Why Trump Started a Trade War: Understanding the Reasons Behind Tariffs

Last Wednesday, Trump announced sweeping new tariffs affecting virtually every nation, shaking financial markets globally. This latest tariff news sent shockwaves through some of the biggest economies in the world. Within two days, stock markets and oil prices plummeted by over 10%. Opinions on why Trump initiated this move vary widely. In this article, I'll walk through eight key explanations to understand Trump's goals clearly, exploring the impact on the global economy and the potential for higher inflation and recession fears.

Before diving in, let's quickly address: what are tariffs? Tariffs are essentially import duties or taxes imposed on goods entering a country, often used as a tool in trade conflicts. The current tariff on Chinese imports has been a hot topic in recent tariff news today, with some measures reaching as high as 104% on goods from China.

Here are eight popular explanations for Trump's tariff strategy:

1. "Trump Has Lost His Mind—It's Pure Foolishness"

Surprisingly popular among the public, this explanation suggests Trump's tariffs on China are irrational and defy logical explanation. While entertaining, analyzing global leaders' decisions from such a perspective misses the complexity behind policy-making. Trump undoubtedly relies on expert economic advisers, including Trump's trade adviser and the US Trade Representative, to shape his policies towards certain objectives.

Yet, I do agree on one point: regardless of Trump's ultimate objectives, his practical execution has been notably poor. Instead of precise, clearly communicated strategies, Trump took an aggressive, blanket approach with exaggerated tariffs, accompanied by misleading statements claiming reciprocal fairness.

2. "Trump is Applying Shock Therapy While He Still Can"

Another theory suggests Trump's aggressive economic policies stem from limited remaining time. With a strong re-election victory and what is likely his last term as president, his time to implement major reforms is short and quickly running out. With upcoming congressional elections in 2026 possibly threatening Republican majorities, Trump is acting decisively—opting for the startup-like approach of moving fast and breaking things in the global trade conflict.

The logic is simple: it’s now or never. In the future, the White House could very well be occupied by a conservative president—someone who favors time-tested economic policies and would find it easier to revert to the economic playbook of the past fifty years.

3. "Tariffs Are Just America's Equivalent of VAT, Ensuring Fair Competition"

This argument echoes official statements from Trump. The logic here argues that the European Union's VAT (around 20%), absent in the U.S., disadvantages American exports.

This explanation is problematic.

• VAT applies equally to domestic and imported goods within the EU, ensuring equal competition locally.

• Similarly, in the U.S., neither imported nor domestic products face VAT, thus competing fairly.

VAT essentially targets consumers within the imposing country rather than distorting international trade competition. Responding to VAT with tariffs seems more politically motivated than economically justified.

4. "Trump is Employing Aggressive Negotiation Tactics"

‍Trump has built a reputation as a skilled negotiator, even authoring The Art of the Deal. He uses the threat of increasing tariffs as a strategic tool to put pressure on other nations, creating an opportunity to later negotiate favorable terms, effectively returning to the previous status quo but with added advantages for the U.S.

Some analysts further elaborate on this, suggesting that economic theory proposes an "optimal" tariff level for strong countries, which could enable them to benefit at the expense of producers in other countries. However, this approach will only succeed if it doesn't lead to a full-blown trade war — meaning that other nations refrain from responding with retaliatory tariffs. So far, mixed reactions emerged: Vietnam, Israel, and India seem willing to negotiate, while Beijing and the European Union retaliate aggressively with their own tit-for-tat tariffs. The outcome remains uncertain, with negotiations with trading partners potentially shifting dynamics significantly.

5. "Attempting to Revive U.S. Manufacturing Base and Strategic Security"

Persistent U.S. trade deficits weakened domestic manufacturing capabilities and critical supply chains, undermining strategic national security.

However, imposing Trump tariffs indiscriminately across various sectors seems excessive. Ideally, tariffs targeting strategic industries needing revival, such as steel and aluminum levies, would make more sense. Trump's broad tariff strategy appears geared towards autarky, self-sufficient economic production, though historically, such economic isolation leads to inefficiencies and limited growth.

Additionally, shifting resources to manufacture new goods inevitably reduces efficient production in existing industries, as resources are finite. Moreover, uncertainty around America's policy trajectory might deter substantial foreign investments, given possible dramatic shifts after Trump's tenure.

6. "Forcing Lower Interest Rates to Refinance U.S. Debt Cheaply"

Trump promised extensive "winning" during his campaign. Ironically, U.S. stock indices dropped notably under his recent policies. Some theorize Trump deliberately destabilizes markets to push investors towards safer Treasury bonds, thus lowering yields.

Lower yields would enable cheaper refinancing of massive U.S. debt, previously issued at higher rates. Mathematically, refinancing debt at reduced rates significantly eases debt management. While economically feasible, practical success requires careful implementation amid volatile financial markets.

7. "Correcting Long-Term Trade Deficits and Related Debt"

America's significant and longstanding trade deficit implies importing more foreign goods than exporting American products, exchanging tangible goods for U.S. Treasury bonds. Such imbalances eventually require correction—either via uncontrolled crisis or managed interventions like current import duties.

Thus, tariffs could deliberately induce a controlled economic slowdown, resetting trade balances and reducing reliance on debt-financed consumption. The Treasury Secretary plays a crucial role in managing these economic strategies.

8. "Reducing America's Burden as Global Reserve Currency"

Stephen Miran, Trump's recently appointed economic advisor, argues the dollar's global reserve status burdens America rather than benefiting it. Persistent global demand for dollars inflates its value, fueling chronic U.S. trade deficits.

If the dollar weren't the reserve currency, natural market adjustments via currency depreciation would boost U.S. competitiveness, correcting imbalances organically. Miran's approach suggests distributing reserve currency burdens globally via tariffs, effectively taxing foreign producers without significantly affecting U.S. consumer prices due to currency adjustments.

However, early impacts of Trump's sweeping new tariffs differ from Miran's expectations—markets react skeptically, weakening the dollar further and diminishing confidence in its reserve status.

Final Thoughts

No single explanation fully captures Trump's complex tariff strategy. All these perspectives partially illuminate the overarching economic challenges America faces—excessive consumption, trade imbalances, global economic shifts, and the dollar's problematic global role.

For decades, America benefited from globalization, outsourced manufacturing, and dollar dominance. Now, as Beijing rises technologically, America must confront difficult realities, potentially reducing living standards—a politically unpopular message.

While outcomes remain uncertain, with the possibility of higher inflation and recession fears looming, one thing is clear: the next few years will certainly be eventful along the way as the global economy grapples with the consequences of these retaliatory tariffs and trade conflicts.

As these new tariffs are taking effect, we can expect to see significant price rises across various sectors. The worst offenders in terms of trade imbalances may face even stricter measures. While some critics argue that Trump may go down in history as the worst president for international trade relations, others believe his aggressive stance is necessary to level the playing field.