Trump’s ‘ham-handed’ tariffs have long-term implications for global markets and interest rates, economist Zandi says

Short-term pain, but long-term gain.

That is how President Donald Trump’s administration has been marketing its economic policies. Higher tariffs and a global trade war may hurt now, the pitch goes, but this will mean a stronger economy in the future. Don’t buy it.

We are already feeling the pain of the mounting global trade war. It took a dark turn earlier this month when the president unveiled so-called reciprocal tariffs on a poster board full of trading partners. These include a 10% tariff that all countries have begun to pay, and even higher tariffs that vary country to country but were quickly suspended for a few months, ostensibly to allow time to negotiate favorable trade deals for the U.S.

This hasn’t gone over well. Shell-shocked global investors have sold stocks, wiping out trillions in stock wealth. They’ve also sold Treasury and corporate bonds, pushing interest rates up, and are giving the U.S. dollar the cold shoulder, shifting their investments into euros, pounds, and yen.

Businesses are beside themselves. They’ve already pulled back on hiring, pared back workers’ hours, and appear poised to cut jobs. The Philly Fed’s monthly manufacturing business outlook survey, an accurate leading economic indicator, has collapsed, consistent with a recession dead ahead.

Consumers are also badly shaken. They haven’t stopped spending, at least not yet, but they have become more cautious shoppers. It is also worrisome that much of their recent buying has been of imported vehicles and other goods to avoid the tariff-induced price increases. Of course, this is just stealing from future sales.

However, the most acute pain will be felt in the coming weeks when higher tariffs push up prices for everything from food and furniture to clothing and cars. This will act like a massive tax increase on consumers and businesses. The odds are uncomfortably high that we will suffer a recession characterized by lost jobs and higher unemployment.

OK, so that’s the short-term pain. What about the long-term gain?

The administration argues that tariffs will bring a lot of manufacturing back to the United States. I don’t see how.

Put yourself in the shoes of the CEO of, say, a global vehicle manufacturer trying to decide whether to build a new assembly plant in the U.S. That factory won’t be completed for three years and will operate for at least 20.

The financial sense of building that factory depends on the tariffs. But given how quickly the tariffs are changing and that they are being challenged in the courts and could be struck down, the CEO doesn’t know what the tariffs will be next week, let alone years from now.

Even if global manufacturers could get comfortable with this uncertainty and expand in the U.S., it wouldn’t lead to many jobs. Manufacturing mainly uses robots, not human workers.

Under the most optimistic scenarios, we are talking tens of thousands of jobs, certainly not millions.

More worrisome in the longer run is that the trade war is undermining the global safe-haven status of the U.S. Safe-haven status means global investors know that if they invest in the U.S., in a Treasury bond or anything else, their investments’ value won’t be upended by a capricious government; laws and regulations are transparent, and while they may change, that’s only after deliberation and due process.

The tariffs and resulting global trade war with foes and allies alike have blown our nation’s safe-haven status to smithereens. The tariffs are not deliberate but based on a ham-handed formula. And there seems to be no process other than the whims of one person.

If that isn’t enough, there are the attacks on the Federal Reserve’s independence. History is clear that a cornerstone of a well-functioning economy is the Fed setting interest rates based on its economic objectives, including full employment and low and stable inflation, rather than bending to anyone’s political desires. The latter would keep rates low for too long and spur higher inflation.

This will cost us dearly, most clearly via higher interest rates on U.S. Treasury bonds. Global investors will demand higher rates for buying Treasurys that may no longer be risk-free. Given that nearly $30 trillion in Treasury bonds are outstanding, even a tiny increase in rates adds enormously to the interest payments future generations will need to pay.

Then there are the higher rates that we all will pay for everything from home mortgages to business loans.

Investors for some time have increasingly questioned whether we are a safe haven. But judging from investors’ reaction to the “liberation day” declaration of a trade war, they are set to conclude that we are not. The global trade war has already seriously damaged our safe-haven status and will be costly to our economy.

Despite it all, there is still time for the Trump administration to stand down on the trade war, salvage some of our status, and avoid the worst economic repercussions — but that time is running out.