The eggs of wrath: Trump’s tariffs could harm the U.S. economy most of all

RU

Ballooning debt and budget cuts

The U.S. entered 2025 on a high note. Under Joe Biden, the economy grew at an average of 3.2% per year, the S&P 500 surged by more than 55%, and total market capitalization hit a record $63 trillion — about 210% of GDP. Inflation slowed to 2.9%, the Federal Reserve began cutting interest rates, and unemployment dropped from 6.7% to 4.1%. But despite these successes, some deep-rooted issues remain, and they’re now shaping the policies of the new administration.

From 2022 to 2024, the federal budget deficit kept climbing, and in 2025, it’s set to top $2 trillion — matching the total cumulative deficit accrued from 2016 to 2018. That means the national debt keeps growing, and the cost of servicing it is getting bigger. This year alone, interest payments on the debt are expected to surpass defense spending. A potential solution would be to lower yields on Treasury bonds, and until recently, there were signs that this might happen. But Trump has a different plan.

The President and his allies profess to believe the deficit can be tamed by slashing government spending — hence the much-discussed DOGE program — and by boosting revenue through “unconventional” means, mainly tariffs. Elon Musk, for example, has floated the idea of cutting federal spending by $1–2 trillion per year — amounting to 14–28% of the 2025 budget plan — while collecting up to $300 billion in tariffs, or 7.5% of the country’s total imports. It all sounds ambitious, but there’s just one problem: it’s not realistic.

Trump vs. the market

The gap between Trump’s goals and his actual capabilities became apparent almost immediately. It manifested in a series of impulsive decisions that rattled the stock market and shook consumer confidence. The U.S. president announced new tariffs not only on Chinese goods but also on imports from traditionally friendly partners like Canada, Mexico, and the EU. These restrictions were introduced, postponed, and adjusted on the fly, creating constant uncertainty in the markets.

As a result, while the average increase in the S&P 500 index during the first two months of a new presidency in the 21st century has been 2.9%, this year we’ve seen a drop of more than 7.2%. This trend is alarming.

The valuations of American companies appear inflated, with their share of global market capitalization surpassing early 1990s levels — when the world briefly saw the “unipolar moment” — and standing at more than double the combined market share of all European countries, China, and Hong Kong at the end of last year. This means that any wave of stock sell-offs could trigger a large-scale market downturn.

At the same time, consumers correctly recognize that higher tariffs will drive up inflation in the U.S. Expectations for price increases over the next 12 months have risen to 3.1%, effectively ruling out interest rate cuts by the Federal Reserve — cuts that are crucial for both economic growth and budget stabilization. While borrowing costs, including mortgage rates, had been falling over the past year, sparking moderate optimism, this trend could soon reverse.

In the next couple of years, rising tariffs are unlikely to lead to a surge in U.S. industrial production driven by factories relocating from China. Instead, they will primarily push up the prices of American goods due to the fact that imports will have become more expensive. This already happened in 2017–2019, when Trump’s previous tariff hikes led to price increases rather than a manufacturing boom.

And that is the fundamental flaw in Trump’s mercantilist approach. Can an economy truly grow behind tariff barriers? And can protectionist policies really bring manufacturing back to America?

Tariffs hit the U.S.

It is widely accepted that international trade benefits all participants by allowing each country to capitalize on its competitive advantages, ultimately reducing costs. This is a sound principle, and for decades, the U.S. was arguably the biggest beneficiary of globalization as a consumer of mass-produced goods. However, at the same time, it steadily lost ground as a manufacturing powerhouse. Between 1985 and 2021, its share of global industrial output fell from 34% to less than 16%. Trump wants to reverse this trend but is looking for an overly simplistic solution.

The deindustrialization of the U.S. — and of the West as a whole — began in the 1980s with the rise of “newly industrialized countries,” where labor costs were extremely low. In the U.S., by contrast, worker compensation accounted for as much as 40% of production costs.

Seeking to maximize profits, American companies moved production to Southeast Asia or else abandoned certain types of manufacturing altogether. But in recent years, technological progress has been reshaping the way production is organized — robotization and automation are cutting labor costs, while taxes and tariffs on energy and infrastructure are rapidly converging across different countries.

It's possible that Western countries may start rebuilding their industrial capacity in the relatively near future. However, the smarter approach would be to boost investment attractiveness through tax incentives and technological advancement rather than trying to isolate themselves from the world with 19th-century-style tariffs.

