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As most are aware, Trump has announced 25% tariffs on Canada and Mexico, and 10% tariffs on China. It seems to me that it presents a number of opportunities.
Being a Rationalist-descended forum, many here believe in listening to experts, following the data, and trusting science to guide our policies. On the other hand, many others here have observed numerous cases where expertise and data collapse when confronted with unexpected real-world events, and have grown far more skeptical of expertise. I have stated previously that I have little faith in Economics as a discipline; I've seen a lot of failed mainstream predictions and what at least have appeared to be failed policies. These new tariffs are the largest and most consequential policy departure from consensus economics in living memory, and as such they present a profoundly valuable natural experiment. For my entire lifetime, the consensus of economists has been that tariffs are a rotten economic policy, that they stunt economic growth and induce stagnation. These tariffs are very large, are aimed directly at our three largest trading partners, and arrived with very little warning; while Trump had stated his intentions clearly, Trump says a lot of things and no one actually expected this to happen. As such, it seems to me that we have an unusually-good natural experiment here, and we should be exploiting it for maximum value.
Simply put, what happens next?
The proof of a theoretical model is the ability to make accurate predictions. Predictions of large-magnitude changes are more valuable than predictions of small changes. Naïvely, it seems obvious to me that large policy changes should have large effects, and this is very clearly a large policy change. If consensus economics is valid, it seems to me that they should be able to predict with reasonable accuracy the consequences of these new policies, and that those consequences should be unequivocally negative. What negative outcomes should we expect, specifically? There was some discussion last week about whether or not our last attempt at tariffs caused the Great Depression; is that the expected outcome here?
One of the old Rationalist traditions is betting, and it's been a somewhat contentious topic as our community has drifted further from the mother country of Scott's comment section. Some people, myself among them, really don't like betting. Happily, this experiment comes with its own betting baked in: what should we expect the stock market to do as the consequences of this policy change roll out? If the economic consensus is valid, what better bear signal could there be than an unexpected, dramatic departure from sound economic policy by the world's dominant superpower? A quick googling tells me that the markets are down generally this morning; should we expect this trend to continue? How do people here intend to manage their investments, given these events?
For reference, previous discussion of the tariffs from last week.
The whole thing was fake.
https://x.com/Claudiashein/status/1886434747238514776
https://x.com/JustinTrudeau/status/1886529228193022429
Trump likes tariffs, but there is one thing he likes more than tariffs: pushing around world leaders.
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I expect short term negative economic outcomes on the Canadian side as Trudeau and the Liberals fight a losing trade war until the next federal election, which they will delay as long as possible but lose. Standing up to Trump plays well with the Liberal base, and allows them to blame the bad economy on him, but it won't be enough to salvage the election. The incoming Conservative government will make some concessions, flatter Trump, ramp up the war on Fentanyl, spend more on the military (the last two things they want to do anyways), thus allowing Trump to declare victory and claim he got Trudeau booted from office. Trudeau manages to salvage some shred of his legacy as the guy who stood up for Canada, and the Liberals will claim that their efforts paved the way for the resolution.
End result: minor increase of Canadian/American economic integration with advantage going to USA, and the Liberal party gets an excuse for why they lost the election. If Canadians are lucky the whole thing allows the Conservatives build infrastructure to sell more oil (and other natural resources) to someone other then the USA and/or increase free trade between the provinces.
Edit: Already wrong. Another W for the nothing ever happens crowd. A domestic win for Trudeau certainly.
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This seems like you're setting up a situation where "if I don't see utter economic catastrophe as predicted by the most histrionic leftists as a result of these tariffs, it'll prove once again that economists, the establishment, and anyone else who disagrees with me is wrong, and my vibes are always right".
The tariffs aren't actually that big by historical standards. Compare them with the Smoot-Hawley tariffs that exacerbated the Great Depression. These tariffs are starting from a low historical baseline, are only hitting the top 3 trade partners instead of everyone, have carveouts (like Canadian energy), will probably be subject to delays (e.g. Trump delaying with Mexico due to their symbolic concessions), etc. Further, the US economy is relatively autarkic with its trade as a percent of GDP being surprisingly low compared to almost any other nation. Then there's the factor of the long-run growth rate being almost monotonically positive in the US, which would offset any decline due to trade wars and would mean that any losses would probably have to be observed from "less growth" rather than "negative growth". Moreover, the hits from tariffs, while some are immediate, largely come from long-term effects of certain industries being less profitable.
