Matthew Partridge: In your new book, The Economic Consequences of Mr Trump: What the Trade War Means for the World, you posit that president Donald Trump’s threats over tariffs are real, rather than a bluff, and represent a major threat to both the US and world economies.
Philip Coggan: Yes. Many investors seem to be assuming that Trump will ultimately back down from his threats of swingeing tariffs; markets have recovered from the collapse that took place in April when they were first announced. However, while there is still a chance that this could be correct, this attitude seems complacent.
Ironically, the assumption that Trump is bluffing may end up increasing the risk of tariffs, both because it means that Trump won’t get the concessions that he’s looking for, and because he thinks that the muted market reaction means they aren’t that economically damaging.
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Matthew Partridge: What are Trump’s aims, then?
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Philip Coggan: In my book, I argue that trying to understand Trump is like trying to nail jelly to the wall. However, I do think that he genuinely doesn’t understand economics and thinks that America’s trade deficit is a sign that America is being “robbed” – the type of mercantilism that was debunked by Adam Smith 250 years ago. He also thinks that returning manufacturing jobs to the United States will help boost his public support.
Matthew Partridge: There has been a wide range of reaction to Trump’s tariffs, from China simply imposing their own tariffs in response to prime minister Keir Starmer agreeing to cut the UK’s import levies. Which road do you see the EU, Canada and Japan going down?
Philip Coggan: I think you can understand the UK and Chinese differences in terms of the strength of their respective negotiating positions. China is a big economy that produces things the US really wants, like the rare-earth materials, as well as cheap goods that help keep down prices.
As a result, China can cause serious pain for the US economy if it wants to. The UK, however, is not only a smaller economy, but depends on the US for its defence. This makes Britain’s negotiating position much weaker; hence the more conciliatory response.
The EU, while economically bigger than the UK, is in a similarly weak position. Firstly, the need to get all 27 countries to agree to any response makes it harder to impose any major across-the-board tariffs, especially when you have countries like Hungary, whose leaders don’t want to antagonise Trump. As with the UK, there is also the security angle. That explains why the EU folded and agreed to what looks like a one-sided deal.
The Japanese faced the problem that many of Trump’s demands didn’t make sense, or were based on things that don’t exist. Take the “bowling-ball test” (the myth that Japanese regulators require imported cars to be able to withstand the impact of a bowling ball dropped from a certain height). The Japanese agreed a deal to protect their carmakers. It is worth noting that importers of Japanese cars will face a 15% tariff but US car producers will have to pay 50% tariffs on raw materials like steel and aluminium.
Furthermore, while both the EU and Japan made vague promises to invest hundreds of billions in the US, there is no sign of legally binding texts, and such promises have been unfulfilled in the past. They may be hoping to wait out Trump’s term before the money becomes due.
Matthew Partridge: If investors are too complacent, what will it take to convince them to take Trump’s threats seriously?
Philip Coggan: One obvious trigger point is the deadline that Trump has imposed at the start of August for concessions from other countries. So, if that deadline passes and Trump decides to go through with the planned tariff hikes, then markets will see that we’re looking at something more than just a 10% tariff on all goods that are imported to the US. Another trigger point could be if he follows through on rumours that he will impose huge tariffs on imported drugs.
Who will suffer most from tariffs?
Matthew Partridge: Are the big losers from Trump’s tariffs likely to be large global firms or smaller domestic firms?
Philip Coggan: It certainly makes sense that big global multinationals will be much more negatively affected than those producing and sourcing inside the US. However, US firms that depend on imported raw materials will also feel some pain, as most larger companies have global supply chains, even if they consider themselves primarily domestic.
Nearly half of all US imports involve either raw materials or components. So, if you depend on imported steel, copper or aluminium, your costs are going to go up quite a lot, which will hurt your profits.
Matthew Partridge: Outside the US, which countries are set to suffer?
Philip Coggan: Well, it depends on how all the tariffs settle down, but I think the biggest losers are going to be those in emerging markets, which have been suppliers to the US in sectors like apparel. You can expect countries like Vietnam, Cambodia and Laos to struggle to find alternative markets for their goods.
The EU is another big loser, and could see at least 1% shaved off its GDP growth, which given the bloc’s mediocre economic growth performance could be quite serious. After all, even with relatively low tariffs, the UK economy is not really growing.
Matthew Partridge: Could Trump’s tariffs cause a global recession?
Philip Coggan: I don’t see the main threat as being some sort of immediate global recession, because these things take time to feed through. But we are already seeing companies cutting, or even completely pausing, their international investment, because they don’t know what the final tariff rate will be.
However, even if there isn’t a crash, tariffs and protectionism make the global economy less efficient at a time when it is already growing rather slowly. It’s important to realise that a lot of the growth during the last 15 years came from China, which is finally slowing thanks to its ageing population. So rather than cause some big implosion, Trump’s tariffs could just speed up the process of global economic entropy.
Will tariffs be a lasting legacy?
Matthew Partridge: Assuming that Trump leaves office in January 2029 (or earlier), do you think his protectionist legacy will endure, or is he just an aberration?
Philip Coggan: Trump’s populism is certainly a very long way away from the free-trade Republicanism of George H.W. Bush, which now seems to be extinct. What’s more, the Democrats are pretty protectionist themselves. During his four years in office, Biden kept most of the Trump tariffs and imposed export restrictions on chips to China (restrictions that Trump has ironically loosened).
So, while you should see a bit more “normality” under a Democratic administration – as they are unlikely to impose blanket tariffs that cover America’s traditional allies or even remote islands populated by penguins in the Antarctic – they may not be as different as you might think.
Matthew Partridge: Are Trump’s trade policies the only thing that could damage the US economy?
Philip Coggan: The tax cuts and spending contained in his so-called Big Beautiful Bill certainly undermines the US fiscal position, which will inevitably lead to both higher interest rates and a weaker dollar.
In the very long run, it could also imperil the greenback’s position as a global reserve currency (the currency in which most global trade takes place), though this may take time, as there isn’t an obvious alternative at present.
More generally, his economic policies, such as cutting federal research budgets and launching an attack on universities, are destroying everything that is great about the US. China is catching up quickly with the US on research spending, and Chinese academics are going home rather than staying in America.
Moreover, a record number of American academics are looking to work abroad.
And these are not things that have a one- or two-quarter impact on economic growth, but could seriously reduce it five or so years down the line. Note that the development of the new generation of weight-loss drugs, which are now generating tens of billions in sales, came from investigating the Gila monster (a type of lizard), which is exactly the sort of basic research that Trump is slashing.
Matthew Partridge: On a more optimistic note, if the US does remain protectionist, could other countries take up the mantle of promoting global free trade?
Philip Coggan: Well, I very much hope they do. The US represents less than 10%-15% of global trade (depending on how you measure it), so if you can keep the other 85%-90% going under WTO rules, then that would reduce the impact. The negotiations over the trade deal between the EU and Latin America’s Mercosur is a really positive sign.
However, since the past 80 years of trade liberalisation has been driven mainly by the US, the withdrawal of the US (and its soft power) from the world stage is very worrying. When the US retreated into isolationism after World War I, it took only 10 years for the global order to start to collapse.
The Economic Consequences of Mr Trump: What the Trade War Means for the World is published by Profile Books (£6.99).
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