Trump Cries Wolf

The current healthy state of the US economy provides little reason for the President to invoke the Emergency Powers Act. The only emergency: The impacts of Trump's draconian policies.

Trump Cries Wolf

April 4, 2025

The April 2 Liberation Day festivities in the Rose Garden of the White House was long on stagecraft but short on reality. And full of great contradictions. While listening carefully to President Trump’s message, I kept asking myself, what are we being liberated from?

I quickly found the answer to my question in the first paragraph of the supporting executive order that was issued coincident with the event, whereby the President invoked the International Emergency Economic Powers Act (IEEPA) as well as the National Emergencies Act as allowed under the Trade Act of 1974. The emergency: “large and persistent U.S. goods trade deficits (that) constitute an unusual and extraordinary threat to the national security and economy of the United States.” While there are compelling macroeconomic reasons to question the validity of this conclusion — namely, as I have argued, ad nauseum, America’s persistent saving-investment imbalance — I concede that the “buck always stops” with the President. Irrespective of any arguments that I and others might make, in the end, a critical part of the President’s responsibility is to call for action in the face of what he believes is a dire emergency.

But that led to my next question: Where is the emergency? This morning, two days after the Rose Garden announcement, the March labor market report showed stronger-than-expected job growth (+228,000) and an unemployment rate (4.15%) that remains quite close to what most economists judge to be full employment. The job gains were, in fact, a little bit faster than the underlying pace of average monthly employment growth in the last two years of the now demonized Biden Administration (+192,000 over 2023 to 2024) while the unemployment rate was only slightly above the 3.8% average of the past two years. A broader perspective can be seen in the so-called Misery Index — the sum of the unemployment and the inflation rates. In February, the Misery Index stood at 6.9% — well below the post-World War II average of 9.2% and identical with the average reading during the first Trump Administration, which the President wistfully looks back on as “the greatest economy in the history of the world.” I repeat my second question: Where is the emergency?

Alas, Donald Trump has never had much patience for fact-based hard evidence. Yet he has no compunction whatsoever about acting on the basis of his rhetoric. According to the Congressional Research Service, this the first instance when the IEEPA has been used to impose tariffs that address trade-related distress. The only previous occasion that approximates the current use of presidential emergency powers came in August 1971, when President Richard Nixon responded to a potential balance-of-payments, or monetary, crisis that he feared might lead to a plunge in the dollar and soaring inflation arising from US abandonment of the gold standard. Under the authority of the Trading With the Enemy Act of 1917, a legislative precursor to the IEEPA, Nixon imposed a temporary 10% surcharge (tax) on US imports that was removed after four months.

The irony, of course, is that Trump’s emergency is not in the numbers but in the misdirected actions he has just taken. Led by a rout on Wall Street, world equity markets have imploded in the immediate aftermath of the bold pronouncements of Liberation Day. Most forecasters have subsequently raised their risk assessments of recession in the US economy and around the world. Unfortunately, this is all too consistent with the dire prognosis that I laid out a few weeks earlier in my missive, “A World Turned Inside Out.” I argued that tariff-related downside risks to the US and Chinese economies, which have collectively accounted for a little more than 40% of the cumulative growth in world GDP since 2010, could well tip the global economy into outright recession by 2026. I stressed that the direct effects of Trump’s tariffs were only the tip of the iceberg considering the likely retaliatory actions that would follow.

Not only were Trump’s so-called reciprocal tariffs larger than I and others expected, but tit-for-tat retaliation has, indeed, been led by the Chinese. I can't say that I am surprised by that. When I was in China last week, I was warned in no uncertain terms that retaliation would be swift and forceful were the US to boost tariffs further on Chinese products. National pride, which lies at the heart of Xi Jinping’s rejuvenation-focused Chinese Dream, leaves China with no other option than to stand up to what it judges to be economic warfare. Nor is China likely to be alone in responding to America’s “Liberation tariffs.” At a minimum, similar actions can be expected from the European Union and Canada.

Predictably, in the face of the carnage on Wall Street, President Trump is waffling, hinting of the great deals that are likely to come. Vietnam, he claimed, was willing to capitulate, and a cautious Mexican President Claudia Sheinbaum has hinted that any retaliation by Mexico might fall short of a full tit-for-tat of the product-specific tariff hikes that have already been imposed on Mexican autos, auto parts, steel, and aluminum. Time will tell as to what extent the Art of the Deal prevails.

Whatever the outcome — and my own hunch is that any deals will only offset a small portion of the tariffs hikes that Trump is imposing on the broad cross-section of America’s deficit-prone trading partners — the damage has been done. Tariff man’s fondness for using the cudgel of protectionism against allies and adversaries, alike, has injected an almost intolerable degree of uncertainty and distrust into the economic climate that can only end badly. The trade deficit is hardly the emergency that Trump makes it out to be. The only economic emergency the United States faces was on full display in the Rose Garden on Liberation Day.

[Note to readers: Normally, I write once a week. Due to extraordinary circumstances, this week is an exception, with a dispatch in each of the final three days of the week. I fully intend to revert to the normal schedule next week. Unless, of course something big comes up …]