Donald Trump Prescribes His Tariff ‘Medicine’ to Remake the Economy
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The world stock markets continue to fall since Donald Trump unleashed his tariff barrage last Wednesday evening. American shares were falling for the third day in a row on Monday as we tape this, following a rout in Asia with Japanese shares falling nearly 8% in the index and Hong Kong's Hang Seng index falling 13% after having been closed on Friday.

Is a recession coming? Donald Trump says not to worry. You have to have some pain when you're undertaking an economic revolution. But signs of political pushback to tariffs seem to be beginning. This is the biggest political and economic story of the day.

if not the year, and it's our subject on Potomac Watch today. Welcome, I'm Paul Gigot with the opinion page of The Wall Street Journal, and I'm here with my colleagues, Joe Sternberg and Mary Anastasia O'Grady, both of whom follow the financial markets and the economy. Let's start with the markets. Mary, what do you think they're telling us, signaling with the turmoil you now see across not just equity markets, but really

all financial markets? Well, I was looking at equity markets this morning, and I think one interesting thing that happened was that in the opening of the market, it sold off really hard. A rumor went around, Newsite published a rumor that Kevin Hassett had said

that the Trump administration was going to pause the tariffs for 90 days. The rumor turned out to be false. The White House denied it. But there was a move up in market prices. And I think what that's telling us is that the market knows that the U.S. economy was relatively healthy going into this mess that we got last Wednesday.

there was a slowdown perhaps coming, but no reason to be overly worried about it. And if this were to go away, some of the damage would be erased. And so I think investors are very eager to see some kind of progress from the White House that would allow them to go back in. So there hasn't been a full capitulation like this is the

the end of time and things are never going to get better. There's still some hope that somehow the White House is going to come to its senses and either reverse the policy or at least mitigate some of the damage by doing something a little bit more reasonable in the area of tariffs. In your view, a tariff-based market right now, which certainly seems...

to be the case. I should add that shortly before we started taping this, Donald Trump came out and said that if China does not rescind its 34% tariff hit on American goods, that was a retaliation against Trump's

34% additional tariffs last week. He's going to slap 50% more tariffs on Chinese goods, and that caused the market to head south again. Let's listen to President Trump on Sunday evening talk about whether he would reconsider the tariffs. I don't want anything to go down, but sometimes you have to take medicine to fix something. And

We have such a horrible, we have been treated so badly by other countries because we had stupid leadership that allowed this to happen. They took our businesses, they took our money, they took our jobs, they moved it to Mexico, they moved it to Canada, they moved a lot of it to China.

And it's not sustainable. We're not going to do it. Now we have hundreds of billions of dollars that's pouring into our country on a monthly basis. It's pouring. It's already started because they put tariffs on it. And eventually it's going to straighten out and our country will be solid and strong again. Joe Sternberg, Donald Trump medicine man. Take your medicine and all will be well, though he doesn't quite say well.

When it will all be well. There's a lot of still questioning on Wall Street and in the political world about Trump's mixed messages here on the tariffs. On the one hand, you get the comments like Sunday, where he seems hard over, we're not moving, we're going to continue with this. That was the message from Commerce Secretary Lutnick on Sunday. That was the message from Treasury Secretary Besant on Sunday.

On the other hand, occasionally Trump seems open to some kind of negotiation. He posted on Friday on Truth Social that the Vietnamese Communist Party Secretary General had phoned him and said, "We're willing to go down to zero tariffs." Trump posted that on Truth Social. He had just hit Vietnam with a 46% tariff, but it sounds like he's open to negotiation.

So, how do you read these mixed messages, Joe? Paul, as with so much else involving President Trump, we should be open first off to the possibility that he himself doesn't know which of these two options he's pursuing at any given time. And I'm also not entirely sure that it matters at this point, because I think that the key thing that seems to be driving a lot of this

market response that has deteriorated now for three straight days in a row is the growing conviction out in the economy that he's for real and that these tariffs are going to last indefinitely.

