Chartbook 370 Is it madness or is it "Brexit-by-CBAM"? Locating Trumpian economics in policy space.

In these head-scratching days it is useful to try to locate the madness of Trumpian economic policy in more familiar policy space. The aim is not to make strong analogies but to ease the pain of thinking about all the nonsense by offering other cases that we have already thought through.

Brexit comes to mind because it is another case of gratuitous of economic self-harm dressed up in the language of economic sovereigntism, manliness etc.

The long-running discussions about carbon taxes and carbon border adjustment mechanisms (CBAMs) come to mind because tariffs like carbon taxes are levies on consumption that have the aim of promoting a structural shift in economic activity.

So what if we think of Trump-o-nomics as Brexit-by-CBAM.

What does history suggest about the likely effects of such a combination?

• The cocktail come as a shock, but in the end the sky doesn’t fall.

• Nor, however, does the elixir produce the intended rejuvenation. The impact, over the following years, is one of slow and progressive deterioration. The hoped-for structural shift arrives slowly, if at all.

• Price incentives alone are not enough to stimulate large-scale investment in the hoped for direction. Investment becomes all the more unresponsive if the general business climate is bad and there are no large and targeted incentives.

The first point - the sky is unlikely to fall - is important to emphasize because it runs counter to a lot of writing about the scope for political autonomy in the face of pressure brought to bear by capital markets.

Drawing on the experience of developing countries, debt crises in emerging markets, and Greece in the Eurozone, critical theorists constructed models of state-investor relations that attributed huge power to bond vigilantes and creditors. The implication was that this was a general characteristic of global political economy. In fact, it is a feature of uneven and combined development. Some people are exposed to some creditors. Others much less so.

Before we even get to America’s exorbitant privilege (it really is a privilege) as the issuer of the world’s reserve currency, the case of Brexit in 2016 demonstrated how much harm a right-populist politics can inflict on major business interests and get away with it. A Tory prime minister literally said “f*** you” to the City of London and after a few tantrums, things calmed down and the City accepted a trajectory of gradual decline and marginalization. There is a lot to be said about British elite politics, the disintegration of national capital and the Tory party as its coordinator. David Edgerton’s piece in the Guardian remains fascinating on this score. But there is also the more basic fact that the main issuers of the vast majority of public debt - the big rich countries - have considerable room for maneuver in relation to their creditors. If they have a cooperative central bank (a big if if you are a left wing populist … or Liz Truss), the chances are they can ride out short-term financial turbulence.

You can’t build a general model of investor power, or “buying time” in a global system characterized by uneven and combined development. If you imagine that you can, you aren’t understanding the system. The unevenness is a feature, not a bug.

Does this mean that Trump can continue doing what he is doing despite the protests of billionaires and the managers of trillion-dollar asset portfolios? Who knows. It will surely be bad for GOP-donor relations. Maybe he will crack under pressure. Maybe they will find an off ramp before we get to 100 percent tariffs on all trade with China. But do you want to bet on it? Does Trump care? The fact that we are even asking the question, tells you a lot about the degree of autonomy US politics actually enjoys.

Beyond the management of the immediate shock, a major difficulty in comparing the impact of Brexit to Trump’s tariff onslaught, is that the UK economy was growing so slowly before 2016 that the business-cycle impact of Brexit was relatively mild. By contrast, the US economy entered 2025 running at full steam. At the beginning of the year, the question was how much longer could the good times last? Did American exceptionalism promise an endless, Australian-style growth boom? The most dramatic impact of Trump’s tariffs may well be to tip the US into recession and to crush the bull market vibes, slashing the wealth of America’s richest households. That is not an effect that most trade models, like the ones that the Peterson Institute uses, allow you to estimate. It may swamp all other damage done by Trump’s tariff intervention.

What trade models do highlight is the long-run damage done by the inefficiency of disassembling and then reassembling (if you are lucky) the global division of labour. In a huge, rich economy like the US, those inefficiencies will be knife cuts rather than hammer blows. But they will hurt low-income households. And if the Brexit example is anything to go by they will hurt smaller businesses, less able to set prices and less able to cope with the shock.