I don't think tariffs are always bad, and this isn't a particularly heterodox position in Economics especially with obvious modern examples like China. But I would prefer them to have a clear purpose -- the Chinese and maybe Mexican tariffs make sense to some extent, but the tariff against Canada seems like a pointless own-goal.
In the first place, I'm not perceiving the predictions of doom to come from "the most histrionic leftists", but rather "the most histrionic economists". Secondly, it seems straightforwardly useful to positively identify who the "most histrionic" people are so that we can stop listening to them. I learned that Paul Krugman was one of these people based on his predictions in 2016, and I'll never take anything he says seriously again. How is this not the straightforwardly correct thing to do?
It seems very clear to me that this policy is far, far outside anything the Economics consensus considers reasonable. If you disagree, the obvious next step would be for me to look for prominent economists predicting doom; I have not looked yet, but I'm confident they won't be hard to find. Do you think I'm wrong? "Less growth" doesn't cut it; we have "less growth" at home. Your list of mitigating factors seems entirely reasonable, but all of them apply just as easily to "this is a good idea, actually". Bad policies are bad because they have bad results, right? So what are the bad results we should expect?
I may be completely misinterpreting your post but it seems to me that the tariffs are clearly intended to be temporary bargaining chips. Long-term consequences are not expected.
That's not clear to me, but then, my sense with Trump generally is that we're flying blind. If this is a bargaining position, what result is he trying to extract from Canada?
One possible option might be to help accelerate the decline of the Liberal party and make the Conservatives commit as allies to Trump personally. That might make sense; I think the general international consensus has derived a very large part of its power from being the party of "normality", so ending normality might work directly against them if it can be done without excessive cost.
Mainly, I'm interested in people nailing down what they actually see happening and what they expect the results to be. I personally have been at least loosely thinking of these as permanent measures, with the goal being eventual re-industrialization of the US, but will happily admit that I might be wildly off-base with that.
If this was someone else doing it, maybe, but Trump doesn’t play 5D chess.
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Please post some examples. There are plenty of bad economists out there writing for progressive think tanks or leftist op-ed sections, but they're already widely reviled by the Right, so they don't serve as good examples.
I want to see economists who are regarded as at least somewhat neutral who are clearly saying that this will be an economic catastrophe, and not just "bad" to some degree. Preferably in an article of some sort, not just Twitter shitposts.
E.g. Noah Smith is probably most left-leaning econ guy I follow, and his article states unequivocally that the tariffs will be bad, but in terms of how bad exactly, he posts an image where the long-run effects are all in the single digits, mostly in the low single digits. This is bad obviously, but hardly cataclysmic.
Price increases on goods most exposed to the tariffs + less economic growth than we'd have in an alternative reality where the tariffs don't happen. As far as I know, this is the consensus of most economists.
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Tariffs on EU were also promised to come soon. Allegedly, EU doesn't import enough american agrocultural produce and cars.
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Nobody is more weak to flattery than Donald Trump. I have argued here before that if Barack Obama called Donald tomorrow and told him he fully agreed with his policies, he was doing what Barry hadn’t been powerful enough to do, and he was undoubtedly one of the best presidents of his lifetime (other than himself), he could parlay that into regular golfing and a weekly phone call to ‘discuss’ the big issues with minimal real effort. People forget that the biggest reason Trump never went after Hillary in office is that he actually kind of likes her, Bill and her always made nice small talk at Manhattan parties after all, and he can only really be tough forever (rather than for brief moments) against people he actually doesn’t like. He certainly doesn’t like Trudeau. But who can forget how his view on Macron went 180 degrees after he got invited as guest of honor to the French Bastille day military parade, had all the soldiers salute him, etc.
Why is Trump not going apeshit on the UK despite the fact that the trade relationship is still a deficit AND Musk’s recent spergout over Rotherham? Because the Labour government smartly decided that they would deploy Prince William to all diplomatic meetings with Trump, and William being a man of very modest intelligence nevertheless trained from birth to always flatter his foreign contemporaries is well liked by The Donald. Nations are people in the Trumpian world view, personal flattery determines everything. He soured on Kim not when it became clear that he wasn’t going to change his nuclear policy, but when it became clear that he didn’t really seem to like Trump very much. His relationship with Putin is similarly ambivalent, I don’t think he likes the guy because on some level he realizes that Putin doesn’t take him seriously.
