President Donald Trump’s tariff policy is shaking the global economy (Note 1). Following the imposition of tariffs on steel and aluminum, an additional 25% tariff on automobiles has been introduced. In addition, the imposition of high rates of individual country-basis reciprocal tariffs has been announced, with Japan subjected to an unexpectedly high tariff rate of 24%. It appears as if the Trump tariff policy aims to throw the global economy into turmoil.
Few economists would deny that imposing tariffs lowers economic welfare by distorting resource allocations and is therefore generally not desirable as an economic policy. Furthermore, the view that bilateral trade surpluses and deficits (trade imbalances) are problems, which underlies President Trump’s reciprocal tariff approach, is incorrect from the perspective of economics. That point was made clear more than 30 years ago by Dr. Ryutaro Komiya, who was then director general of the Research Institute of International Trade and Industry (MITI/RI), RIETI’s predecessor, based on the savings-investment balance theory (Komiya, 1994). It is difficult to understand why a trade policy focused on the bilateral trade balance is still being adopted.
The series of policy moves since President Trump took office is of serious consequence in that they not only affect trade and investment directly through the imposition of high tariffs but also sow uncertainty over what form of trade policy is likely to take shape in the future. The trade policy uncertainty (TPU) index for the United States is at a record high level, and the TPU index for Japan is also rising sharply (Note 2).
Various policy changes, such as the introduction of additional measures, may lie ahead, and tariff measures, including retaliatory tariffs against the United States adopted by other countries and further U.S. retaliation, could continue to be used as policy tools. It is highly likely that the global economy will continue to be shrouded in an extremely high level of uncertainty. In this column, I will consider President Trump’s trade policy from the perspective of uncertainty, based on my recent book (Morikawa, 2025).
Economic Effects of Trade Policy
Increased uncertainty, regardless of whether it is related to trade policy, has negative effects on macroeconomic activities due to the wait-and-see behaviors of companies and households, which include postponing capital investment, recruitment, and purchase of durable goods until the uncertainty abates. This mechanism is known as the “real option effect.” It has a stronger influence on highly irreversible types of investments.
For companies, starting new overseas activities, such as investment for entering foreign markets or creating global supply chains, entails significant sunk costs which are unrecoverable once the investment has been made. The option value of waiting is greater for overseas investment than the case of domestic investment, so there is a high likelihood of overseas investment being strongly affected by uncertainty over trade policy.
Many empirical studies have been conducted on the effects of uncertainty over trade policy, and the fact that such uncertainty has negative effects on the real economy has been robustly corroborated with evidence (Note 3). Recently, the UK referendum on the exit from the European Union (Brexit) and the U.S.-China trade war in the latter half of the 2010s have become subjects of much research. In contrast to the results of those unfortunate circumstances, many studies have revealed that commitments to GATT and WTO rules and bilateral and multilateral trade agreements (PTAs: preferential trade agreements) have the effect of expanding international trade and investment by reducing uncertainty.
As to the direct effects of tariff hikes by the Trump administration, there have been several estimations undertaken using econometric models and the Input-Output Table. While the results vary, estimations incorporate the effects of uncertainty have been rare. According to the estimation by Ito (2025), which is based on past analyses of the effects of policy uncertainty, the recent increase in policy uncertainty may be disruptive enough to suppress Japan’s GDP by 0.9%. This effect will add to the direct impact of the tariff hikes if the uncertainty remains at a high level.
Decline in Effectiveness of Macroeconomic Policy Due to Uncertainty
Not only Japan but countries around the world are affected by the Trump tariffs, and the economic activity of the United States itself is likely to come under strong downward pressure. Monetary easing and fiscal policy measures, such as reducing taxes are often employed to mitigate recessionary pressure. The problem is that when an uncertainty shock causes a recession in the United States or across the world, standard macroeconomic policy measures are unlikely to be effective.
That is because when there is a high level of uncertainty, the responsiveness of companies and households to economic stimulus provided through monetary easing and tax reduction weakens because the uncertainty increases the range of inaction of companies and individuals to changes in demand (Bloom, 2014). In other words, when a recession rooted in uncertainty occurs, the uncertainty offsets the effectiveness of standard macroeconomic policy measures, making it necessary to implement those measures in combination with measures to reduce the uncertainty itself.
It is highly likely that the recent U.S. tariff hikes represent a violation of the WTO rules. However, with the weaking of the WTO’s dispute settlement function, it is also difficult to restrain the uncertainty through international rules. Retaliatory measures taken against the Trump tariffs by other countries will prove to be meaningful to some degree if they serve as a deterrent against further U.S. measures. However, the retaliatory measures could also escalate the tariff war, inviting counter retaliation from the U.S. side, further increasing the global uncertainty. In short, retaliatory measures are a double-edged sword.
Expectations for U.S. Economists
Studies on uncertainty have demonstrated that preventing unnecessary policy uncertainty is the best way of promoting investment (Dixit and Pindyck, 1994). Unlike uncertainty shocks caused by natural disasters and pandemics, uncertainty shocks due to human factors can essentially be avoided.
If having President Trump’s tariff policy revised through foreign government lobbying is ineffective, we can only pin our hopes on opposition to the policy arising from within the United States. As high tariffs are sure to have a significant negative impact on consumers and import industries in the United States itself, there is a possibility that voices of protest will gradually grow.
It goes without saying that the United States is the center of economic research and has produced many Nobel laureates in economics. Many of the theoretical and empirical studies concerning trade policy and uncertainty mentioned in this column were conducted by economists in or from the United States. It is very disappointing that the knowledge of economics accumulated in such a country is not being reflected in actual policies. I look forward to seeing U.S. economists raising their voices and urging serious reconsideration of the Trump trade policy.
April 3, 2025
>> Original text in Japanese
