Photo: Anna Moneymaker/Getty Images
The on-again, off-again tariff roller coaster continues.
Yesterday, President Trump’s 90-day pause on “Liberation Day” reciprocal tariffs on all countries except China had businesses and investors breathing a sigh of relief. It appears that evidence of the sell-off of 10-year and 30-year Treasury bonds, and the resultant rise in yields, gave the administration pause. Whether or not that was a kill switch on President Trump’s attempt to reorder the global trading system, U.S. economic policy itself, once the bulwark of the global economy, is now the main source of risk and instability to the global economy.
A pause on the most expansive use of tariffs in a century is welcome: It could offer a narrow window within which countries can negotiate. Yet, a stack of tariffs remains in place on a number of allied countries, and tariffs on Chinese goods are even higher as of yesterday. Retaliatory measures by China and Canada have gone into effect. We are still in the midst of a multifront trade war of our own making, and Americans are feeling the impact of these taxes on imports.
The developments over the past few weeks have caused me to go down memory lane. I came of age when Ronald Reagan, Margaret Thatcher, and others were cementing a neoliberal order based on a global trading system that was negotiated and built systematically for generations. It rested on the understanding that open and competitive markets, as well as cross-border trade and investment, would serve as engines of wealth creation and growth. It was also based on the wisdom that economic integration—no matter how imperfect—was preferable to the “beggar thy neighbor” policies of previous eras that could easily turn economic wars into hot wars. This paradigm guided the policy establishment in the United States and other countries for decades.
As a graduate student, I found the neoclassical framework as compelling in analytical clarity as frustrating in narrow assumptions of how the world worked (for instance, perfect information, perfect competition, no transaction costs, and no security externalities). As I would learn through experience, economic policy is both engineering and art. Success requires a passion for the mechanics of markets, as well as a passion for the people who navigate them. And that, perhaps, has been one of the biggest failings of the policymakers of the last two generations. We discounted the full costs of economic reforms—whether due to global trade, technology, or Chinese mercantilism—borne by American workers across the country. And it was only a matter of time before the discontents of the “forgotten men and women” found expression in our politics, and dramatically so in the 2016 presidential election and elections thereafter.
Exactly 30 years ago, in his book The Revolt of the Elites, the U.S. historian Christopher Lasch warned of the widening chasm between policy elites and the general population, and the erosion of the “reciprocal obligation” that characterized earlier eras. He was prescient in anticipating—and uncritically encouraging—the populist wave that would eventually crash against the rock of the U.S. political establishment. That is now part of our history. If populism had a superpower, it is the ability to identify problems in emotive and powerful ways, and President Trump’s prowess in doing that is undeniable.
Lasch failed to acknowledge the consistently poor track record of populism and populists—in their varied expressions across countries and time periods—in delivering economic solutions and favorable outcomes. As of now, this administration, with its chaotic and incoherent tariff plan and the havoc it is causing in global markets, does not appear to be bucking this trend. We can hope for a circuit breaker—one that will forestall a historic and massive economic policy failure just under three months into the administration’s term. That, however, will depend on which of two impulses will drive Trump’s economic strategy in the weeks and months ahead.
The first impulse is revanchist and isolationist, based on the notion that the United States has, on net, been exploited by the world. Tariffs are meant to fix this imbalance, motivate the reshoring of industries, and increase manufacturing employment (despite, as Figure 1 shows, the continued fall in labor share of manufacturing despite higher average effective tariffs in the past). While the administration has been transparent about its intention to use tariffs as the instrument of choice, it has been less clear about the theory of the case: How exactly will tariffs promote well-paying jobs in advanced manufacturing as opposed to reshoring lower-skilled factory jobs (“millions screwing in little screws to make iPhones”) or less labor intensive, automated factories? The volatility around the administration’s approach to tariffs has also made it harder to discern its actual game plan and its desired end state for the United States’ role in the new economic order. For instance, are tariffs primarily a source of leverage or a source of revenue?
The second impulse behind the administration’s economic agenda is innovationist—most clearly reflected in its approach to achieving U.S. full-stack leadership on AI, including by meeting its infrastructure and energy needs, as well as the president’s intentions to revitalize its U.S. science and technology system. The administration presumably aims to leverage and protect the U.S. innovation system—the largest, most dynamic, and most geographically dispersed in the world. Such an effort is urgently needed—a necessary component of any effort to revive U.S. industrial competitiveness.
Modernizing our science and technology ecosystem is the work of many hands—federal, state, and local; public and private; U.S. and allied. The administration can galvanize this effort first by recommitting to increasing public spending on basic research—reversing a 60-year trend, as Figure 2 shows, and stepping up to the challenge posed by the quality and scale of Chinese research in advanced technologies. To be sure, any program of increased U.S. public investment in research and development should go hand-in-hand with a focus on improving the productivity of scientific research, for instance, by leveraging the use of AI.
Perhaps we will look back on this week and thank the bond market because it began to restrain the administration’s trade war impulse. It offers a window of opportunity for U.S. policymakers in the administration and the Hill to focus on the time-tested and stress-tested source of U.S. economic advantage—its ability to out-innovate at the technological frontier with the participation of a larger and larger share of U.S. workers and young people.
Navin Girishankar is president of the Economic Security and Technology Department at the Center for Strategic and International Studies (CSIS) in Washington, D.C.
