Laughter over tariffs set by US President Donald Trump on imports from various countries quickly turned to chills as stock markets plummeted. Then, once plans were paused after tanking financial markets, we all laughed again.
Yet somehow, in the glee over Trump’s apparent defeat, we failed to notice that we’ve accepted as a baseline for negotiations tariffs on our US exports that are roughly five times higher than those applied to the European Union and UK until April 2025.
Financial markets and fairness
The administration’s stance on international trade has long been driven by the belief that the US trade deficit results from unfair trade relationships. In order to curb a significant weakening of the US position in its critical rivalry with China, this leads to three core approaches to US import tariffs.
First, for Trump’s team, global trade isn’t governed by principles of fair, equal competition. The only way to measure this unfair competition is the outcome itself: the US trade deficit. The formula for calculating new ‘reciprocal’ tariffs doesn’t focus on tariffs for specific goods but on the overall trade balance between the US and its partners.
Second, US import tariffs have two main goals: weakening China in global competition and generating federal revenue to enable the elimination or significant reduction of corporate and individual income taxes, even capital gains taxes. Tariffs, therefore, cannot remain at current levels – they must increase.
Third, they were prepared for – and expected – radical changes to the US tax system and new tariffs to cause disruption and potential financial market shocks before delivering a manufacturing revival. Only the threat of collapsing government bond prices, signalling broader financial market trouble, might have prompted some reflection.
It’s also worth noting that Trump’s team often speaks of other measures beyond tariffs, such as taxes on incoming capital to reduce its attractiveness to the US. Less frequently, but still notably, they mention the possibility of restructuring US debt, likely targeting debt held by foreign owners.
In outlining the Trumpian worldview, it’s only fair to add a few factual notes. The loss of manufacturing jobs in the US stopped long ago. US manufacturing actually added jobs compared with the situation more than 10 years ago. Average wages in manufacturing have grown steadily at over 3% annually, with hourly wages now exceeding $35. The median real income has risen by about 23% since its 2012 low. That’s roughly 1% per year, not spectacular but hardly a collapse into poverty. As for growing inequality, data suggest it has largely stabilised for over a decade.
Europe’s role in America’s worldview
In discussions about Europe’s part to play for the US, their perspective and goals can’t be ignored. This defines the potential compromise the EU could achieve – ideally to our benefit – on tariffs and industrial policy.
Any compromise must include easing our non-tariff barriers. Changes to the General Data Protection Regulation framework, under discussion in the European Parliament in March 2025 – with talk of possibly abandoning it – could be a promising start.
Another demand from Trump’s negotiators will surely be limiting EU trade with China. It’s hard to imagine the US tolerating the EU becoming a ‘backdoor’ for Chinese subcomponents entering the US market via European products.
Similarly, zero tariffs for European goods seem highly unrealistic. Tariffs are meant to generate revenue and the EU – ignoring US objections to value-added tax – is too significant an importer to the US market to be exempt from ‘contributing to the federal coffers’. Nor does the UK’s position seem dramatically different.
This doesn’t mean the EU must agree or lacks alternatives. Closer co-operation with China is one option but, as a citizen of one of the EU’s ‘new economies’ I believe such co-operation today is likely to require compromise with China’s eastern ally, Russia. I struggle to see how that would benefit central and eastern Europe or the Balkans – former satellites of an ally that openly dreams of our return to that status.
Tariffs as compensation for tax cuts
This brings us to Trump’s other economic goals: a not-too-strong dollar and lower interest rates. Achieving higher tariffs, lower rates and a stable currency without raising prices is simply impossible in today’s US economy.
The US federal budget expects revenues of around $5.5tn this fiscal year. Individual income taxes account for roughly $2.6tn, corporate taxes $4.7bn and capital gains taxes about $3bn. US imports in 2024 totalled around $3.5tn, with goods making up $2.8tn and services the rest. Imports from China were under half a trillion. At best, they might offset reductions in capital gains or corporate taxes. Meanwhile, the federal deficit, projected at $1.9tn, is likely to exceed that based on first-half trends.
This matters because new tariffs will inevitably raise the price of goods US voters consume. The announced tariffs will hit not only cheap Chinese goods but even cheaper products from other Asian manufacturers – think $5 t-shirts and socks – that US workers can hardly produce.
We must remind ourselves that voter dissatisfaction with rising prices partly swung the 2024 election against Democrats. Meanwhile, in 1981, when another Republican president, Ronald Reagan, arrived in office, he was mocked by media as a ‘second-rate actor’ with no intelligence. Today, he is regarded as one of America’s most successful presidents. That doesn’t mean he didn’t face fierce criticism for radically changing US policy but there’s a key difference.
Reagan welcomed capital inflows and opened the economy to foreign competition, driven by optimistic faith in deregulated US businesses succeeding globally. Unlike Trump, he didn’t shy from military confrontations with the US’s main global rival at the time. The differences – perhaps shaped by today’s reality with China – are clear. The Trump administration’s economic philosophy carries far more pessimism about America’s global role than Reagan’s did.
The mid-term elections could split Congress between Democrats and Republicans, ending the Trump administration’s ability to push through major changes. This may delay the implementation of decisions, but the administration wants them not just drafted but approved.
Miroslav Singer is Director of Institutional Affairs and Chief Economist at Generali Group and a former Governor of the Czech National Bank.
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