Liberation day? There can be no winners from Trump’s trade war

Trump’s ‘Liberation Day’ plans are full of holes – and American consumers and market traders will pay a heavy price for Trump’s tariffs, writes James Moore

Donald Trump is characterising it as “Liberation Day”. The rest of the world is scratching its collective head and wondering how the most destructive trade policy the US has ever embarked on will end – and how much damage it will do to the global economy.

The latter wasn’t exactly flying before the US President proved that his bite could indeed be as bad as his bark. It still hasn’t properly recovered from the multiple shocks it has had to contend with in recent years. From the outset, Trump presidency 2.0 looked different. More organised. Filled with loyalists unlikely to attempt to frustrate the President’s destructive instincts, as some of the more experienced and mainstream Republicans in the last administration did.

Apparently, he was armed with a plan and had everything needed to make it happen. However, on the subject of trade – and arguably economics and inflation reduction while we’re at it – Trump has proven to be every bit as erratic as he was when he was last in office. With his tariffs, he has played a game of hokey cokey. In-out-in-out-shake it all about. Threats were followed by deals, followed by more threats, prompting either attempts at negotiation or reciprocal tariffs. Canada and Mexico have taken this last route; China and the EU will surely follow.

It’s still not clear how this “liberation” will work or what form it will take. Will the tariffs be Trump’s favoured 25 per cent? Will they land on top of the levies already imposed? How will those charged with collecting at America’s ports and border crossings cope? Who knows or dares to ask? The potential chaos will be mitigated at first because of the protective measures taken by those affected. While some – especially on Wall Street – viewed his victory with rose-tinted spectacles, importers in the US were much more sanguine and took steps to prepare for the worst.

They stepped on the gas. The net result of this can be seen in the numbers. Trump’s attempt to reduce the US trade deficit resulted in it jumping to a record $131.4bn in January 2025, up from a shortfall of $98.1bn in December 2024. The irony could hardly be more painful. Of course, that will unwind over time, and Trump will doubtless use the fall in the deficit when it does to claim the policy is working. But his trade H-bomb will result in fallout over the US as much as it does over the rest of the world and not just by requiring American consumers to pay more for the goods they buy or hiking the costs of US businesses which import raw materials from overseas.

‘Cool heads are required in response because, and this bears repeating, there can be no winners from this sort of war’ (EPA)

Keep an eye on the dollar, which has already tumbled against the pound, the euro and the yen, losing all the gains it posted during Wall Street’s post-election euphoria. The US national debt stands at more than $36trn. Of that, it has to refinance $9tn this year. America taxpayers are likely to have to pay more than the average coupon of 2.8 per cent on that paper before US inflation and potentially higher interest rates have done their work. A weak dollar doesn’t help.

America also relies on international investors and businesses to buy from it. The dollar is the world’s reserve currency, which helps. China, for example, holds nearly $1tn on its own. This could easily get very messy if America’s partners decide to up the ante in a fit of pique. Asian nations are already mulling a joint response.

A number of people have taken to citing the Smoot-Hawley Tariff Act of 1930, which was the last time the US played the tariff game. As with today, the aim was to protect US farmers and businesses from foreign competition. The net effect was to worsen the impact of the great depression in the US and worldwide. And, yes, it could get that serious if this escalates. Cool heads are required in response because, and this bears repeating, there can be no winners from this sort of war.

As Ronald Reagan said, “We should beware of the demagogues who are ready to declare a trade war against our friends, weakening our economy, our national security and the entire free world.” Quite so. Reagan is not revered internationally like he is in parts of the US. I wouldn’t be surprised if that starts to change.