets were afraid of what she might do next. It was only her resignation that calmed things down. That won’t (and shouldn’t) happen here, but Congress or the courts could take the tariff toy away from the president, and that might have a similar effect in restoring at least some confidence.
Summers: We have an extremely complex machine that is not functioning perfectly, as Oren reminds us. But once we have taken a sledgehammer to the machine, there will be long-term worry about its functioning. Does anyone doubt that we are seeing an unprecedented level of raw, blustering incompetence that is having catastrophic effects?
Patterson: I think the reaction by the markets, business community and even Republican members of Congress in the days before the pause underscores that process matters. No one doubts that the government can and should do better for American companies and people. But how best to move forward? A process that decreases household wealth and corporate valuations and puts into question our alliances can’t possibly be optimal. And yes, it could chip away at the trust in U.S. assets, including the dollar and Treasury bonds.
Rose: I know it’s unfair to ask you to speculate on how the Trump White House might act, but the impact is so stunning, it’s worth discussing. What happens to the reciprocal tariffs in 90 days? And if they come back, what’s the likely impact?
Cass: A benefit of the 90-day suspension is that next steps are likely to be staggered. I would expect the administration to reach several deals with major partners. They could also begin signaling different expectations for smaller countries with immaterial imbalances, such as help with isolating China. There’s a good chance we see a couple of cases of brinkmanship, or perhaps even a couple of “failures” that allow the president to show his willingness to impose tariffs. We’d be able to do all that in a way that is not nearly as disruptive or costly as the Liberation Day blitz.
Furman: The bigger question is what happens to China tariffs. They represent a massive and rapid change to the United States’ third most important trade relationship. China is retaliating, and it is not clear what will calm this process down. As for the others, it is possible we get some good deals. More likely we get face-saving minor compromises. No matter how this shakes out, I would be surprised if we end up with an average tariff rate much below 12 percent. The two most economically successful countries with populations over one million with tariffs at that rate are Iran and Venezuela.
Patterson: It’s been fascinating in recent days to see how violently the markets are swinging — in both directions — on tariff news and speculation. I also assume some deals will be reached and perhaps some tariffs will be lowered. Investors may initially express relief. But as Jason notes, we’d still potentially be in a new world with higher base-line tariffs.
Summers: I hope I am wrong, but I am pretty pessimistic. In the best case, we are still imposing a major supply shock on the economy. Given the administration’s track record, it would be amazing if the 90 days go by without further policy announcements that add to uncertainty. The China situation may spiral out of control and lead China to take steps outside the trade realm, such as selling U.S. financial securities in destabilizing ways or taking measures directed at Taiwan and its export of semiconductors.
Furman: It is notable that leading macroeconomic models, for example, the Budget Lab at Yale, predict that tariffs of this magnitude would lower growth by only about one percentage point this year. Taking everything into account, Goldman Sachs and other forecasters now expect about 0.5 percent G.D.P. growth this year, which is not a recession. But I suspect that tells us more about the problems with macro models than it does about the lack of severe problems in the world.
Summers: The models never came close on the 2008 crisis, and also predict far less impact on companies than the stock and bond markets are now discounting. The Biden administration relied on exactly the models you cite to dismiss inflation fears.
Cass: I’m pleased to be in a discussion of economists dismissing the models when they don’t produce the answer they expect.
Rose: Talking of economists needing to predict the future! What’s the Federal Reserve supposed to do now? Typically, the central bank would be a moderating influence if inflation takes off again or growth slows or something breaks in financial markets. But, as they say, is this time different?
Furman: Normally, you want the central bank to move quickly and decisively to prevent bad things from happening. But that’s impossible now. The higher inflation we’re going to get calls for a rate hike, the higher unemployment rate we’re going to get calls for a rate cut, and myriad other factors could bounce any which way. So the Fed not only is powerless to stop this, it doesn’t even know which direction it should go, and will have to delay deciding — just like businesses and consumers are doing.
Patterson: Markets were assuming four quarter-point rate cuts before the end of this year before the pause. Even after, it’s still three. There is a risk they will be disappointed as the Fed waits to have more clarity on what the growth and inflation trends are.
Summers: The Fed’s problem goes back to the fact that this is an iatrogenic financial crisis, our first one, even with the pause. Iatrogenic illness is when you get a serious infection from being in the hospital or from a doctor’s treatments. We are now in standard emerging-market territory where a central bank is hamstrung by pressures to both raise and lower rates. There is no good answer. That is why the International Monetary Fund comes into emerging markets, and came into Britain in 1976. Nothing like that is imaginable for the United States.
Cass: A somewhat novel challenge is that any higher prices passed on to consumers through tariffs is not inflation in the sense a macroeconomist would worry about, because they are only imposed at the border. If you proposed some other tax, say, to reduce the budget deficit, economists would not call that inflationary. But because they don’t like tariffs, it’s suddenly fashionable to throw around.
Rose: And how about the Fed?