True, until the 1880s, tariffs were the primary source of revenue for the U.S. government. But it’s important to remember that back then, federal spending accounted for just 2.3–2.7% of GDP, whereas today it has reached 25%. To match the revenue proportions of that era, the average tariff on all imported goods would need to be at least 100% — a completely unrealistic scenario in today’s global economy.

Austerity risks recession

The second pillar of Trump’s economic policy — cutting government spending by laying off tens or even hundreds of thousands of federal employees — also looks unpromising. Even setting aside the potential for public protests, such a move would put far more jobs at risk, intensify labor market competition, and create a clear downward trend in consumer spending and economic growth. Notably, some signs of this slowdown are already visible in current retail sales data.

Consumer spending accounts for nearly 69% of U.S. GDP — one of the highest shares in the world. Any stagnation in this area could lead to major macroeconomic problems.

In the coming months, we will see just how resilient the U.S. economy is to these challenges. The key indicators to watch will be:

• Stock market performance, particularly whether it can maintain its current levels, or if it will slip from correction into decline
• The trajectory of mortgage and consumer loan rates
• Monthly federal budget deficit figures
• Inflation trends

The likelihood that Trump’s actions will trigger a recession is steadily increasing. And it’s worth remembering that voters backed a Republican president with the expectation of an economic miracle. If he fails to deliver, the political fallout could be even greater than the backlash over the DEI programs scrapped by Trump on his first day in office — or even of the setbacks in foreign policy.

The rest of the world is also at risk

Surprisingly, the global economy is influenced more by U.S. domestic policy than by its foreign policy. The tariffs Trump has already imposed and plans to introduce don’t seem to be the main source of concern. In 2024, U.S. trade with the rest of the world was valued at $7.3 trillion, while global trade exceeded $65.4 trillion. The U.S.-EU trade turnover stood at $976 billion, while trade with China amounted to $582 billion — a nearly 25% drop from 2022 to 2024. Even if 25% tariffs and a further 20–25% decline in trade occur in these areas, it wouldn’t spell disaster for any of the world’s three largest economies.

At the same time, Trump’s confrontational trade policies could lead to a significant economic downturn in Canada (where exports to the U.S. account for 19% of GDP), and an outright economic crisis in Mexico (where this figure reaches 36%). In other words, trade wars are more likely to have a serious impact on the U.S. itself and on the North American continent in general than are on the rest of the world as a whole. Compared to Canada and Mexico, exports to the U.S. make up just 2.33% of China’s GDP and 2.98% of the EU’s. Given the extensive trade networks of both China and Europe, any decline in their exports to the U.S. could likely be offset by growth in other markets.

Based on the measures announced by the White House, the U.S. under Trump is aiming for greater trade independence from the wider world. This could be achieved without catastrophic consequences for globalization, as the U.S. has long ceased to be the dominant force in international trade.

Trade relationships are far more diversified in today's global economy than they were in the era of the 1997–1998 Asian financial crisis, when exports to the U.S. were critical for most emerging industrial economies. Meanwhile, Washington is not seeking to relinquish its dominant status in international finance. In this regard, Trump’s stance — opposing sanctions and strongly resisting the creation of alternative global currencies outside the Western sphere — seems more like a stabilizing factor than a risk.

For the United States today, it is crucial to avoid what could be called “alternative globalization” — a new system of international trade that bypasses the dollar and the financial infrastructure built around it. It is also important for the U.S. to maintain its standing as an investment destination. American business success over the years has been built on high company valuations, the protection of property rights, and the ease of attracting capital. As the dominant player in the global economic system that has developed over the past few decades, the U.S. is far more reliant on preserving this position than on the billions of dollars the White House might generate from tariffs and restrictions recently introduced. Whether Trump and his advisers fully grasp this is still uncertain.

If Trump succeeds in his efforts to promote economic self-sufficiency, the United States could become the “weak link” in the global economy, and the resulting damage would likely be worse for the U.S. itself than for the rest of the world.

Could the current administration introduce any initiatives to soften the negative effects of their economic strategies? So far, proposals include creating a fund from cryptocurrency assets to address the national debt (though this is still uncertain, as the crypto market’s total value is 12-14 times smaller than the federal treasury’s liabilities); launching “commercial green cards” at $5 million each (with claims of a successful sale of the first thousand, but the government would need to sell 6-8 million to tackle the debt); and, perhaps most significantly, eliminating the IRS and abolishing income and capital gains taxes. While this proposal would surely face fierce opposition from left-wing politicians, it could transform the U.S. into the world’s first permanent offshore haven, attracting significant investment.

Each of these initiatives — especially the last, as legislative proposals are already making their way through Congress — seems far more promising than the uncertainty that comes with voluntary deglobalization.