Economists have exhaustively analyzed Trump's latest trade war, examining both the basic effects of tariffs and the more understated consequences of policy uncertainty. But there is another critical angle worth exploring: the dynamics of interventionism suggest that government responses to the consequences of this trade war are likely to trigger a cascade of additional interventions, ultimately exacerbating our economic problems.
Predictably, one of the first major policy decisions of the second Trump administration was to impose tariffs on a wide range of imported goods. Protectionism has been one of Trump's most consistent policy positions since his first term. Despite this rhetorical consistency, considerable uncertainty persists about the precise implementation of protectionist policies under Trump 2.0. This uncertainty, in and of itself, generates pernicious effects for businesses and trade relations, compounding the already negative impacts of tariffs.
While specific trade policies can be difficult to predict, the concept of the "dynamics of interventionism" provides a framework for anticipating their development. This concept, originated by the economist Ludwig von Mises and developed by contemporary economists such as Sanford Ikeda , describes the logical progression of government intervention.
Consider this illustrative example:
1. U.S. government imposes tariff on Chinese steel.
2. China retaliates with tariffs on U.S. agricultural products.
3. U.S. farmers suffer losses, which motivates the implementation of agricultural subsidies by the government.
4. These subsidies are financed with revenues from the initial tariffs.
5. Subsidies artificially maintain resources in inefficient sectors.
6. New problems arise that trigger additional interventions.
The chain reaction of interventions creates a self-perpetuating cycle of policy responses to problems caused by previous policies.
The dynamics of interventionism are playing out in real time with Trump's latest trade policies. Let's analyze how this cycle is already beginning to unfold.
Trump imposes substantial tariffs on Canada and Mexico-some of the United States' most reliable trading partners-disrupting established supply chains and increasing costs for businesses.
Financial markets plunge in response. Political uncertainty indices soar. Business prospects deteriorate sharply as companies struggle to adapt to the new business landscape.
In the face of these negative effects, the government announces a targeted pause in tariffs, specifically for the automotive industry. This selective application creates winners and losers, distorting market incentives and creating opportunities for regulatory arbitrage. Inevitably, once the government selectively lifts tariffs for one industry, others will seek similar exemptions. This encourages rent-seeking, such as lobbying and political favoritism-seeking, which creates additional market distortions and reinforces the cycle of intervention.
The administration seems to believe that this pause will give automakers time to move production to U.S. soil. Trump's argument boils down to: once cars are produced domestically, there will be no need for tariffs!
This logic fundamentally misunderstands why production occurs where it does. If domestic production were truly the most efficient option, companies would already be manufacturing here, without government pressure. While domestic production avoids tariffs, it will not necessarily translate into lower prices for consumers, due to higher labor and material costs.
When these higher prices inevitably materialize, what happens next? Following the dynamics of interventionism, we can predict a third wave of interventions: perhaps subsidies for U.S. automakers or tax credits for consumers who "buy American". These policies will artificially divert demand away from domestic producers, generating substantial irretrievable economic loss and trapping labor and capital in sectors where they are less productive than they might be elsewhere.
Each step in this sequence illustrates Mises' vision: government interventions create unintended consequences that trigger other interventions, setting off a chain reaction that moves us progressively away from efficient market outcomes.
Trade policy under the current administration will undoubtedly be chaotic. But the dynamics of interventionism tell us something even more troubling: the impact of new tariffs will not be limited to trade policy alone. As the administration struggles to address the negative consequences of its trade war, we can expect additional interventions implemented on an ad hoc basis in various economic sectors. These responses will likely exacerbate existing problems and create entirely new ones, setting the stage for further intervention.
The lesson is clear. In assessing the impact of Trump's trade policies, we must look beyond the immediate effects of tariffs. The dynamics of interventionism tell us that the current trade war will not be limited to tariffs, but will spill over into other areas of economic policy, fueling distortions that policymakers will strive to correct with even more interventions. The result? A growing and unpredictable web of government actions that takes us further and further away from free markets and economic efficiency.
Chandler S. Reilly, The Daily Economy