Cass: I sympathize with the challenge for the Fed both in dealing with a new economic dynamic and in having so much uncertainty about both the long-run trade policy and the fiscal policy. Are the tariffs going to reduce the budget deficit, thus reducing government borrowing? Are they going to get plowed into bigger tax cuts? Are they going to get spent on industrial policy and work force investment? I’d think those are quite different trajectories and raise different concerns.
Furman: I agree with Oren that in normal times the Fed could look through this supply shock because the inflation would be transitory. But context matters, and even before these tariffs started, core inflation was running at about 2.8 percent and inflation expectations were elevated. The risks of inflation getting more embedded is not something the Fed will or can ignore.
Rose: Tariffs are front and center right now. But lurching around the corner is the tax bill, which is set to renew the 2017 individual tax cuts, potentially permanently. For now, the Senate version would add roughly $5.7 trillion to the debt over the next 10 years, while the House plan would cost $2.8 trillion. Various smart people have been worrying about the size of the debt on and off for years. We spend more on interest payments than the military. Is now the time to really worry?
Furman: The debt is not an urgent crisis, but we need to start to push it down as a share of the economy, not up, like the House and Senate are both doing. In fact, that congressional debate is closely related to the trade issues we’re discussing. When a country runs a larger budget deficit, that leads to a larger trade deficit. So President Trump wants trade policies to bring trade deficits down while pushing budget policies that will go in the opposite direction.
Cass: Jason is making an important point here about the relationship between the budget and trade deficits. I think the United States has very fair complaints about policies pursued by other countries that have driven large trade deficits, but we bear responsibility as well for running enormous fiscal deficits that we look to the world to fund.
Patterson: I worry that tariff revenue is potentially being counted on as a secure source of funds for tax cuts. How can it be secure if there are deals being made and tariff rates changing, not to mention the revenue being subject to consumption, which is dynamic? I’ve already voiced my worries about structurally higher borrowing costs. There could be another market shoe to drop if the deficit outlook gets really dark and investors question the reliability of how we got the math to work.
Rose: And then there’s the money we need to spend to bail out the most politically sensitive tariff victims.
Patterson: Right. In Mr. Trump’s first term, retaliatory tariffs on American farm goods led the government to provide large subsidies to farmers, which eroded the tariff revenue. It also resulted in buyers, mainly China, moving their business to places such as Brazil. Even when tariffs were rolled back, that didn’t change. Can we afford the same subsidies today? How will we protect market share for American businesses? I’d love to see the administration thinking more about this.
Rose: With the time we have left, here’s a rapid-fire round. First, what are the chances of a recession in the foreseeable future?
Summers: Given that policy has adjusted, around two-thirds.
Patterson: Assuming most tariffs eventually stay, it would be my base case.
Cass: I don’t do percentage chances. I think those types of forecasts are among economists’ worst habits.
Furman: If current tariff rates continue, then 45 percent.
Rose: If this kind of policy turmoil continues, what’s going to be the first big thing to break: a company, a bank, a merger, the G.O.P., something else?
Summers: Who knows? If you drive drunk at 90 miles per hour, you will have an accident. It’s hard to say what exactly it will be.
Patterson: I am worried about the housing market with higher mortgage rates and potential job losses. And I agree with Larry — we’ll probably be surprised.
Cass: If I can have two, I think we could see some failures of companies dependent on Chinese inputs, and I worry geopolitically about the effect of what nearly amounts to a China embargo on their calculus on Taiwan.
Furman: I hope it is the president’s authority to unilaterally set tariffs, broken either by the courts or Congress.
Rose: What are you worried you’re getting wrong about the economy?
Summers: There likely is some consequence of this lurching around that has not yet become salient. When you don’t fully understand systems, it’s best not to approach them with a sledgehammer, and we don’t fully understand how the economy operates.
Patterson: Will the tariffs that remain fuel inflation, or will the hit to consumption, oil prices and wages be enough to cap inflation and let the Fed lower rates?
Cass: I worry about the time frame. I strongly believe reindustrialization is possible and necessary, but it is going to be hard, and if it takes too long the balance of costs and benefits will begin to feel wrong.
Furman: Inflation and unemployment will both go up, but I’m worried about getting the ratio of these two wrong. It’s critical right now to know which is the bigger problem.
Oren Cass is the chief economist at American Compass, a conservative economic think tank, and writes the newsletter Understanding America. Jason Furman, a contributing Opinion writer, is a professor of the practice of economic policy at Harvard University and was chairman of the White House Council of Economic Advisers from 2013 to 2017. Rebecca Patterson is an economist and senior fellow at the Council on Foreign Relations who has held senior roles at JPMorgan Chase and Bridgewater Associates. Lawrence H. Summers, a contributing Opinion writer, is a former president of Harvard University, where he is currently a professor. He was Treasury secretary under President Bill Clinton.
Source photographs by Comstock and Andrew Harnik via Getty Images.
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