Here's Why Trump's Tariffs Could Make America Less Exceptional
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I'm Stephen Carroll and this is Here's Why, where we take one news story and explain it in just a few minutes with our experts here at Bloomberg. April 2nd, 2025 will forever be remembered as the day American industry was reborn, the day America's destiny was reclaimed, and the day that we began to make America wealthy again.

The American economy is richer, more innovative, and for more than a decade has grown at a faster rate than most of the developed world.

But uncertainty over the effects of Donald Trump's policies, particularly on trade, has many people asking if the outperformance of the US economy could be coming to an end. A very broad, crude consensus was that the US administration was going to be brilliant for the US economy and terrible for everywhere else, quite simply put. And so what we're seeing so far this year is question marks on both sides of that.

When we know consumer spending drives about 65%, 70% of GDP in the US, that's something that we're going to watch very, very closely. We do see that consumer confidence has deteriorated quite fast. Any way you slice it, none of this looks to be positive for growth or inflation in the short run. In just a few short months in office, the US president has upended the global trade in goods that's worth some $24 trillion.

Here's why tariffs could make America less exceptional. Our head of economics and government and host of the Trumponomics podcast, Stephanie Flanders, joins me now for more. Stephanie, first of all, for context, how much better has the American economy been doing than the rest of the world up until now?

Well, I think we're often harking back to the global financial crisis because certainly in the UK, but also a lot of other countries, that was when there seemed to be a kind of step shift, slowdown in growth and productivity in most developed economies. And the US has just not suffered from that in the same way. So even since 2008, its average real growth rate has been just under 2%, maybe 1.8%, not

quite as good as it had been in previous years, but still much better than both the European Union or the UK, which has been sort of just over 1%. And I think it's even more striking since COVID, where the US has more or less continued that rate of growth since COVID. And the economy is probably 15% bigger now than it was at the end of 2019 before the pandemic. And both the EU and the UK have not come anything like close to that.

So what will tariffs mean for that trajectory for the US economy? Who feels their effect most? There's an immediate hit. And obviously, we're still sort of passing through, as you've probably gathered, some of the numbers weren't quite as advertised. And there's even some sort of basic elements of these tariffs where we don't know whether to add them up

up or just consider them as totals for each country. I know that sounds completely basic, but it seems to be something that even some officials in the White House aren't entirely clear about. But insofar as we can put these numbers into the models, the sort of rough model of the US economy would suggest that it would reduce GDP by between 2% and 3%, so not nothing at all, and raise the level of prices by around 1.5%. But of course, a lot

depends on what importers do. Do they pass on these effectively tax increases, the tariff increases at the border to consumers? Or do they do what actually has been happening in the first round of tariffs in the last few months? They've been generally kind of taking it on the chin. And obviously, that means that that would have a less impact on inflation. So I think we're fairly confident of the hit to growth. I think

How large and how long lasting the inflation impact is a real question mark, which obviously is going to matter a lot for the central bank, for the Federal Reserve as well. On that question of how long things will last, as you say, there's so much that we still need to know. What negotiations might yield, perhaps a change in position around certain sectors or certain industries? What will be the key factors to watch to determine whether or not this will have a lasting effect on the American economy?

As I mentioned, there's one aspect, which is that how do importers deal with this? Do they just squeeze their margins because they're worried about losing out on competition? Well, that will be good for inflation. But if you think if you're Donald Trump and you actually wanted to boost US production and US companies through doing this, that's not going to help very much if the importers are just absorbing any of the increase.

But I think there's a sort of broader factor. I mean, Donald Trump has said he wants a lot of production for things like Carnival.

like cars to just come back to the US. Well, there's a reason why many of these parts and even the cars themselves often, the production had moved overseas is because it's much cheaper. And if you bring everything back to the US, then the unit cost of these things is going to be more expensive over a long period. So I think that's what the Federal Reserve is kind of

trying to work out. Often they would have said this was just a short-term thing and that prices, it'll just be a step change in the level of prices. But if it changes the underlying dynamics of the economy, that we're now making things more expensively than we were when we were making them abroad, well, that could be an ongoing increase in inflation. Are there certain industries or parts of the American economy that will do better as a result of tariffs?

I mean, if you look at what happened in the first Trump term, steel was hit very early on with tariffs.

And that's happened again in this term. I think that the president considers steel to be a sort of fundamental symbol of U.S. industrial might. And he's trying to protect what is now a very shrunken steel industry in the U.S. Well, that is a sector which will potentially do quite well. U.S. produced cars.

Tesla is one of the few car companies that does make the cars sold in the US almost entirely made in the US. Those companies will gain, those sectors will gain. But if you think of something like steel, there's vastly more parts of the economy that use steel as an input than produce steel. It's a tiny part of the economy. It's a tiny share of employment.

But the amount of manufacturing and other parts of the economy that you steal is enormous and a lot of jobs are affected. So what we found in the first term is even the much more limited tariffs he had then

actually cost jobs overall. And indeed, the government was having in many cases for agriculture, for example, having to subsidise farmers for their losses in these tariffs, which kind of meant, you know, everything was a bit of a wash. It's often said that if America sneezes, the rest of the world catches a cold. What does a weaker American economy mean for the rest of us? Well,

Well, of course, a lot of people have been making the comparison with the 1930s, the famous or infamous Smoot-Hawley increase in tariffs, which was quite similar in magnitude. We think that the average effective tariff rate for the US has gone up by about 20 percentage points, which is more or less what happened in the 30s. And then that started a global trade war, everybody retaliating against each other, and global trade fell by 60%. This time,

because this is the US unilaterally doing this, although some countries are obviously weighing up whether to retaliate against the US, we obviously don't anticipate them retaliating against each other because this has been triggered by the US. So in that sense, we don't think it is going to be on the same scale. And obviously, goods is a much smaller share of our overall economy now than it was back in the 30s. We have all these services which make up the majority of most developed economies. So it's not

the 1930s. But it is a significant hit. I mean, we think in the European Union, the exports to the US could halve and that will be a hit to GDP, you know, potentially a sort of half a percentage point, which the European Central Bank might have to respond to by cutting interest rates.

The UK, the central bank has a bit less room for maneuver, but it certainly puts a small proportion of GDP on the line and certainly some jobs in sectors like the car industry particularly. So it is a hit. It's not enough in itself to trigger a global recession. But as we said at the start, a lot of countries are not in the strongest shape coming into this. So it definitely is, could definitely do without it.

Stephanie Flanders, Bloomberg's head of economics and government and host of the brilliant Trumponomics podcast. Thank you. For more explanations like this from our team of 3000 journalists and analysts around the world, go to Bloomberg.com slash explainers. I'm Stephen Carroll. This is Here's Why. I'll be back next week with more. Thanks for listening.

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