Well, but then doesn't it matter if he negotiates them? Well, I think that it will end up mattering if the effect of it is that it looks like he intended to negotiate all along because he is at least leaving that option open as a way to get himself out of this pickle as time goes on. Because he says right now that he

doesn't care so much about the market response. And, you know, I have a little bit of sympathy for an argument in general that politicians shouldn't slavishly follow the markets up and down. But, you know, we have to remember stock prices embed investors' expectations about future profits. So it's a signal of, you know, people's expectations about productivity, about the overall health of the economy.

That signal about the tariff policies is very, very bad right now. And so I think the key point, you know,

without going too far down the rabbit hole of what Trump actually believes or what he thinks that he's accomplishing right now. I think the key point is that at least he is leaving himself that out to claim that this is all about negotiating leverage. So he will have that option available if and when he thinks the time has come. All right, we're going to take a break. And when we come back, we're going to ask whether or not Donald Trump is open to negotiation with

with countries to pare back his tariffs when we come back. This message comes from Viking, committed to exploring the world in comfort. Journey through the heart of Europe on an elegant Viking longship with thoughtful service, destination-focused dining, and cultural enrichment on board and on shore. And every Viking voyage is all-inclusive with no children and no casinos. Discover more at viking.com.

Welcome back to Potomac Watch. I'm here with Mary O'Grady and Joe Sternberg. If you assume, Mary, as I do, I agree with Joe, Trump really wants tariffs, okay? I think he believes in them. I think my meetings with him, our meetings with him have underscored this. He really does think they are a useful economic tool, actually a preferable economic tool. He'd prefer an economy with high tariff walls,

protecting various American businesses. The question is, the transition to get there could be painful. And I think the only thing that's going to cause him to shift would be significant pain. And I'm not talking about even a 20% decline in the market or bear market. I'm talking about probably recession, talking about price increases, stagflation, something that really begins to affect his approval rating.

And that, I think, would make a difference. Now, on the recession front, you've got various Wall Street folks saying they're increasing their chances of a recession this year. J.P. Morgan now puts it at 60%. Evercore ISI, which I like, puts it now at 40%. And growth for the year at a mere 1%, which is pretty precarious.

You see junk bond spreads widening enormously. That's a low quality debt suggesting the risk of corporate defaults has increased. You had the flight from the dollar late last week. It's come back a bit, but that's not a good sign.

So I think there are some signs out there that we could be in for some greater economic trouble. I mean, it's troubling to me that I think what you're suggesting, and I think you're probably right, that he's not going to change his plan immediately.

until we get this kind of pain that you're describing. But that's not going to come next week or even next month. That's going to sort of happen throughout the year. So are we going to be stuck with this until things get so bad that he's forced to move off and then he'll say, okay, I'm going to negotiate and he'll declare victory and let up?

a little bit on the tariff fight, but that's implying that a lot of destruction, wealth destruction is yet to come. And I think you're probably right because it's not so much, I mean, he says he doesn't pay attention to the stock market and his real obsession are bilateral trade deficits. And we are a richer country than most of these countries. We're going to run bilateral trade deficits.

I mean, it was ridiculous when he was in the Rose Garden and he cited Cambodia as an example of a country that has been ripping us off for all these years. I mean, I would add Guatemala to that. Guatemala sells us bananas, coffee.

and papaya. And they've been ripping us off, not allowing us, I guess, to grow our own. I mean, it's just absolutely preposterous. And yet it's his main argument. And his second argument is that American workers are worse off with free trade. And there's zero evidence. I mean, you can go, I was just at a, I'm listening to a talk about all the data that

that talks about industrial capacity, industrial production, manufacturing production. We have lost apparel and leather goods, I think, but most other manufacturing capacity that we had has actually improved since 1994 when we joined NAFTA.

