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Donald Trump’s characteristically rambling speech at Davos yesterday touched upon many familiar themes: Europeans must ramp up defence spending; the EU and China should address their “unfair” trade surpluses with the US; and Russia’s “horrible” war in Ukraine needs to end.
But one comment, in particular, stood out from the new US president’s speech.
“[If] you don’t make your product in America, which is your prerogative, then very simply you will have to pay a tariff, differing amounts, but a tariff, which will direct hundreds of billions of dollars and even trillions of dollars into our treasury to strengthen our economy and pay down debt.”
The remark is revealing for three reasons.
The first is that it definitively settles an ongoing debate among economists – and, most likely, among Trump’s own cabinet members – about how “Tariff Man’s” repeated threats to impose duties on US imports should be understood.
According to one view – endorsed by, among others, Vice President JD Vance – tariffs are simply good economics. By implementing them, the US will boost its tax revenue, raise citizens’ wages, and turbocharge its economy.
“Anything that you lose on the tariff from the perspective of the consumer, you gain in higher wages, so you’re ultimately much better off,” as Vance put it in an interview last year.
A second interpretation – supported by, among others, Trump’s pick for US Treasury secretary, Scott Bessent – is that the tariff threats are fundamentally not grounded in economic concerns. Rather, they “can be used for negotiations” – a strategy designed to win concessions from, or gain leverage over, other countries.
Trump’s Davos speech conclusively demonstrates that the US leader aligns with the ‘Bessent’ rather than the ‘Vance’ interpretation.
For Trump is not, after all, primarily making an economic argument for tariffs – although, admittedly, he does note that tariffs do have certain economic benefits, such as boosting tax revenue.
To him, tariffs are ultimately a ploy – a way for the self-proclaimed “deal maker” to get what he wants.
Manufactured concerns
A second reason why Trump’s remark is worth dwelling upon is more subtle – namely, the reference to foreign firms making products in the US.
In other words, Trump is not merely using tariffs as a threat to, for instance, force other countries’ to purchase more US oil and gas. His goal is wield the threat specifically to boost domestic manufacturing.
This particular use of tariffs, as it turns out, has a long and storied history. Indeed, it is one that has been pursued by none other than the very first US Treasury Secretary, Alexander Hamilton.
In his “Report on the Subject of Manufactures” delivered to the US House of Representatives in 1791, Hamilton noted that the “superiority enjoyed by nations, who have preoccupied and perfected a branch of industry” typically can only be addressed through “the extraordinary aid and protection of government” – including through the introduction of “protecting duties”, i.e. tariffs.
Interestingly, Hamilton, like Trump, also noted that such levies have “the additional recommendation of being a source of revenue”.
Hamilton’s main cause of concern was, of course, Britain, which at the time was the world’s manufacturing powerhouse.
Trump’s, on the other hand, is China – a country which has become the “the world’s sole manufacturing superpower” largely, although not exclusively, due to Beijing’s economic protectionism – and, arguably, Washington’s lack thereof.
Tariffically American
Such historical links illustrate a third, more uncomfortable truth about Trump: namely, that he is – historically, culturally, and economically – a uniquely American phenomenon.
Indeed, his Davos remarks suggest that, both in terms of his ultimate ambitions and his hubris, he is as American as Jay Gatsby:
“Can’t repeat the past?” he cries incredulously. “Why, of course you can!”
Economic Policy Roundup
The European Commission will call for an “unprecedented” reduction of red tape to boost the bloc’s faltering economy over the coming five years, according to a draft of the EU executive’s much-vaunted Competitiveness Compass, seen by Euractiv. The plan, whose release has been delayed until next Wednesday after Commission President von der Leyen fell ill during the Christmas holidays, also calls for deeper economic “coordination” between EU institutions, member states, and private firms. Read more.
The only constituency in Germany’s national election that matters. With over 40% of eligible voters 60 or older, up from 34% twelve years ago, Germany’s election is largely a race to win the elderly. They are a group with one big priority: pensions. With their backs against the wall, the Social Democrats have resorted to outright pension alarmism, accusing the rival Christian Democrats (now polling at about 30%, compared to the SPD’s 15%) of planning to cut pensions, while casting themselves as defenders of the elderly. Read more.
Donald Trump accuses the European Union of treating the United States “very, very unfairly”. In a wide-ranging speech delivered via video link to the World Economic Forum in Davos on Thursday, the US president criticised the EU’s “large” corporate tax and VAT rates and condemned the bloc’s failure to address its significant trade surplus in goods with the US. “From the standpoint of America, the EU treats us very, very unfairly, very badly,” said Trump. “They have a large tax… They don’t take our farm products, and they don’t take our cars, yet they send cars to us by the millions.” Read more.
Germany’s central bank pushes for a U-turn on debt rules. Germany’s usually hawkish central bank President, Joachim Nagel, is getting more serious about reforming the country’s constitutional deficit rule, pushing beyond technical changes. “We have to work on the overall concept of the debt brake,” Nagel said at a side event of the World Economic Forum’s annual meeting in Davos. Read more.
Europeans’ “laziness” and inherent aversion to risk-taking are responsible for Europe’s economic decline, says European Central Bank President Christine Lagarde. The ECB chief told Davos attendees that the re-election of Donald Trump as US President should also serve as a “wake-up call” for EU leaders to deepen the EU’s single market by removing internal barriers to trade and investment. “We can do more than a decent job if we were to remove fast – fast – some of the barriers that we have just let history, you know, laziness, bureaucracy build and stand in the way of what we have,” Lagarde said. Read more.
Donald Trump’s protectionist policies will likely increase eurozone borrowing costs and inflict further damage on the bloc’s anaemic economy, warns eurozone financial rescue fund chief. Speaking just minutes after Trump’s second presidential inauguration on Monday, Pierre Gramegna, Managing Director of the European Stability Mechanism (ESM), said that rising global borrowing costs indicate that investors “are already pricing in” the economic impact of Trump’s “America First” policies. “Europe’s growth will likely suffer from the expected new course of the US administration,” Gramegna said. Read more.
The European Commission reiterates its refusal to rule out confiscating frozen Russian assets despite Belgium’s warnings. European Commissioner for Economy Valdis Dombrovskis said on Monday that while “all economic and legal risks” associated with the confiscation of Russian sovereign assets held in the EU should be “duly considered”, the Kremlin must nevertheless be made to “pay” for the harm inflicted on Ukraine during its nearly three-year-long war. Dombrovskis’ remarks came just minutes after Belgium’s Finance Minister, Vincent Van Peteghem, said that confiscating the assets poses serious “legal” and “economic risks” to the eurozone. Read more.
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