I also think this is what frustrates Elon about Trump’s embrace of Altman, Bezos and so on. It’s like spending years building up a business relationship only to have your competitor win a deal after a single dinner and some Grade A bullshit game, it’s seethe-worthy. But Trump has few eternal enemies and even fewer eternal friends. His greatest weakness (and, in some ways, a great strength) is that his primary criteria for loyalty are strictly temporal, rather than historic.
Regarding Kim, one of the most fascinating things about Trump is that no matter how much he rants about communists and Marxists on a general level when it comes to his domestic opposition, this doesn't seem to translate at all to foreign policy, which is ruled by non-ideological "you like me, I like you" considerations as his other interpersonal relations, as shown by the recent U-turn on Maduro. (Sure, there are arguments to be made regarding the actual levels of Marxism within both Kim and Maduro administrations, but that's at least how they are generally seen.)
Sounds pretty based to me. I really don't like people who try to spread their worldview globally.
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Strong agree with all of this. Trump is a vibesmaxxer-in-chief, being far more concerned with how he appears on cable news than any objective measurement of the impact of his presidency. There's a very good chance that some symbolic concessions could delay, reduce, or even cancel the tariffs altogether. None of that is guaranteed, but there's a good chance.
Damn, good call: https://x.com/JustinTrudeau/status/1886529228193022429
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Would this be a prediction that the tariffs don't actually happen, then?
Why? Other people have pride, too. As far as the tariffs, Trump likes the market to do well, and that ultimately places an upper bound on tariff policy.
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Man, these next few years are going to finally be a referendum on Keynesian versus Austrian economics. Or maybe referendum is the wrong word, but a test. On the one hand, you have the notion that deficits can pile up forever, inflation is required to prevent a deflationary great depression, government spending doesn't cause inflation, etc. On the other hand, you have the ideas that if we balance the federal budget, pay down our debt, reduce regulations, and tax foreign goods, we can keep wage growth above inflation and everyone will be better off. If this plan gets bungled, or is executed perfectly and just plain doesn't work, that's it, Keynesian economics until the end of time.
Personally, I'm rooting for the later case. Trumps first term saw corporate taxes slashed, regulations slashed, minimal inflation, historic wage growth (though that was a low bar), and that included the beginnings of waging a trade war with China. And this was despite "all the economist" saying it would ruin the US economy. So on the face of it, I'm not terrified of what happens with more of a trade war, especially given the aggressive spending cuts Trump's admin has been performing, and the regulation cuts, and hopefully even tax cuts I'm anticipating. I'd say if Trump 45 was a preview of things to come, there is a decent chance Trump 47 will be even better.
Your first paragraph is an egregious strawman of mainstream (Keynesian) economics. It's also not a particularly accurate view of Austrian economics either. Are you saying Austrians would be in favor of tariffs? It's not really clear from what you wrote, but that would be a very strange Austrian indeed.
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Tariffs aren't Austrian economics, that's accursed mercantilism.
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I expect once Trudeau is gone, Canada bends the knee... but Trump also becomes somewhat less demanding.
I'm not changing my investments, which are broad-market. If the tariffs turn out badly, I don't see any clear winners as a result, and making money off losers (with options or short plays) is too risky for my blood.
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Tariffs on Mexico delayed for a month- Mexico making concessions.
If Wikipedia is correct about the scale and scope of the Mexican Drug War, sending 10,000 extra troops to the border (which is the only concession announced) is a pretty meaningless concession - there are already 300,000 plus Mexican troops involved in fighting the drug cartels, and Mexico's interest in defeating them is stronger than America's. (If the Mexicans are deliberately tanking said fight because the cartels have bought Sheinbaum, then sending 10,000 extra troops to the border won't change this).
Two obvious possibilities for what went on on the call:
Given the size of the market rallies (and in particular the MXN rally) on the announcement, financial markets do not expect tariffs on Mexico to come back in a month's time, and almost certainly don't expect any kind of voluntary arrangement that would materially curtail Mexican exports to the US.
Also possible that the concessions bought enough goodwill for Trump to believe Rubio will obtain more substantial concessions in a months time.
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