And since 2001, when China came into the WTO. Well, I mean, we have also lost furniture making. We have lost lower skilled manufacturing jobs overseas. I think we have to concede that. But I think your point is about manufacturing overall production, which is higher than ever. That's your point, I think. By the way, I would challenge a little bit on the furniture. But those jobs that have gone overseas are low wage jobs. Right.

And what we have done through manufacturing and also technology, boosting manufacturing capacity and production and improving our technology is we have a lot more output per worker. Yeah, that's what I mean. So you have fewer workers in those industries, but it doesn't mean that Americans are worse off. Yeah, that I agree with. American overall manufacturing is much more productive and grows in productivity and so on.

But it uses less labor, which is the political problem that Trump is using to justify the tariffs. And one of the things that's really striking to me here, Joe, is the degree to which Trump is fairly candid in saying, we want a revolution here. This is a revolution. We want to remake the global financial and economic system. We want to...

have this transformation, which is a word that the political left usually uses when it talks about economics. And here we have somebody on the political right saying that I am willing to absorb the pain

of transforming the economy because in some future day, in some way, it will be a new era of prosperity. Usually, conservatives are more modest in their expectations for how government policy can transform the economy. Well, and usually conservatives are right to be more modest about how effectively you can transform the economy without messing everything up.

Paul, I think that's a critical point here. I think that part of what's been going on just since last week, especially in markets overseas, is that people have been realizing that this actually is the grand scope of Trump's ambition here. I think that that was not necessarily clear to a lot of people, particularly outside of the US before Liberation Day last Wednesday. It is becoming clear now.

You know, it goes back also to this issue we were discussing a couple minutes ago about how long Trump might intend for the tariffs to last. I mean, he himself and the circle of many of the advisors he has surrounded himself with fundamentally believe that the global economy needs to be rearranged.

because it was born of a set of circumstances after the Second World War that are just no longer applicable. And the US essentially allowed itself to be taken advantage of to rebuild Japan and Germany and eventually to allow China to develop. And we have to reverse that. As with so many of the grand utopian projects of the left, the history here is all wrong. They misunderstand China.

a lot of the phenomena that they're complaining about in the past, which is leading them to terrible prescriptions for what to do in the future. But it is worth considering that this is a serious

Joe, let me ask you, how do you think Europe's going to respond? That's going to be a key decision this week. Well, I think that, you know, as we've discussed in previous podcasts, the smart thing for them to do would be nothing. There's no reason that Europe should foist greater costs on its own consumers and businesses than it should on its own.

to punish the US. But the political reality is that I think that a lot of voters and European voters already are preconditioned to dislike Trump for a variety of reasons. So there's going to be substantial political pressure to retaliate. And I think that that can take the form of the sort of strategic retaliatory tariffs that Brussels has

attempted in the past on behalf of the European Union. It might become much more aggressive this time. You could see more concerted regulatory assaults on American tech companies, for example. There is going to be huge pressure to do something, and it illustrates how once you start the tariff war, it's hard to stop

because you activate all of these political pressures you don't understand and can't control within your trading partners. Yeah, that's... I think the smart play for Europe, I agree totally, would be to call Trump's bluff on the zero tariffs and just say, yeah, let's go to zero, Mr. President, and see if he's willing to do that. My guess is he's

Probably not because he'd have to take off the American tariff, what, 20%, 25% on foreign trucks that we've had since the 1960s, among other things. We are going to take another break. And when we come back, we'll talk about the political pushback, such as it is, against Trump's tariffs when we come back.

