Brunetti View December 2025

It is probably the biggest experi­ment in uncon­ven­tional economic policy that we have seen in a rich industria­lized country in recent decades. And it is certainly the outstan­ding macroe­co­nomic event of this year. With the aim of leading the economy – subito – to unpre­ce­dented heights, hardly a single economic policy stone was left unturned in the USA this year. In the opinion of most econo­mists, however, the methods and instru­ments used were highly unsui­table. Although the policy mix was actually aimed at achie­ving large growth gains as quickly as possible, the US economy remains remar­kably undynamic. As we discussed in the last “View”, the populist expan­sion strategy was thwarted by the massive uncer­tainty created by the practi­cally daily policy changes. As a result, the unusual policy mix has weakened growth practi­cally from the outset. If this policy is maintained, the medium-term growth momentum of the US economy is also likely to be substan­ti­ally impaired.

Customs duties as the main actor

One policy area obviously stands out, namely trade policy. Tariffs are, so to speak, the symbol of Trump’s economic policy and he already empha­sized during the election campaign how central he considers signi­fi­cant tariff increases to be. And whatever you think of it, the admini­stra­tion has delivered what was promised in this respect. The chart in the Finan­cial Times, which is updated regularly, shows the impres­sive progres­sion of US trade policy since the new admini­stra­tion took office. The small graph in the top section of the picture traces the course of average US tariffs since the begin­ning of the 20th century. In response to the high costs of the unfort­u­nate protec­tionist measures in the interwar period (symbo­lized by the Smoot-Hawley Tariff Act), there was a clear rethink after the end of the Second World War. As part of the reorga­nization of global economic insti­tu­tions, the USA took the lead in the joint efforts of industria­lized count­ries to dismantle trade barriers as far as possible. Average tariffs were there­fore reduced step by step and reached a very low level of almost zero percent in this millen­nium. Donald Trump brought this wave of libera­lization in global trade to an abrupt end this year. Tariffs quickly shot back up to the level at the end of the Second World War. The large chart in the figure traces this specta­cular develo­p­ment in the current year in more detail. After some initial tariff increases in the first quarter, the shock of the – origi­nally titled – Libera­tion Day came at the begin­ning of April. From this high point, tariffs have since been reduced somewhat with some back and forth, but are currently still at a very high average of just under 15%. Inciden­tally, the most recent event here is the so-called “customs deal” with Switz­er­land.

This develo­p­ment is also remar­kable because such a protec­tionist trade policy is diame­tri­cally opposed to the basic recom­men­da­tions of econo­mics. Econo­mists debate many things, but when it comes to the harmful effects of tariffs, there is a remar­kable consensus of opinion.

There are various arguments for this, but the basic reaso­ning is very simple. Firstly, the (inter­na­tional) division of labor is the basis of prospe­rity (imagine a self-suffi­cient Switz­er­land) and secondly, any trade only takes place if both parties benefit from it. The US admini­stra­ti­on’s argumen­ta­tion makes it clear that it does not accept or under­stand these two premises. If, for example, it considers every bilateral trade deficit to be proble­matic and wants to bring the produc­tion of as many goods as possible back to the US, then it is de facto taking the immensely expen­sive and ineffi­cient path towards self-suffi­ci­ency. And when it repea­tedly insists that trade with certain count­ries is at the expense of the US, it believes that foreign trade is a zero-sum game and that one country’s gain is another’s loss. But this is a funda­mental misun­derstan­ding, because no one can be forced to trade and trade there­fore only takes place if both sides benefit; it is a positive-sum game that increases the size of the cake overall and is there­fore not about distri­bu­ting an existing cake.

Against this backdrop, it is econo­mic­ally undis­puted that imposing tariffs is harmful and that the US admini­stra­tion is doing itself and its country a monumental disser­vice if it conti­nues to do so. The political-economic problem is that the costs of tariffs are prima­rily long-term. In the short term, they are attrac­tive because they appear to protect domestic produc­tion and at the same time generate govern­ment revenue. However, the costs come mainly in the longer term because the value chains have to be reorga­nized and become less efficient and the workforce is deployed less produc­tively. This signi­fi­cantly reduces future growth poten­tial. However, one negative effect can already be felt in the short to medium term, namely the increase in the price of goods.

Threat of infla­tion (loss of purcha­sing power)

And this brings us to the second parti­cu­larly remar­kable effect of Trump’s policy mix. Practi­cally all measures threaten to fuel infla­tion. The first is the trade policy just described. A large propor­tion of the tariffs are generally passed on to custo­mers. It is clear to see that this has already begun in the USA, as consu­mers are incre­a­singly complai­ning about the falling afforda­bility of goods that are subject to high tariffs. However, the severe restric­tions on migra­tion are also leading to wage pressure and thus price increases due to the incre­a­sing shortage of labor. Budge­tary policy has the same effect through tax cuts combined with continued extra­or­di­na­rily high govern­ment spending. And last but not least, the admini­stra­tion is constantly attacking the US central bank and deman­ding drastic interest rate cuts. These attacks under­mine the indepen­dence of the central bank, which is central to price stabi­lity, and any further interest rate cuts would also have an infla­tio­nary effect. Overall, all elements of this policy mix are driving up prices and it is there­fore no surprise that US infla­tion, and core infla­tion in parti­cular, is stubbornly holding steady at 3% despite the gloomy economic trend. Rising infla­tion expec­ta­tions also indicate that the peak of this trend has probably not yet been reached.

… and Switz­er­land?

As is well known, Switz­er­land was hit parti­cu­larly hard by the US tariff hammer. Accor­dingly, a slump in goods exports led to weak GDP growth in the second quarter and a signi­fi­cant decline in the third. As a country heavily depen­dent on exports, Switz­er­land cannot escape such a foreign trade shock. On a positive note, there are now signs of an agree­ment that should lead to a reduc­tion in tariffs from a strato­spheric 39% to a still high 15%. The decisive factor here is that Switz­er­land is likely to have a similar burden to the EU, which will reduce additional crowding-out effects to its detri­ment. Accor­dingly, a slight recovery in the outlook is to be expected and the GDP slump in the third quarter may not mean the start of a reces­sion after all.

In general, the latest reactions from the US admini­stra­tion show that it is begin­ning to realize that tariff policies are incre­a­sing prices, reducing the afforda­bility of goods for US house­holds and thus incre­a­singly affec­ting the govern­ment’s popula­rity. It is there­fore quite conceivable that protec­tionist measures will be scaled back somewhat in the near future, which could signi­fi­cantly brighten the outlook for the global economy. However, in view of the US admini­stra­ti­on’s proven unste­adi­ness this year, this is prima­rily a tenta­tive hope for the time being.