Trump’s Trade Policy is Far More Rational Than it Looks 

Below is an edited transcript of a live conversation that Stefano Feltri had with economist Lorenzo Bini Smaghi on January 16, 2026, at the EGEA bookshop in Milan. The event was part of the series “Europe in the crises — the answers we need”, co-organised by EGEA and Bocconi University’s Institute for European Policymaking (IEP). 

Lorenzo Bini Smaghi, an IEP Bocconi fellow, holds a degree in economics from the Université Catholique de Louvain (Belgium) and a PhD from the University of Chicago. From June 2005 to December 2011, he served on the Executive Board of the European Central Bank. He chaired Snam (2012–2016) and Italgas (2016–2019), and has been chair of Société Générale since 2015. 

We are now roughly a year into Trump’s second term in the White House, and the discussion opens with the issue that dominated its early phase: trade policy and tariffs. On April 2, 2025 — dubbed “Liberation Day” — Trump moved from rhetoric to action and launched his tariff offensive. In July 2025, an agreement with Europe followed: 15 per cent tariffs on a large share of European goods. 

With hindsight, what was the real purpose of the tariffs? 

To understand the objective, it helps to go back to the 2024 election campaign. The winning message was that the US — despite a year of solid growth and near-record low unemployment — remained a country in which part of the population was struggling, especially in Central America, squeezed by inflation and by deindustrialisation. After the global financial crisis, US manufacturing was effectively cut in half. 

Trump crafted a politically potent narrative because it was easy for key segments of the electorate to grasp: blame foreigners — “they took our jobs”. The villains were the countries running trade surpluses against the US: China, Mexico and, to some extent, Europe. 

In that framing, tariffs — taxes designed to penalise firms that produce abroad and sell into the US — were sold as the natural tool to reindustrialise the country and rebalance trade, thereby recreating jobs. 

That was the electoral logic. But if that had truly been the goal, tariffs would have been applied selectively, targeting products that can plausibly be replaced by domestic production. You would not tax bananas, which the US does not produce; you would focus on goods such as cars and motorcycles. 

Instead, the approach was different: broad-based tariffs, including against countries that do not run a surplus against the US. The UK is a telling case — it runs a trade deficit with the US, yet it was treated much like the EU, which is in surplus. That suggests that, beyond the campaign narrative, the goal may be something else — more intelligible as fiscal policy than as trade policy. 

The US Supreme Court is set to determine whether Trump had the authority to impose this wave of tariffs. In practice, tariffs function like a tax — and in the US, taxation is not solely a presidential matter; it involves Congress, reflecting the constitutional balance between executive and legislative power. 

A president can invoke extraordinary authority in emergencies linked to foreign policy. But if tariff-setting is treated as domestic fiscal policy, it should require congressional approval. 

Trump, not coincidentally, is already laying the groundwork by arguing that a Supreme Court rebuke would harm federal finances. That is another clue: beyond jobs, tariffs can serve to raise revenue by taxing consumption. The politics are straightforward: persuade voters that foreigners pay. In reality, the burden falls on US consumers and businesses. 

This fits a familiar Republican template: tax consumption while cutting taxes on investment, profits and business. The so-called Big Beautiful Bill is fiscally sustainable only if it is financed — at least in part — by new revenue. Since openly raising taxes is politically difficult, tariffs offer a way to do it indirectly while presenting the burden as imposed on others. 

So are tariffs best understood as a fiscal tool rather than a trade instrument? 

The strategy appears broader still. The underlying aim is to support investment — above all in high technology — because that is where the competition with China is being fought. Technological primacy is a bipartisan goal in the US. The American lever is tax cuts; the Chinese lever is subsidies, more or less explicit. 

On both sides, large fiscal deficits — on the order of 7–8 per cent of GDP — and rising debt point to a race of borrowing and incentives that fuels the technology contest. In that context, tariffs are one component of the strategy. 

If attention is fixed solely on tariffs, the debate tends to revolve around inflation and price effects. Yet, so far, the US economy has held up: it is growing at more than 2 per cent, and equity markets have benefited from tax reductions, indirectly supporting consumption — not least because many US households hold a significant share of risky assets such as equities. 

