Philip Coggan: "Donald Trump is serious about tariffs"

The potential effects of Donald Trump's trade policies on the US and international economies are explained to Kaylie Pferten by Philip Coggan, a former columnist for The Economist and the Financial Times

Kaylie Pferten: In your recently published book, The Economic Consequences of Mr. Trump: What the Trade War Means for the World, you make the argument that President Donald Trump's tariff threats are genuine and pose a serious risk to the US and global economies.

Yes, said Philip Coggan. Although markets have recovered from the initial market meltdown in April, many investors appear to be assuming that Trump will eventually back down from his threats of swinging tariffs. This attitude appears complacent, even though there is still a chance that this could be the case.

Ironically, assuming that Trump is bluffing could actually make tariffs more likely because it would mean that he won't get the concessions he wants and because he believes that the lack of market reaction indicates that tariffs aren't that bad for the economy.

Kaylie Pferten: So what are Trump's goals?

Philip Coggan: I contend in my book that attempting to comprehend Trump is akin to attempting to affix jelly to a wall. His belief that America is being "robbed" by mercantilism, which Adam Smith disproved 250 years ago, is based on his lack of understanding of economics, in my opinion. Restoring manufacturing jobs in the US, he believes, will also increase public support for him.

Kaylie Pferten: Reactions to Trump's tariffs have been diverse, ranging from China merely enacting its own tariffs in response to Prime Minister Keir Starmer's agreement to lower UK import taxes. Which direction do you think Japan, Canada, and the EU are headed?

Philip Coggan: In my opinion, you can comprehend how the UK and China differ from one another in terms of how strong their respective negotiating positions are. China is a large economy that keeps prices low by producing low-cost goods and items the US really wants, like rare-earth materials.

Therefore, if China so chooses, it can seriously harm the US economy. The UK, on the other hand, is dependent on the US for its defense and has a smaller economy. Because of this, Britain's negotiating position is considerably weaker, which explains the more accommodative reaction.

Despite having a larger economy than the UK, the EU is in a similar precarious position. First off, imposing significant universal tariffs is made more difficult by the requirement that all 27 nations agree to any response, particularly when dealing with nations like Hungary whose leaders do not want to irritate Trump. There is also the security factor, just like in the UK. Thus, the EU gave in and accepted what appears to be a one-sided agreement.

Several of Trump's demands were illogical or based on unfounded assumptions, which presented a challenge for the Japanese. Consider the "bowling-ball test"the fallacy that car imports must be able to survive the impact of a bowling ball dropped from a specific height in order to pass Japanese regulations. A deal was reached by the Japanese to safeguard their automakers. While US automakers will be subject to 50% tariffs on raw materials like steel and aluminum, importers of Japanese automobiles will only be subject to a 15% tariff.

Furthermore, there is no indication of legally binding agreements, and both the EU and Japan made ambiguous pledges to invest hundreds of billions of dollars in the US, which have previously gone unmet. They might be attempting to postpone the payment until after Trump's term is over.

Kaylie Pferten: What will it take to persuade investors to take Trump's threats seriously if they are already too relaxed?

Philip Coggan: Trump's deadline for concessions from other nations at the beginning of August is a clear trigger point. Therefore, if that deadline is met and Trump proceeds with the proposed tariff increases, markets will realize that we are considering more than a ten percent tariff on all US imports. Another catalyst might be if he carries out the rumors that he will impose high tariffs on drugs that are imported.

Who will be most negatively impacted by tariffs?

Kaylie Pferten: Do big international companies or smaller domestic companies stand to lose the most from Trump's tariffs?

Philip Coggan: It makes perfect sense that large multinational corporations will suffer far more than those that source and produce domestically. Although most larger companies have global supply chains, even if they consider themselves primarily domestic, US companies that rely on imported raw materials will also suffer.

Components or raw materials make up almost half of all US imports. Your profits will suffer if you rely on imported copper, aluminum, or steel because your costs will increase significantly.

Kaylie Pferten: Which nations outside of the US will be negatively impacted?

Philip Coggan: Depending on how the tariffs all work out, I believe that emerging markets that have supplied the US with goods like clothing will suffer the most. It's reasonable to assume that nations like Vietnam, Cambodia, and Laos will have difficulty finding other markets for their products.

Another major loser is the EU, which may see at least 1% of its GDP growth cut off, which could be quite detrimental considering the bloc's poor record of economic growth. Ultimately, despite comparatively low tariffs, the UK economy is not expanding.

Kaylie Pferten: Will a worldwide recession result from Trump's tariffs?

Philip Coggan: Since things take time to stabilize, I don't think that a sudden worldwide recession poses the biggest threat. Yet, because they are unsure of the final tariff rate, businesses are already reducing or even stopping their foreign investment.

Even in the absence of a crash, protectionism and tariffs reduce the efficiency of the world economy, which is already expanding slowly. It's critical to recognize that China has contributed significantly to growth over the past 15 years, and that growth is finally slowing as a result of its aging population. Therefore, Trump's tariffs may actually accelerate the process of global economic entropy rather than causing a major implosion.

Will the legacy of tariffs endure?

Kaylie Pferten: Do you believe that Trump's protectionist legacy will last, or is he an anomaly, assuming he steps down in January 2029 (or earlier)?

Philip Coggan: Trump's populism and George H. Trump's free-trade Republicanism are undoubtedly very different. W... Bush, which appears to be extinct now. Additionally, the Democrats themselves lean toward protectionism. Biden maintained the majority of the Trump tariffs during his four years in office and placed export limitations on chips to China, which Trump has ironically relaxed.

Because a Democratic administration is unlikely to impose tariffs that cover America's traditional allies or even remote Antarctic islands inhabited by penguins, you should expect a little more "normality" under their rule. However, things might not be as different as you might think.

Kaylie Pferten: Could Trump's trade policies be the only thing harming the US economy?

Philip Coggan: The tax cuts and spending in his so-called Big Beautiful Bill undoubtedly weaken the US economy, which will eventually cause interest rates to rise and the value of the dollar to decline.

Even though there isn't a clear substitute at the moment, it might eventually jeopardize the dollar's status as the world's reserve currency, which is the currency used for the majority of international trade.

More broadly, his economic policies are undermining all that is admirable about the United States, including attacking universities and reducing federal research funding. China is rapidly overtaking the US in research expenditures, and Chinese scholars are returning home instead of remaining in the US.

A record number of American academics are also seeking employment overseas.

And while these factors don't have an immediate effect on economic growth, they have the potential to significantly slow it down in the next five or so years. The new generation of weight-loss medications that are currently making tens of billions of dollars in sales were developed through research on the Gila monster, a kind of lizard. This is precisely the kind of fundamental research that Trump is attacking.

Kaylie Pferten: On a more hopeful note, could other nations step up to support international free trade if the US does continue to be protectionist?

Philip Coggan: I sincerely hope they do. Keeping the remaining 8590% of global trade under WTO regulations would lessen the impact, as the US accounts for less than 10%15% of global trade, depending on how it is measured. The trade negotiations between the EU and Mercosur, the Latin American trading bloc, are a very encouraging development.

Nonetheless, the US's (and its soft power) withdrawal from the global arena is extremely concerning, given that the US has been the primary force behind trade liberalization for the past 80 years. The world order began to fall apart within ten years of the US's withdrawal into isolationism following World War I.

Profile Books is the publisher of The Economic Consequences of Mr. Trump: What the Trade War Means for the World (6.99).