Unintended (but not Unexpected) Consequences

The Daily Mail from the UK reports that White House staffers are “freaking out” as Donald Trump’s “Liberation Day” approaches. Liberation Day (April 2nd) is the day President Trump has promised to roll out his new tariff regime for all to see. Staffers are freaked out because no one seems to know exactly what these tariffs will look like, to which countries the tariffs will apply, how much these tariffs will be and who will see tariffs exempted, and which products or industries will be targeted. Mr. Trump is even threatening secondary tariffs that will be applied to countries trading with other countries that he is angry at. It seems like total chaos, just like he likes it (as pointed out in my recent commentary, The Antifragile Man, March 6, 2025).

The stock market is gyrating like an Olympic break dancer, not responding to the beat of the underlying economy or guided by the nuanced phrasing of Fed Chairman Powell but instead is hanging on to every utterance of President Trump who appears to be constantly in front of TV cameras saying whatever pops into his head at the moment, each new policy, each change of policy or contradiction of previous policy sending the freaked out White House staffers in search of how what he just said changes all the things he said before.

But all the chaos and confusion are just the knee-jerk reactions to Mr. Trump’s off-the-cuff comments. But President Trump has bigger plans. He intends to fundamentally change how the American economy functions. He intends to bring manufacturing back to the United States, creating a paradise of 1950s-like blue collar jobs for all his MAGA followers. But beware. Tariffs intentionally disrupt trade and those disruptions can have unfortunate consequences. Trump’s tariffs on steel enacted during his first term in office are credited with creating about 1000 new jobs in the US steel industry. But the increased costs created by those tariffs are reported to have cost the loss of up to 75,000 jobs in downstream industries.

And foreign competition isn’t the only reason that there are less steel workers in the US. In 1950, the US produced around 90 million tons of steel, employing 700,000 workers. In 2015, steel production was still around 90 million tons, but the steel industry only employed around 89,000 workers. Tariffs not only protect businesses, they protect unions. That is why Shawn Fain, head of the United Auto Workers, supports tariffs. But unions also oppose innovation. That is why the International Longshoremen’s Association opposes automation of America’s antiquated ports. Tariffs are a disincentive to innovation. Why spend money on R&D when political contributions to protectionist politicians have much greater impact on the bottom line.

But reduced innovation creates another problem. US population growth has slowed. In 2022 population growth accelerated slightly from its Covid lows but reached only 0.4% with immigration accounting for 81% of that growth. The fertility rate in the US is 1.8, below the rate needed to maintain a steady population. As a result, the US population is getting older and the number of retirees is soaring while the working age population is declining. Economic growth is dependent on a combination of growth in the number of workers and increasing productivity. But combining a declining number of working age people with reduced innovation arising from protectionism will result in much slower growth. And behind protectionist walls keeping out foreign producers, there will be less price competition. So low growth and rising prices means stagflation.

All the talking heads on TV are analyzing, discussing and bloviating about the economic impact of President Trump’s tariff agenda to be announced on the so-called Liberation Day of April 2nd. But there is one more major consequence of protectionist import substitution schemes such as President Trump is proposing – the political impact. Import substitution puts the control of the economy into the hands of government, just as much as socialist central planning. The history of protectionist import substitution regimes is bleak. The government controls all the strings to the economy and the party that controls the government controls all that power. The Partido Revolucionario Institucional (or PRI) controlled Mexico for over 70 years. The Peronistas ravaged Argentina ever since the 1940s until the Argentines, sick of the corruption and a crappy economy, took a gamble on the Libertarian Javier Milei. But the Peronistas are still waiting in the wings hoping for Milei to fail.

Single party rule is more than one possible consequence of President Trump’s tariff agenda. However, I do not think that single party rule is an unintended consequence but, rather, THE intended consequence. But if Mr. Trump is to be successful he must implement his plans now. Import substitution often works well initially before the rot sets in. The next election is only 18 months away and he needs all sectors of the economy believing in the success of his plan. The opposition party usually scores well in off-year elections so he is desperate to get things done.

Mr. Trump’s ambition is much bigger than transforming the US economy. Bigger even than making America great again while in the process upending the rules-based world order. When Donald Trump says that April 2ndis going to be Liberation Day, it is not going to be OUR Liberation Day. It will be his Liberation Day.