On their own, tariffs are contractionary: they reduce purchasing power and, if imports cannot quickly be replaced by domestic supply, they can compress demand in the country imposing them — while cutting exports in the country hit. But when combined with tax cuts, the net effect can be supportive of growth. 

What is often overlooked is the trajectory of public debt: it is now around 120 per cent of GDP, and projections for the coming years take it towards 140 per cent — above Italy’s level. There is no single, definitive indicator of the “sustainable” threshold, but the trend is troubling. It is one of those files that are frequently left to the next administration. 

Do the dollar’s performance and the rise in gold suggest that Trump’s choices are undermining the dollar’s role in the international financial system — or do they mainly reflect wider uncertainty and geopolitical risk? 

If this policy were sustained over time, it is plausible that the risk premium on dollar assets — and on US assets more broadly — would rise. The question is what credible alternative exists. One can debate whether the euro might become an option in the long run, but today it is not. 

There is also a third pillar alongside fiscal policy and tariffs: deregulation and the use of America’s financial system as a growth engine. 

Reading the new National Security Strategy, it is striking that the financial system is explicitly cited among the tools of US foreign policy. The dollar’s strength is not just the currency; it is the US financial ecosystem — deep and liquid markets, dense intermediation, large funds, large banks. 

That is why, despite dollar risk — which could mean a weaker currency and higher long-term interest rates — global investors have limited alternatives today. US markets remain the most attractive, especially in sectors benefiting from tax cuts. 

And why is the gold price rising? 

Gold tends to rise with inflation and with perceptions of geopolitical risk. In recent weeks, conflict-related fears have intensified. In addition, some central banks — beginning with China — are reducing their dollar exposure in order to limit dependence on the US currency. 

But alternatives are scarce. The euro could be one, yet Europe’s financial market remains too fragmented. In that gap, gold — and to some extent cryptocurrencies — become temporary shelters for investors seeking protection and preferring to wait before reallocating to other assets. 

Trump has long pressured the Federal Reserve, from efforts to push out Governor Lisa Cook to attacks on chair Jerome Powell, who is due to leave in a few months anyway. Why accelerate the confrontation now, and what immediate outcome is Trump seeking? 

Powell is on his way out; the Fed’s board already includes members appointed by Trump; and in May the president will be able to nominate a new chair, consolidating a majority. Why the urgency? 

One hypothesis is that the fiscal strategy is not delivering broad-based gains for the part of the electorate Trump promised would benefit — especially on jobs and inflation. Polls and intermediate election results point to erosion in support, including in traditionally Republican states. With midterm elections in November, the political risk is high: losing congressional majorities would expose Trump to legislative gridlock and, in extreme cases, impeachment proceedings. 

The administration needs quick results on the economy. But rate cuts take months to transmit to real activity. Hence the push for lower rates “now” — to support property markets, equities and consumption. In the months ahead, absent a broader improvement — not only for tech companies but for incomes and employment — pressure for expansionary measures, monetary and fiscal, will grow. The debate has even floated the idea of a family bonus: $1,000 per person for households earning less than $100,000 a year. 

To an outside observer, this can look irrational; electorally, it is coherent: the closer the deadline, the stronger the temptation to stimulate. 

But if rates fall, inflation may rise again. Doesn’t that risk worsening the cost of living — even for symbolic everyday goods — and hurting the voters that sucha a policy is meant to protect, with obvious consequences for political support? 

In the short run, the most immediate effect of interest rates is visible in financial markets: valuations improve, which can support the cycle. The inflationary impact often arrives later — even after a year. That is precisely why monetary policy is entrusted to an independent central bank: to avoid the political temptation to stimulate before elections and offload the inflationary cost afterwards. 

The same logic can extend to foreign policy. In moments of tension or conflict, public support often rallies around the president. If electoral pressure rises, so may the temptation to fuel — or at least emphasise — geopolitical tensions, presenting the president as the leader who can hold the country together. Trump is a highly instinctive politician: he understands his electorate and will do everything he can to maximise his position ahead of the next political deadline.