Trump's tariffs may cause a disastrous trifecta

Hurricane Trump appears to have made landfall. When the time comes to count the losses, the record will show that it didn’t just happen. Oversights and bungled responses to unforeseen events weren’t to blame. The cause was deliberate acts of policy executed in proud, strutting defiance of prevailing expert opinion. The White House and its enablers in Congress have no excuse for what’s coming.

The president’s "Liberation Day" announcement on tariffs was much more aggressive and far-reaching than expected. Financial markets were already in turmoil but something closer to outright panic followed. Share prices tanked and U.S. bond prices moved up sharply, an unambiguous signal of surging uncertainty and heightened risk of recession. As far as tariffs are concerned, more bad news might be to come.

Unfortunately, the economic danger isn’t confined to trade disruption and its direct consequences. Trade is only one of three linked and converging factors. Recently, I explained its connection to two other threats: Unsustainably escalating public debt, and cracks in the Federal Reserve’s freedom to direct monetary policy. Within a few days, all three dangers had become vastly more ominous — and in every case, overt policy choices are to blame.

The president’s declaration adds to tariffs already planned or introduced (on steel, aluminum and cars) an across-the-board levy of 10% on almost all imports, plus so-called reciprocal tariffs applied to some 60 trade partners on a country-by-country basis. The European Union faces a tariff of 20%; Japan, 24%; Taiwan, 32%; China, 34% (54% once you include a 20% tariff announced earlier).

Some defenders of this insanity (including, notably, Treasury Secretary Scott Bessent) say the new barriers will be lower in due course. They’re a "ceiling," and countries will be able to offer concessions and negotiate the tariffs down to some unspecified floor.

Maybe. Vietnam, for instance, depends heavily on its exports to the U.S., and faces a punitive tariff of 46%. It might have no choice but to submit. Trump says it’s offering to eliminate its tariffs on U.S. goods.

But not every country is Vietnam. China has already announced commensurate tariffs on imports from the U.S. and new controls on its exports of rare earths. The EU’s leaders are also discussing countermeasures. A cycle of retaliation and counterretaliation could easily take hold. This threatens recession — but not just any recession.

Taking a sledgehammer to trade imposes a supply shock like the oil-price spikes of the 1970s. It pushes output down while pushing prices up, the condition (if it persists) called stagflation, and a central bank’s worst nightmare. In such circumstances, monetary policy must choose between supporting output and suppressing inflation. It can’t do both. If the Federal Reserve chooses to prioritize price stability, Trump (who’s already calling for faster interest-rate cuts) will be furious and object. So the trade war tees up a fight for control of U.S. monetary policy — in its own right, another grave threat to economic stability.

Now add impending fiscal breakdown, a danger that trade has sidelined for the moment. The Congressional Budget Office recently published its annual assessment of the long-term outlook for deficits and public debt. On the so-called "current-law" basis, which assumes among other things that the most expensive provisions in 2017 Tax Cuts and Jobs Act will expire next year as promised, the outlook is plainly unsustainable. Debt held by the public (the most relevant metric) stands at 100% of GDP this year, rising to 118% in 2035, 136% in 2045 and 156% in 2055.

Those numbers, as they stand, demand immediate action. Almost incredibly, Congress is about to make them much worse. House and Senate Republicans aren’t just planning to extend most of the TCJA (at a ten-year cost, depending on the details, of around $5 trillion) while holding the biggest categories of public spending safe from cuts. In the latest twist, they’re also getting ready to dismantle the last remaining institutional brake on future deficits. Current rules — under a process called "reconciliation" — allow budgets to be adopted by simple majorities so long as they keep within certain limits. One is that deficits cannot be higher after 10 years, as projected on the current-law basis. The new idea is to adopt a current-policy baseline for these projections.

This arcane distinction could be extremely consequential. Shifting to the new treatment essentially uses an accounting gimmick to declare the TCJA extensions costless for budget-control purposes. The extensions cost the same as before; their effect on future deficits and debt is the same. Used in this way, the "current policy" baseline is really a "we no longer give a damn" baseline. Collapsing fiscal control combined with stagflation multiplies the economic risks — not least, by adding to the Fed’s difficulties. The perception that public debt can’t be contained will cause uncertainty to spike, threatening to reverse the current flight to government bonds, drive up long-term interest rates, raise expected inflation and expose hitherto-concealed financial fragilities. Navigating this combination of stresses will be inordinately difficult for the Fed. The possibility of explicit or implicit default will push the system firmly toward "fiscal dominance." And again, as it wrestles with the fallout, the central bank will find itself in the administration’s cross hairs.

Which brings us to the third risk — an overt assertion of control over Fed policy. As with tariffs, as with debt, this has also significantly worsened in the past few days. The White House is intent on bringing independent agencies under its sway, arguing (not unreasonably, in constitutional terms) that they are part of the executive and should be accountable to the president. It recently dismissed two Democratic appointees from the National Labor Relations Board and the Merit Systems Protection Board. The fired officials sued, and a court ruled in their favor. But now the administration has prevailed on appeal and, for the moment, the dismissals stand. Be afraid. Just how much de jure or de facto independence the Fed has is open to dispute — but dispute is the president’s specialty. When he and the central bank fall out, as they almost certainly will, lawfare may cancel the country’s last remaining repository of economic-policy competence. And for as long as it lasts and no matter who wins, any such contest will be another source of risk and instability.

A British prime minister accustomed to successive crises once remarked that a week is a long time in politics. He was thinking too small. The past week has seen U.S. and global economic prospects shift momentously, and very much for the worse.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners. Clive Crook is a Bloomberg Opinion columnist and member of the editorial board covering economics. Previously, he was deputy editor of the Economist and chief Washington commentator for the Financial Times.