The real costs of Trump’s economic agenda are staggering

The key difference is that Roosevelt’s New Deal was a radical—and ultimately successful—effort to pull the US out of the Great Depression. By contrast, Trump’s policy drive lacks such a clear and immediate catalyst, as the US economy was performing well before he came to office.

Rather than responding to an economic crisis, Trump’s policies seek to reorient the American economy by revitalizing its once-dominant manufacturing sector. Whether they will succeed is far from certain.

Weaponization of international trade is at the top of Trump’s economic agenda. Since April, he has imposed sweeping ‘reciprocal’ tariffs on almost every country in the world, then adjusted them repeatedly—lifting some, lowering others and reinstating or increasing many.

As a result, the average effective US tariff rate has surged from 2% in 2024 to more than 16%, its highest level since the 1930s.

While many commentators have warned that sharply higher tariffs could fuel domestic inflation, the real risk lies elsewhere.

By increasing the cost of imported inputs from countries like Mexico, Canada and India, Trump’s tariffs raise production costs in America and undermine its ability to compete globally.

Reduced competitiveness will likely lead to a decline in US exports, squeezing working-class incomes.

Trump’s One Big Beautiful Bill Act, which combines tax cuts for the rich with cuts to health-care and food-assistance programmes, will compound the damage by disproportionately harming low- and middle-income Americans while adding trillions to the federal deficit.

Unless these policies are reversed soon—an unlikely scenario—their impact on the American economy could be devastating.

While the immediate effect on prices may be limited, high tariffs will ultimately slow GDP growth and erode wages, particularly for working-class Americans. This decline is likely to be a secular trend, potentially leading to a sharp deterioration in economic performance.

Mainstream economists often overlook a critical fact: economic performance is influenced by much more than economic-policy decisions. As Francis Fukuyama has argued, it hinges on the strength of domestic institutions and the degree of trust within and between countries.

It also depends on what Joseph S. Nye Jr. called ‘soft power,’ or the ability to persuade rather than coerce.

Unfortunately, the US president has taken a sledgehammer to American institutions.

For example, hundreds of international students at leading US universities have had their visas abruptly revoked by the Trump administration, further weakening trust in America’s long-term commitments and adding to the damage already caused by Trump’s relentless attacks on longtime US allies and contempt for the rule of law.

The greatest risk is a loss of confidence in the US dollar, which, as the world’s leading reserve currency, has long been the bedrock of US economic dominance. I vividly recall 5 August 2011, when Standard & Poor’s downgraded America’s credit rating from AAA to AA+.

At the time, I was serving as an advisor to the Indian government and witnessed the widespread uncertainty about the potential impact on global financial markets.

Ironically, this downgrade triggered a flow of money into the US, as investors seeking a safe haven rushed to buy dollar assets. The prevailing belief was that the US was a country that would never default on its external debt.

That trust, built over decades, has been central to the dollar’s dominance. It has also allowed the US to accumulate an external debt of $28 trillion, which is more than any other country.

While this gives the US a significant strategic advantage, it also implies a major vulnerability: if confidence in the dollar were to erode, the rug would be pulled out from under the American economy.

The unpredictable shifts in US policy under Trump have made financial markets increasingly jittery. If current trends persist, the consequences could be swift and severe, leading to a historic loss of confidence in the dollar and a flight of capital from US assets.

The only hope is that Americans will oppose Trump’s harmful policies and force him to reverse course. Despite short-term challenges, the US economy is resilient enough to recover.

But if Trump continues for the next three and a half years as he has so far, the US could find itself facing the kind of conditions that Roosevelt had to address; only, this time the country’s economic decline could be irreversible. ©2025/Project Syndicate