The president and reality are drifting apart
In his speech to Congress on March 4th President Donald Trump painted a fantastical picture. The American Dream, he declared, was surging bigger and better than ever before. His tariffs would preserve jobs, make America richer still, and protect its very soul. Unfortunately, in the real world things look different. Investors, consumers and companies show the first signs of souring on the Trumpian vision. With his aggressive and erratic protectionism, Mr Trump is playing with fire.
By imposing 25% tariffs on goods from Canada and Mexico, also on March 4th, Mr Trump is setting light to one of the world’s most integrated supply chains. Although he belatedly delayed duties on cars by one month, plenty of other industries will suffer. He has also raised tariffs on China and has threatened the European Union, Japan and South Korea. Some of these duties may also be deferred; others may never materialise. Yet in economics as in foreign relations, it is becoming clear that policy is being set on the president’s whim. That will cause lasting damage at home and abroad.
When Mr Trump won the election in November, investors and bosses cheered him on. The S&P 500 rose by nearly 4% in the week after the vote in anticipation of the new president lighting a bonfire of red tape and bringing about generous tax cuts. His protectionist and anti-immigration rhetoric, investors hoped, would come to nothing. A stockmarket correction or a return of inflation would surely curb his worst instincts.
Alas, those hopes are going up in smoke. Elon Musk’s doge is causing chaos and grabbing headlines, but with little sign yet of a deregulatory bonanza. (Mr Trump’s order banning the federal purchase of paper straws will do little for America Inc’s bottom line.) The budget blueprint passed in Congress in February keeps the tax cuts from 2017, in Mr Trump’s first term, but does not expand them—though it does add trillions to the national debt. In the meantime, Mr Trump’s tariff promises would return the average effective duty to levels not seen since the 1940s, when trade volumes were much smaller.
No wonder that, despite Mr Trump’s talk of a roaring comeback, the markets are flashing red. The S&P 500 has given up nearly all its gains since the election. Although economic growth remains fair, in recent weeks the yield on ten-year Treasuries has fallen, measures of consumer sentiment have plunged and small businesses’ confidence has slipped, hinting at a slowdown to come. Meanwhile, inflation expectations are rising, perhaps because Mr Trump is talking about all those wonderful new tariffs.
Underlying the alarm is a dawning realisation that Mr Trump is less bound by constraints than investors had expected. Although price rises blew up Kamala Harris’s presidential campaign, the prospect of inflation is not deterring Mr Trump, who argues that the economic harm from tariffs is worth it. During his first term he gloried in the long stockmarket boom; this time markets have not featured among his many social-media posts. His postponement of the car tariffs is too short-lived for the industry to adapt. Mr Trump is sticking to his belief that tariffs are good for the economy.
Just as important, the people around the president also appear to lack influence. Scott Bessent, the treasury secretary, and Howard Lutnick, the commerce secretary, are both financiers, but if they are trying to rein in Mr Trump, they are not doing very well. Instead of being wise counsellors, they come across as stooges, explaining why tariffs are essential and Wall Street doesn’t matter. Few businesspeople want to speak truth to power for fear of drawing Mr Trump’s ire. And so the president and reality seem to be drifting ever further apart.
That threatens America’s trading partners. For some reason, Mr Trump reserves special hostility for Canada and the EU. Because his approach lacks any coherent logic, there is no knowing how to avert his threats. Worse is to come if he carries through his promise to Congress to impose reciprocal tariffs, which match the duties that American exports face abroad. That would create 2.3m individual levies, requiring constant adjustment and negotiation, a bureaucratic nightmare that America unilaterally abandoned in the 1920s. Reciprocal tariffs would strike a fatal blow to the global trading system, under which every country has a universal rate for every good that is not within a free-trade agreement.
As if that were not bad enough, tariffs will harm America’s economy, too. The president says he wants to show farmers that he loves them. But protecting America’s 1.9m farms from competition will inflate the grocery bills of its nearly 300m consumers; and compensating them for retaliatory tariffs will add to the deficit. Whatever Mr Trump believes, economic growth will suffer because tariffs will increase input costs. If businesses cannot pass them on to consumers, their margins will wither; if they can, households will experience what amounts to a tax rise.
Mr Trump’s policies set up an almighty clash with the Federal Reserve, which will be torn between keeping rates high to curb inflation and cutting them to boost growth. One of America’s most important remaining independent institutions, the Fed would have to face down an angry president used to getting his way. When the administration staged a power grab over the Fed’s regulatory responsibilities it carefully set monetary policy apart. How long would that distinction last?
MAGAlomania
The world economy is at a dangerous moment. Having defied reality (and the constitution) after he lost the election in 2020, only to be triumphantly re-elected in 2024, Mr Trump has no patience for being told that he is wrong. The fact that his belief in protectionism is fundamentally flawed may not sink in for some time, if it ever does. As the message that Mr Trump is harming the economy grows louder, he could lash out at the messengers, including his advisers, the Fed or the media. The president is likely to inhabit his protectionist fantasy for some time. The real world will pay the price.