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From the opinion pages of The Wall Street Journal, this is Potomac Watch. Welcome back. I'm Paul G. Goh here on Potomac Watch with Mary O'Grady and Joe Sternberg. Mary, there's beginning to be some pushback. You've seen Bill Ackman on Wall Street talk about economic nuclear winter coming from the tariffs. Now, Ackman

Only last week, I think he was saying good things about the tariffs, so now he's not. Elon Musk said he wants zero tariffs with Europe, willing to risk Trump's wrath. Chuck Grassley and Maria Cantwell introduced a bill that would give Congress the ability to vote on tariffs after a certain period of time, I think 60 days. Ted Cruz, a Texas senator, a big Trump supporter, talked about how this could be terrible for the Republican Party.

party, these tariffs. So you're beginning to see at least some pushback. I guess we're going to have to see more, but I guess I take this as something of an encouraging sign. I think it's been a big disappointment to see how the Republicans have basically just groveled in front of Trump as he's talked about this new wave of protectionism. And I was wondering how long it would take for them to start waking up. I mean, the investor class obviously is hurt directly because they manage money for people and

Their reputations are on the line. But, you know, I think the politicians are also, in a sense, talking their own book because this is going to hit consumers and it's going to hit savers, retirees, people who are planning to retire. So there's a large segment of the population that's negatively impacted by this, what is it now, $7 trillion loss of wealth in the stock market. You know, I'm not surprised about Ted Cruz. I mean, Texas is totally integrated with Mexico. And if the

tariffs on Mexico hit the economy, Texas is going to get hit very hard. So, you know, this is the only thing we can hope for, those of us who want to return to a free and prosperous society, is that the markets will be the ones that eventually call Trump out.

to get Trump's attention enough to get him to change course. Well, Trump is rejecting Adam Smith's economics here. I like to use Adam Smith as a sort of metaphor for the market and its market discipline. And old Adam Smith has a way of enforcing discipline on bad decisions.

But it's interesting to me so far that the business class is muted so far in its opposition or willingness to speak up here against Trump's tariffs. You have the Chamber of Commerce, for example, which was willing to sue the heck out of the Biden administration for various economic decisions. I don't think they've sued Trump yet for this.

though they have issued a kind of mild statement of disapproval about the tariffs. You have the Business Roundtable issued a similar statement, but it's left to a lowly company in Florida, Simplified, a small business to sue the Trump administration for violating, exceeding its executive authority in issuing these tariffs.

tariffs on an emergency declaration. I guess the reason businesses have been so reluctant is because they fear retribution. If anybody sticks their head up above the parapet, they risk Trump going after them in some particular way. He's demonstrated he's willing to do that against law firms and others. And I hear from executives whispering, good on Bill Ackman.

But hey, don't ask me to go on the record. It's worse than that, I think, because, you know, you're hinting, Paul, at this fear of retribution in some form from the Trump administration. But remember, businesses are now in the position where a lot of them are going to have to be asking for favors from the Trump administration, because I think that the circus has started

In terms of people taking meetings at the Commerce Department or sort of calling up friends in the administration, seeing if they can get special carve-outs or exemptions, it's a consequence of the fact that the tariff policy is so sweeping and the rates are so high.

that you create this incredibly destructive but insurmountable incentive for businesses to try to lobby on their own behalf at the expense of their competitors. And I think this is an important part of the politics here, and it's important to understand how destructive this is, because the American economy, traditionally, we haven't wanted to operate that way. We wanted...

And we built our prosperity over many decades and a couple centuries on the basis of a relatively small government that would create equal opportunities for all businesses. And a consequence of the tariff policy that I think that we're only now starting to grapple with is

The higher the tariffs, the more incentive there is to engage in that kind of special pleading and the more power that gives to the bureaucrats who are on the receiving end of those pleas for assistance. So, I mean, any conservatives who were unhappy about, you know, Biden administration or Obama or other democratic abuses of power, I mean, think long and hard about the kind of opportunities for mischief that this tariff policy is creating.

It's the Beltway Swamp expansion. All right. Thank you, Mary O'Grady. Thank you, Joe Sternberg. We'll leave it at that today. The story is not going away as financial markets are telling us. Thanks to all of you for listening to Potomac Watch. We're here every day. Thanks for listening.

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