Over the longer run, can tariffs support industrial growth? Sure. But generally that is a recipe for catch-up growth on the part of poor countries. Can rich countries use trade policy to sustain industry? Of course they can. Think of Switzerland and its efforts to hold down the value of its currency to maintain a balanced economic structure. Or think of the tacit protectionism exercised through public procurement from national military-industrial champions.

But touting general tariffs as a way of supporting comprehensive structural and socio-economic change in the largest and richest economy in the world, in which manufacturing accounts for less than ten percent of employment … well that is a first. Lets not pretend that South Korea’s experience in the 1970s and 1980s has much relevance here.

One thing does, however, seem reasonably clear. If we take the current obsession with manufacturing seriously, if we credit that Trump and Biden and so many of the folks caught uncomfortably in the space between them truly want to see America reindustrialize, then what do they need? Investment! Investment, investment, investment.

And what have we learned from all those years debating green industrial policy discussion, Bidenomics, the energy transition, the Green New Deal etc? Price signals are not enough. A tariff is a price signal like a carbon tax. If you buy foreign/carbon-intensive stuff, you pay the tax. Specifically, it is like a carbon border adjustment mechanism i.e. a selective tax on carbon-intensive foreign imports. This was a policy that was denounced as unthinkable by the fossil lobby and eventually abandoned by the US climate left.

Now, the analogy between Trump’s general tariffs and carbon taxes is, again, imprecise. The market for imports being shut out by Trump’s tariffs is already there. This is not a case of green innovation. The US consumer market is huge. So investors may not need guarantees of the kind they demand when you are trying to induce an energy transition. It would be interesting to hear David Victor and Chuck Sabel on how they judge the impact of tariffs on US innovation, based on their work on innovation and climate policy.

But investors are certainly going to need to know that these tariffs are permanent, which is one thing that the Trump crew seem not to agree on.

Furthermore, if the US is going to get into manufacturing on a large-scale, we presumably don’t want to import relatively badly paid mass assembly jobs. As Commerce Secretary Howard Lutnik conjured up in his deathless remarks about “armies of millions of workers”, the vision for the US is actually to move to highly sophisticated manufacturing.

That will require investment plus innovation. That ups the ante in terms of long-term commitments. Building a sophisticated supply-chain whether across borders or within the US economy, requires a clear sense of the risk-return. And it takes time.

And that brings us back to the recession. The shock of Trump’s tariffs is now. When do they expect the investment boom to arrive? As Tracy Alloway put it yesterday in the OddLots newsletter:

The Trump administration says it wants to build expensive things. But at the same time it appears to have destabilized pretty much every form of capital out there and sparked a massive retreat from the American economy. It’s very hard to see who’s supposed to step in to fill to plug the hole.

As Barack Obama lamely but tellingly remarked: “Imagine if I had done any of this.”

Why can Trump do what he is doing? Because there is more flex vis a vis capital than we general imagine. But also because he is shielded on his right flank.

If Trump were a left populist I would add as a fourth lesson from debates over the last decade. European experience also teaches that if you combine a “progressive” consumption tax with regressive tax cuts for the super rich, as Macron did in 2018 and Trump and the GOP are proposing in 2025, you end up running the risk of pitchforks (Gilets Jaunes). But in America’s topsy-turvy politics the folks most likely to wield pitchforks put Trump in the White House. Ditto for Brexit. So there is no obvious check from that side either.

This isn’t an exercise in prediction. It is an exercise in clearing the mind. But it does suggest that the Trump experiment has room to run.

I’m reminded of a favorite quotation from Adam Smith:

In late 1777, Adam Smith received news of General Burgoyne's defeat at Saratoga, promising calamity for Britain's war effort in America. His correspondent expressed deep concern that the nation was ruined. "There is a great deal of ruin in a nation", was the great economist's calm reply.

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