Finance
Free trade flaws fueled Trump’s rise in 2016 — and the problems remain, top economist says
Former U.S. President Donald Trump speaks after attending a wake for New York City Police Department (NYPD) officer Jonathan Diller, who was shot and killed while making a routine traffic stop on March 25 in the Far Rockaway section of Queens, in Massapequa Park, New York, U.S., March 28, 2024.
Shannon Stapleton | Reuters
Decades of trade deficits and a strong dollar created too many “losers” in the U.S. economy who turned to Donald Trump’s protectionist policies, according to Richard Koo, chief economist at the Nomura Research Institute — and those conditions remain.
Trump’s “America First” economic policies led his administration to institute a slew of trade tariffs on China, Mexico, the European Union and others, including slapping 25% duties on imported steel and aluminum.
As the Republican nominee for the 2024 presidential election, Trump has proposed a baseline 10% tariff on all U.S. imports and a minimum levy of 60% on imported Chinese products.
These policies have drawn widespread criticism from economists, who argue that tariffs are counterproductive, as they make imported goods more expensive for the average American.
Speaking to CNBC’s Steve Sedgwick on the sidelines of the Ambrosetti Forum on Friday, Koo said protectionism was a “horrible thing,” but that Trump’s approach “does have some economic logic.”
“When we studied economics and free trade, in particular, we were taught…that free trade always creates both winners and losers in the same economy, but the gain that winners get is always greater than the loss of the losers, so the society as a whole always gains. So that’s why the free trade is good,” he noted.
Koo nevertheless argued that this rests on the assumption that trade flows are balanced or in surplus, while the U.S. has been running huge deficits for the last forty years, which have expanded the number of “losers.”
“By 2016, the number of people who consider themselves losers of free trade, were large enough to elect Trump president, and so we have to really go back and say to ourselves: what did we do wrong to allow this many people in United States to view themselves as losers of free trade?” he said.
For Koo, the key problem was the exchange rate, as the strength of the U.S. dollar incentivized foreign imports and hurt U.S. companies exporting around the world.
“We kind of let the exchange rate be decided by so-called market forces, speculators, my clients, Wall Street types, but the foreign exchange rate has to be set in a way that the number of losers does not grow to a point where the free trade itself is lost,” Koo said.
He pointed to a similar pivotal moment in 1985, when President Ronald Reagan faced the same issue of a strong dollar and rising protectionism. At the time, Reagan responded by facilitating the Plaza Accord with France, West Germany, Japan and the United Kingdom to depreciate the U.S. dollar against the respective currencies of these countries through intervention in the foreign exchange market.
“That’s the kind of thing we should have been more conscious of doing. Instead of allowing [the] dollar to go wherever the market takes [it], and then these people who are not as fortunate as we are in the financial markets, end up suffering and end up voting for Mr. Trump,” Koo added.
He argued that economists need to move beyond the idea that the trade deficit is simply down to “too much investment” and “too few savings” in the U.S., as this means deficit can only be reduced by remaining in recession until domestic demand weakens so much that U.S. companies can export more goods, which would not be possible in a democracy.
Koo again pointed to past dealings with Japan, suggesting that if the argument held that overseas companies are just filling in where U.S. companies cannot satisfy domestic demand, then the American companies fighting Japanese firms in the 1970s and 70s should have recorded huge profits due to excess demand.
“But that did not actually happen. It’s the opposite that happened. So many of them went bankrupt, so many losers of free trade were left in the streets, because it was not savings and investment issue, it was the exchange rate issue,” he said.
“The dollar should have been much weaker, and Reagan understood that that’s why he took that action.”
President Donald Trump speaks before signing executive orders in the Oval Office on March 6, 2025.
Alex Wong | Getty Images
President Donald Trump says that tariffs will make the U.S. “rich.” But those riches will likely be far less than the White House expects, economists said.
The ultimate sum could have big ramifications for the U.S. economy, the nation’s debt and legislative negotiations over a tax-cut package, economists said.
White House trade adviser Peter Navarro on Sunday estimated tariffs would raise about $600 billion a year and $6 trillion over a decade. Auto tariffs would add another $100 billion a year, he said on “Fox News Sunday.”
Navarro made the projection as the U.S. plans to announce more tariffs against U.S. trading partners on Wednesday.
Economists expect the Trump administration’s tariff policy would generate a much lower amount of revenue than Navarro claims. Some project the total revenue would be less than half.
