The Trump test begins: Tariffs, power plays and economic risk

Any hope that U.S. President Donald Trump’s professed love of tariffs was a bluff vanished this week.

Less than a week after returning to the White House, Trump hammered Colombia with a 25% levy, a sanction that was quickly rescinded when that government backed down and acceded to U.S. demands about accepting deportees.

The speed with which the U.S. president reached for this tool — against an ally no less — is proof that his threats are not empty words. Trump is a pugnacious leader with no tolerance for dissent. It promises to be a wild four years.

The deportation of illegal immigrants is a Trump administration priority. That is no surprise. The issue has defined Trump’s political identity and dominated his three campaigns for president. He promised raids and mass deportations as soon as his new administration began to show his determination to fix this problem.

Indeed, a week in, the administration launched the largest domestic deportation operation in U.S. history, prompting a standoff between Trump and Colombian President Gustavo Petro. The U.S. removed 7,300 immigrants who were in the U.S. illegally in the past week, some 200 of which were sent to Colombia.

Petro, who had accepted returnees from the Biden administration, objected to the use of military aircraft, complaining that Colombians were being treated like criminals and he refused to allow the planes to land. Trump responded by threatening sanctions of 25%. Petro backed down after first suggesting he would impose his own tariffs on U.S. products.

Central to understanding what happened and its significance is the White House explanation of what transpired. “Today's events make clear to the world that America is respected again,” it said in a statement. That simple evaluation bodes ill for the next four years.

Most simply, this episode makes plain the Trump administration’s preference and predilection for the use of raw force when challenged. The world is well-acquainted with his “love” of tariffs: He has pledged that he will implement across-the-board levies soon, with some, on neighbors Canada and Mexico, slated to go into effect on Feb. 1.

Treasury Secretary Scott Bessent is reported to back a 2.5% across the board global tariff that would be gradually increased. Shocking as that plan may be, Trump dismissed that idea, countering that he wants a rate “much bigger” than that. “We’re going to protect our people and our businesses, and we’re going to protect our country, with tariffs,” Trump said.

While our every instinct is to dismiss this idea as crazy, it is a serious proposal that is intended to serve three purposes. First, it will give businesses a reason to return their operations to the United States to avoid the levies. As Trump explained in a speech on Monday, “As tariffs on other countries go up, taxes on American workers and businesses will come down and massive numbers of jobs and factories will come home.”

Second, the revenues collected will, says Trump, allow him to lower corporate taxes for companies operating and making goods in the U.S. This will facilitate the overhaul of the U.S. tax system that Republicans have long supported; in their most feverish dreams, income and corporate taxes are abolished, replaced by the new levies.

Finally, across-the-board tariffs confirm Trump’s image of himself as a strong president, one who is ready to dispense with conventional wisdom in the pursuit of his goals. They are proof that the new U.S. president is not going to practice business as usual and he will use the full force of U.S. economic might to achieve his objectives. Supporters argue that they underscore his reputation as a tough-minded singularly focused leader with little use for conventional wisdom.

In fact, however, this approach will be disastrous. Very few serious people believe that tariffs can generate sufficient revenue to facilitate a restructuring of the tax system. All it takes is a quick look at the sums involved to see that they do not add up. Economists estimate that tariffs at the most — and at eye-watering levels — would collect less than 40% of what income taxes bring in.

High tariffs on imports would ultimately reduce U.S. wealth. As Brad Glosserman noted in his column this week, new analysis from the Peterson Institute for International Economics warns that a 25% tariff on all goods from Mexico and Canada would reduce U.S. gross domestic product by at least $200 billion, and likely considerably more, in addition to the losses suffered by the two targets. A 10% tariff on China and retaliation in kind by Beijing would cost the U.S. $55 billion over the four years of the Trump administration and increase inflation in the country by 20 basis points.

Companies hit by sanctions would reroute their trade. Some might go to the U.S. as intended, but more would likely search out third markets; some governments are already pursuing new trade relationships that would accomplish this. This would diminish the U.S. presence and status in the global economy, a trajectory to be worsened and accelerated by the apparent lawlessness of U.S. policymaking and the administration's seeming indifference to this perception.

Of course, other countries would impose levies in retaliation, increasing costs to the U.S. and reducing global wealth and prosperity. The world lived through this experience once in the 1930s and the consequences were catastrophic.

The cumulative effect of these developments, if unchallenged, would promise a breakdown of the existing international economic order and the eventual marginalization of the U.S. within it — as well as the global political order. And all of that to create the image of a strong and determined leader.

Hopefully, Trump and others within the U.S. will realize that this price is too high to pay. Japan and other like-minded governments should help them to reach that understanding. There are flaws in the global trading order, but petulance and extreme unilateral actions are not the way to fix them. Cooperative, multilateral solutions are. Tokyo, with partners, should identify and correct the problems through the World Trade Organization or the Comprehensive and Progressive Agreement for Trans-Pacific Partnership.

Difficult though as this will be, still harder will be convincing Trump that his bombastic, instinctive and abusive style is counterproductive. His compulsion to create crises that he then solves — even when the facts are otherwise — to his credit does him and his country no good.

Governments should show that they are interested in negotiating solutions to problems, but insist that diplomacy is not conducted via bullhorns and temper tantrums. This may sound naive, but Trump respects strength above all. The U.S. may be the world’s largest military and economic power, but that does not mean that it will prevail in every situation. Successful negotiations with him will require subtlety, creativity, perseverance and determination.

Coalitions of the willing can muster those strengths and will have to. In unity, there is strength — and that will be much in demand in the coming four years.