Liberation Day- Economic perspective and opinions

Trumps Tariffs- Will there be a trade war coming?

Wednesday 9pm BST, multiple channels were covering the same thing: President Trump's "liberation" day, in which he announces a bunch of tariffs with hopes to "make America great again". In this blog post, I shall be exploring the cause behind these new tariff's, and then the consequences they may have on the global economy. I shall be looking at these Tariff's from the UK's perspective, and will use economic reasoning to explain points which I believe might be useful for exams.

But what is a tariff? A tariff is a form of protectionism where a charge is put per unit is implemented by a government on imported goods, to either protect a domestic market or gain extra revenue. However, there are also consequences for this seemingly smart strategy:

• Higher prices for consumers (reduction in consumer surplus)

• Short-term gains for inefficient domestic producers (goes against schumpeter's theory of creative destruction)

• Deadweight welfare losses due to market distortion (market failure?)

• Risk of retaliatory tariffs (Ricardo's theory of comparative/absolute advantage)

The Tariff diagram is a really piece of application to use:

Explaination: Let’s take the market for automobiles where the world automobile price is perhaps below than the US domestic supply price; other countries can produce automobiles at a cheaper price. Domestic demand is Q2, domestic supply is Q3 and the gap is met by imports. Increasing the world supply price through the use of a tariff makes imports more expensive. This causes two affects the first being domestic imports contract and the second being in theory that domestic investment increases; domestic manufacturers may see opportunities of profit(incentives). An important part to include exams would also be to include consumer welfare; the triangle for consumer surplus decreases.

And so, what is the reasoning behind:

Well, there are three main aims:

1. The main aim is to get the US trade deficit "back to zero". Tariffs have been based on the relative size of US trade gaps with countries, which shows how trump is targetting those who his people rely the most from.
2. The second key aim is to raise billions in extra tax revenues that can ultimately finance big tax cuts in the future.
3. Jobs: The Trump administration is hoping that tariffs causes a switch-back in manufacturing towards the US economy in industries from cars to textiles and from semi-conductor chips to steel. 

This policy clearly shows how politics and economics have their clashes; where inward looking nationalism challenges the fundamental principals of free trade. Achieving all three aims; lower trade deficit and higher tax revenues and  more jobs is almost impossible. It also strongly depends on US consumers continuing to buy from those countries affected (they need to have a low PED for imports).

Consequences, seen so far, of the taxes:

• $5.4 trillion lost from U.S. stock markets in two days following Trump’s tariff announcement, driven by fears of a global recession.

• S&P 500 fell 6% in a single day and 9.1% for the week, marking its worst week since the COVID-19 pandemic began.

• FTSE 100 dropped 7% over the same week, while Europe’s Stoxx 600 shed 8.4% and MSCI Asia Index declined 4.5%.

• Nasdaq Composite entered bear market territory(when stock market declines of at least 20% from their most recent peak), falling over 20% from its December peak.

• China retaliated with 34% tariffs on all U.S. imports, escalating trade tensions.

• JPMorgan downgraded its U.S. GDP growth forecast from +1.3% to -0.3% for 2025 and predicted unemployment rising to 5.3%.

• As Mr Richards would prolly like me to mention: Trade deflections. They will prolly occur as countries like Canada and Mexico avoid new U.S. tariffs, increasing their export volumes to the US as substitutes for Chinese goods

Opinions and other thoughts:

Tariffs without parallel state support are ineffective. This was a major point raised in a conversation i watched between Gary Stevenson and economist Professor Ha-Joon Chang. They argue that simply raising trade barriers does nothing if you’re not also investing in the domestic industries you're trying to protect. A point a collegue also mentioned earlier in the week.

Chang is known for his work on infant industry theory, highlighted that countries like South Korea and Japan succeeded because they combined protectionist measures with subsidies, R&D, and skill development. Without those, all tariffs do is raise prices and shield weak industries from competition without forcing them to innovate.

I also saw on sky a point that was quite interesting: is the current political climate resemblant of the 1930s, where economic instability fuelled political extremism. The Great Depression saw the rise of protectionism, nationalism, and economic irrationality, are we our political system regressing?? The 1930s saw global leaders let economic ideology (like the gold standard and fiscal austerity) dominate policy, often at the expense of human welfare. Today, economic policy decisions, like interest rate hikes or market bailouts, eem to drive political outcomes, rather than the other way around. This is a dangerous inversion.

Some guy on Sky(forgive me if he's famous):

“Politics is becoming a derivative of economics again—and that’s irrational. It should be the other way around.”

Essentially his tariffs show how poor economic policy can be driven by political performance. The Stevenson–Chang discussion reminds us that tariffs without subsidies are hollow tools. Meanwhile, a volatile stock market, rising global debt, and fear of recession add to the uncertainty. Consumer's dont like uncertainty, which may lead to(as many have suggested) a global recession.