Roughly $600 billion to $700 billion a year “is not even in the realm of possibility,” said Mark Zandi, chief economist at Moody’s. “If you get to $100 billion to $200 billion, you’ll be pretty lucky.”
The White House declined to respond to a request for comment from CNBC about tariff revenue.
The ‘mental math’ behind tariff revenue
There are big question marks over the scope of the tariffs, including details like amount, duration, and products and countries affected — all of which have a significant bearing on the revenue total.
The White House is considering a 20% tariff on most imports, The Washington Post reported on Tuesday. President Trump floated this idea on the campaign trail. The Trump administration may ultimately opt for a different policy, like country-by-country tariffs based on each nation’s respective trade and non-trade barriers.
But a 20% tariff rate seems to align with Navarro’s revenue projections, economists said.
The U.S. imported about $3.3 trillion of goods in 2024. Applying a 20% tariff rate to all these imports would yield about $660 billion of annual revenue.
“That is almost certainly the mental math Peter Navarro is doing — and that mental math skips some crucial steps,” said Ernie Tedeschi, director of economics at the Yale Budget Lab and former chief economist at the White House Council of Economic Advisers during the Biden administration.
Trade advisor to U.S. President Donald Trump Peter Navarro speaks to press outside of the White House on March 12, 2025 in Washington, DC.
Kayla Bartkowski | Getty Images
That’s because an accurate revenue estimate must account for the many economic impacts of tariffs in the U.S. and around the world, economists said. Those effects combine to reduce revenue, they said.
A 20% broad tariff would raise about $250 billion a year (or $2.5 trillion over a decade) when taking those effects into account, according to Tedeschi, citing a Yale Budget Lab analysis published Monday.
There are ways to raise larger sums — but they would involve higher tariff rates, economists said. For example, a 50% across-the-board tariff would raise about $780 billion per year, according to economists at the Peterson Institute for International Economics.
Even that is an optimistic assessment: It doesn’t account for lower U.S. economic growth due to retaliation or the negative growth effects from the tariffs themselves, they wrote.
Why revenue would be lower than expected
Tariffs generally raise prices for consumers. A 20% broad tariff would cost the average consumer $3,400 to $4,200 a year, according to the Yale Budget Lab.
Consumers would naturally buy fewer imported goods if they cost more, economists said. Lower demand means fewer imports and less tariff revenue from those imports, they said.
Tariffs are also expected to trigger “reduced economic activity,” said Robert McClelland, senior fellow at the Urban-Brookings Tax Policy Center.
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For example, U.S. companies that don’t pass tariff costs on to consumers via higher prices would likely see profits suffer (and their income taxes fall), economists said. Consumers might pull back on spending, further denting company profits and tax revenues, economists said. Companies that take a financial hit might lay off workers, they said.
Foreign nations are also expected to retaliate with their own tariffs on U.S. products, which would hurt companies that export products abroad. Other nations may experience an economic downturn, further reducing demand for U.S. products.
“If you get a 20% tariff rate, you’re going to get a rip-roaring recession, and that will undermine your fiscal situation,” Zandi said.
There’s also likely to be a certain level of non-compliance with tariff policy, and carve-outs for certain countries, industries or products, economists said. For instance, when the White House levied tariffs on China in February, it indefinitely exempted “de minimis” imports valued at $800 or less.
The Trump administration might also funnel some tariff revenue to paying certain parties aggrieved by a trade war, economists said.
President Trump did that in his first term: The government sent $61 billion in “relief” payments to American farmers who faced retaliatory tariffs, which was nearly all (92%) of the tariff revenue on Chinese goods from 2018 to 2020, according to the Council on Foreign Relations.
The tariffs will also likely have a short life span, diluting their potential revenue impact, economists said. They’re being issued by executive order and could be undone easily, whether by President Trump or a future president, they said.
“There’s zero probability these tariffs will last for 10 years,” Zandi said. “If they last until next year I’d be very surprised.”
Why this matters
The Trump administration has signaled that tariffs “will be one of the top-tier ways they’ll try to offset the cost” of passing a package of tax cuts, Tedeschi said.
Extending a 2017 tax cut law signed by President Trump would cost $4.5 trillion over a decade, according to the Tax Foundation. Trump has also called for other tax breaks like no taxes on tips, overtime pay or Social Security benefits, and a tax deduction for auto loan interest for American made cars.
If tariffs don’t cover the full cost of such a package, then Republican lawmakers would have to find cuts elsewhere or increase the nation’s debt, economists said.
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