Tariffs by Chatbot: Trump's Trade Policy as AI-Generated Farce

So... we have Krugman, Smith, Bernstein, Drezner... and counting... all agreeing that these tariffs are stupid. That they're going to cause chaos, for all and hardship for the average American. I'd love to see a seed from a reputed economist telling us why the tariffs are good.

There are links in the seed.

S E E D E D   C O N T E N T

Why Scott Bessent, Howard Lutnick, Jamieson Greer, and Kevin Hassett have not yet resigned and apologized for working for Trump—that is not something that I can grok, at any level. But at least they are having no input on the Trump administration, for they have all been replaced by some ChatBot:

Dominick Preston : Trump's new tariff math looks a lot like ChatGPT's <https://www.theverge.com/news/642620/trump-tariffs-formula-ai-chatgpt-gemini-claude-grok>: 'ChatGPT, Gemini, Grok, and Claude all recommend the same "nonsense" tariff calculation: When President Donald Trump began yesterday's announcement of the White House's latest trade policy brandishing a novelty-sized cardboard sign labeled "Reciprocal Tariffs," the immediate and nearly unanimous response was bafflement…. A 10 percent baseline tariff on all imports… including from uninhabited islands, plus absurdly high rates on specific countries, supposedly based on "tariffs charged to the USA" — which didn't match up to other, non-cardboard-sign-based estimates…. James Surowiecki… found you could recreate each of the White House's numbers by simply taking a given country's trade deficit with the US and dividing it by their total exports to the US. Halve that number, and you get a ready-to-use "discounted reciprocal tariff."… Why did Trump's team use it? Well, like plenty of people who've realized their homework is due in three hours' time, it seems like they may have been tempted by AI. If you ask ChatGPT, Gemini, Claude, or Grok for an "easy" way to solve trade deficits and put the US on "an even playing field", they'll give you a version of this "deficit divided by exports" formula with remarkable consistency… [with] all four platforms g[iving] us the same fundamental suggestion…

The one thing we do know is that these particular tariffs are not going to be around in a month. Why not? Because Trump wants to make headlines. But I think Jared Bernstein is right that some set of tariffs will be around in a month, and will stick around. Why? Because:

Jared Bernstein : The Most Important Economic Question Right Now <https://econjared.substack.com/p/the-most-important-economic-question>: 'The economy that Trump inherited was fine… solid GDP growth, robust jobs, low unemployment, rising real wages and improving consumer confidence. This is all just a huge, deeply misguided vanity play… based on false numbers… [but] to back down at this point would be to admit that he and his team have been operating from a place that is many miles away from reality. And such an admission is very likely a bridge too far for them. So, stay tuned and fasten your seat belts…

I think Dan Drezner has this right:

Dan Drezner : American Foreign Economic Policy Is Being Run By the Dumbest Motherfuckers Alive <https://danieldrezner.substack.com/p/american-foreign-economic-policy>: 'The fuckwittery continues unabated…. Paul Krugman watched Trump's Rose Garden speech announcing the tariffs and declared, "he's gone full-on crazy."… [But] Trump has always been like this. What has changed… has been the near-absence of any dissenting voices within the Republican Party, the absence of any adult voices within his administration, and the abject incompetence of his staff….

The administration claimed that foreign countries had placed tariffs on the United States…. They used their own BS formula…. A White House official confirmed this to the New York Post 's Steven Nelson, "The numbers [for tariffs by country] have been calculated by the Council of Economic Advisers… based on the concept that the trade deficit that we have with any given country is the sum of all trade practices, the sum of all cheating." This is a dumb concept! Countries do not necessarily run trade deficits or surpluses simply because of their trade policies!…

What is truly nuts, however, has been the statements by Trump officials in which they do not seem to realize that other countries might retaliate: [Bessent:] "One of the messages that I'd like to get out tonight is everybody sit back, take a deep breath, don't immediately retaliate, let's see where this goes. Because if you retaliate, that's how we get escalation…"

Unless "don't immediately retaliate" is Bessent-speak for "I will fix this if you don't joggle my elbow", that last is even stupider than Donald Trump. Why? Because we already know where this goes if you don't retaliate. Where this goes is here:

You cannot make a deal with Donald Trump. As I wrote last month:

Brad DeLong : DRAFT: Mar-a-Lago Discord <https://braddelong.substack.com/p/draft-mar-a-lago-discord>: '[Remember that] Trump believed that NAFTA was the worst trade deal America ever made…. Trump demanded that Canada and Mexico help him fix it—and they did, with the USMCA…. [But did doing that favor mean] that Canada and Mexico are now in… [some] "green bucket": friends of America, with whom Trump cooperates[?. No]…. Of all the countries in the world, Trump is angriest at Mexico and Canada… What Mexico's and Canada's willingness to play ball with him and get into the green bucket for him has gotten them from Trump is, in the words of Michael Corleone, this: "You can have my answer now, if you would like. My offer is this: Nothing"…

Globalization has been a huge source of growing American wealth over the past century and a half. For America, that source of wealth is now at an end. But not for the rest of the world—it, especially Europe, India, and China, will continue to benefit, increasingly:

Dan Drezner : American Foreign Economic Policy Is Being Run By the Dumbest Motherfuckers Alive <https://danieldrezner.substack.com/p/american-foreign-economic-policy>: 'The Wall Street Journal' s Jason Douglas and Tom Fairless open their story on the tariffs by declaring: "President Trump's biggest tariff blitz yet sends a clear message to U.S. and foreign companies alike: The era of globalization is over."… Drezner's World disagrees…. The era of globalization is over for the United States . The rest of the world will happily trade with each other at much lower tariff rates…

That happiness to trade with others is already having consequences. Strategic rhetorical accommodation without substantive concession accompanied by a frantic replacement of ties to the United States with ties to others has already begun. It will accelerate. Bessent, his affinity, and others have been promising us for at least six months that Trump keeps score by the stock market, and hence that the stock market has an effective veto over destructive policies.

They lied.

Expect to see rhetorical engagement—publicly flattering former President Trump's agenda. Expect to see verbal affirmation of Trump's framing of American greatness. Expect to see express willingness to work with him.

But there is and until Donald Trump is confined to the booby hatch precisely zero reason—either economic, strategic, or diplomatic—for any international actor to accommodate their policy to Trump. Such accommodation would not be reciprocated with consistent or predictable good-faith engagement. Commitments made will not be honored. Restraint hinted at will not be observed in the face of any opportunities for domestic political spectacle.

Further, counterparty countries vulnerable to asymmetric retaliation—or symmetric retaliation that hurts both sides equally, or asymmetric in the other direction that hurts the United States much more than the counterparty—are already beginning to act to decisively remove interdependence. Mexico is undertaking a strategic reorientation toward Europe and China, seeking alternative suppliers and partners to make up the high-tech nodes in the global value chains upon which Mexican manufacturing depends. I do not know, but I am sure that Mexico is thinking about countermeasures to impose concentrated costs on the Trump-aligned coalition within the United States in response to the future abrogations by Trump of the USMCA that will come. The same for Canada. The idea that Canada and Mexico would be economic and political supports and allies in some contest-of-the-systems competition with China is now dead.

The obvious analogy is to Brexit. Up-to-date empirical estimates suggest Brexit has left the United Kingdom now approximately 10% poorer than it otherwise would have been, with losses still accruing. This looks like a bigger deal than Brexit. Brexit was supposed to "regain control" for Britain, not break trade links. But the whole point of the Trump tariff policy is to break trade links.

And yet S&P 500 stock market index is only—only—down 7% from where it was at the end of last year. I think the market is still expecting to wake up next week and recognize that this is all a dream, and that Scott Bessent is in control:

God knows why…

What does this do to the macroeconomic forecast? I would give an 80% chance the NBER Business Cycle Dating Committee gives us a 2025 business cycle peak, and stagflation—the combination of rising inflation and rising unemployment—start.

More granularly? I do not yet know.

This morning, I asked Paul Krugman: "So what is going to determine what is happening and will happen? Will the driving force be shocked to the trade account, the capital account, or the cost account?"

Paul Krugman's answer: "Yes".

Exports and imports are both likely to dive as the tariffs and the retaliatory countertariffs go into effect. If the dollar stays roughly the same, exports are likely to fall by more: people who buy our exports will think that they dare not get or stay dependent on U.S. producers given that we are ruled by a feces-flinging chaos monkey, and that will put additional downward pressure on our exports. By contrast, the fall in imports will likely be moderated as people hope for a rollback. Thus the trade-account channel will—at a constant dollar—more likely than not widen our trade deficit.

But the value of the dollar will be determined by what the capital-account channel does. Will the dollar rise in value as increased global economic chaos leads people to want to move their wealth into the U.S. given its role as a safe haven? Will the dollar fall in value as people think there are other safe havens, and Trump is an idiot and will put in place still more idiotic wealth-destroying policies? I confess I do not know.

And how will the Federal Reserve react to the higher inflation that is now on the way?