Trump puts his theory to the test

With sweeping auto levies, the US president is putting his beliefs about tariffs into practice on the global economy, but economists are not optimistic, writes Ana Swanson from Washington

- 

President Donald Trump and his supporters have clashed with mainstream economists for years about the merits of tariffs. Now, the world will get to see who is right, as the president's sweeping levies on automobiles and auto parts play out in a real-time experiment on the global economy.

In Trump's telling, tariffs have a straightforward effect: They encourage companies to move factories to the United States, creating more American jobs and prosperity.

But for many economists, the effect of tariffs is anything but simple. The tariffs are likely to encourage domestic car production over the long run, they say. But they will also cause substantial collateral damage that could backfire on the president's goals for jobs, manufacturing and the economy at large.

That's because tariffs will raise the price of cars for consumers, discouraging car purchases and slowing the economy. Tariffs could also scramble supply chains and raise costs for car-makers that depend on imported parts, reducing US car production in the short term.

They could also lead to retaliation on US car exports, as well as other products American companies send abroad, leading to damaging global trade wars.

On Thursday, global stock markets fell, with auto stocks hit hardest, as investors absorbed the scope and severity of Trump's plans. Shares in General Motors, which imports many of its best-selling cars and trucks from Mexico, were down roughly 7%. Stellantis and Ford shares were also lower. European shares closed lower Thursday, with carmakers suffering the worst losses.

As automakers and economists scrambled to rework their growth forecasts, America's allies slammed Trump for imposing tariffs, saying the levies would destabilise the global economy, and vowed to retaliate.