Paul Krugman has strongly criticised the Trump administration’s tariff plans, highlighting their serious and in some cases paradoxical economic implications.
First, he stresses that the proposed tariffs are significantly higher than those imposed by the Smoot-Hawley Act of 1930, and points out that the US economy is now three times more open to international trade than it was then. This, he argues, makes the impact potentially much more damaging. One of the most immediate effects is the general uncertainty that is paralysing investment decisions: companies don’t know what the tariffs are going to be in the coming months, so they can’t plan for the future.
Krugman says he finds it hard to imagine a worse trade policy than the current one. He wonders what China and Europe could realistically negotiate with Washington, given that they are not necessarily guilty of unfair trade practices that would justify such extreme measures.
He challenges the idea, promoted by the Trump administration, that the world economic order is structurally unfair and disadvantages the United States. He explains that the US trade deficit is largely the result of foreign capital inflows, not a ‘rigged’ global order. The idea that the United States should maintain a balanced bilateral trade balance with every single country is absurd. In his view, all the talk of ‘reshaping’ the global economic order is a pretext to justify the imposition of tariffs.
Another key point is the risk that the current measures will destroy global supply chains, which are one of the main drivers of productivity in modern trade. Krugman insists on a technical but crucial point: the damage caused by tariffs grows exponentially, in proportion to the square of the tariff rate. As a result, very high tariffs can have a devastating effect on the global economy.
According to Krugman, the long-term impact could be more severe than Brexit, leading to a potential loss of 3-4% of US GDP, or even more. But the short-term impact could be even more dramatic, with extraordinary uncertainty causing companies to postpone investment and hiring.
Under normal circumstances, Krugman reminds us, tariffs do not cause long-term unemployment, but they do reduce productivity and real incomes. In the current context, however, he sees an unusually high probability of recession, precisely because of the uncertainty it induces. Contrary to the popular narrative, he does not attribute the Smoot-Hawley Act to the Great Depression, but sees the current uncertainty as a concrete threat.
At the strategic level, he blames current policies for weakening US economic exceptionalism, based on faster productivity growth and more favourable demographics than other advanced countries. He also expresses concern about cuts in scientific research and layoffs at centres of excellence under the Trump administration.
Finally, on China, he acknowledges that it has behaved badly in the past by maintaining an undervalued currency and weak domestic demand. He believes that even a more rational American president would have taken a hard line. But the current Chinese strategy, based on exports to the US, is no longer sustainable.
Krugman concludes with an institutional warning: the current mess also stems from the fact that Congress has long delegated broad powers to the president in trade matters. He argues that it is time for Congress to regain control of this crucial function.
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