After slight deflation in March, prices rose again in April. The Bureau of Labor Statistics (BLS) reports that the Consumer Price Index (CPI) increased 0.2 percent last month. Over the past year, it rose 2.3 percent. “The April change was the smallest 12-month increase in the all items index since February 2021,” BLS notes. This is welcome news for those of us hoping for continued disinflation.

Shelter prices increased 0.3 percent last month, “accounting for more than half of the all items monthly increase.” That’s because shelter makes up a large part of the CPI—nearly a third of the index, approximating its share in the average household’s budget. Also, energy prices increased sharply. They’re up 0.7 percent on the month, driven primarily by natural gas and electricity. There’s likely a significant seasonality component here.

Core CPI, which excludes volatile food and energy prices, rose 0.2 percent last month and 2.8 percent last year. This is the slowest it has grown since March 2021. Again, this is evidence of persistent disinflation.

The Federal Open Market Committee (FOMC) recently decided to keep the target for the Fed funds rate range unchanged. It’s still 4.25 to 4.50 percent. Adjusting for inflation using the twelve-month headline CPI figure yields a real fed funds target range of 1.95 to 2.20 percent. Alternatively, adjusting for inflation using the annualized three-month headline CPI figure of 1.6 percent yields a real fed funds target range of 2.65 to 2.90 percent.

Let’s consult the Fed’s estimates for the natural rate of interest to see whether current market rates represent appropriate monetary policy. The New York Fed puts the natural rate of interest between 0.80 and 1.31 percent in 2024:Q3. The Richmond Fed lists a much larger range: 1.15 to 2.61 percent, with a median of 1.86 percent. The real federal funds rate target range is above the New York Fed’s estimates and the Richmond Fed’s median estimates, regardless of whether the twelve-month or three-month CPI measure is used. The real federal funds rate target range constructed from the twelve-month CPI measure is below the upper end of the range offered by the Richmond Fed, while the range constructed from the three-month CPI measure exceeds it. Taken together, the interest rate evidence suggests monetary policy is somewhere between neutral and tight.

We should also consult monetary data, comparing money supply growth to money demand growth. The M2 money supply is up 4.18 percent over the past year. Broader liquidity-weighted measures are rising between 3.41 and 3.51 percent per year. On the other side of the market, we have money demand, which we can proxy by adding US population growth to real GDP growth. Population growth is about 1 percent, whereas real GDP growth is about 2.05 percent. Hence money demand is growing roughly 3.05 percent per year. All measures of the money supply are rising faster than this, suggesting loose money. This is an interesting divergence from the picture we get from interest rate data.

The discrepancy comes down to a statistical quirk. Although real GDP is still growing on an annualized basis, it actually shrank a bit in 2025:Q1. The reason was a temporary surge in imports, as households and businesses tried to get ahead of impending tariffs. 

But this doesn’t actually mean the US economy is poorer. Domestic spending on consumption and investment remained strong. Some spending was temporarily diverted to foreign production rather than domestic production, in anticipation of tariff-induced price hikes. A single quarter’s decline in measured production isn’t a reliable indicator of a coming recession. 

Especially when it comes to categorizing imports, we should be careful not to confuse accounting conventions for economic analysis. Furthermore, many analysts predict a return to growth next quarter. The Wall Street Journal’s forecasting average is 0.8 percent growth in 2025:Q2. Money demand is likely growing more rapidly than we think. The money supply is probably increasing as fast as it ought to.

The FOMC was right to keep rates where they are. Monetary policy is probably slightly tighter than neutral, which is where we want it to foster broad-based disinflation without damaging the economy. As always, we need to pay attention to future data releases, especially the Fed’s preferred price index, called the Personal Consumption Expenditures Price Index (PCEPI). But policy looks approximately correct for now. Given the Fed’s monumental errors in recent years, we should be grateful it’s getting up to speed.

The Everyday Price Index (EPI) rose to 293.8 in April 2025 on the heels of an 0.34 percent gain. This marks the fifth monthly increase in a row for AIER’s proprietary inflation measure. 

Among the twenty-four constituents of the EPI, 12 rose in price from March to April, two were unchanged, and nine declined. The three categories seeing the largest price increases were motor fuel (one of the largest decliners last month), admission to movies, theaters, and concerts, and nonprescription drugs. Internet services and electronic information providers, purchase, subscription, and rental of video, and fees for lessons and instructions prices showed the biggest declines. 

AIER Everyday Price Index vs. US Consumer Price Index (NSA, 1987 = 100)

Chart

(Source: Bloomberg Finance, LP)

Also on May 13, 2025, the US Bureau of Labor Statistics (BLS) released its April 2025 Consumer Price Index (CPI) data. Both the month-to-month headline CPI and core month-to-month CPI number increased by 0.2 percent, less than the 0.3 percent increase forecast for both.

April 2025 US CPI headline & core month-over-month (2015 – present)

Month-to-month headline inflation in April reflected mixed monthly pressures. The energy index rose 0.7 percent, reversing March’s 2.4 percent decline. This was driven by a 3.7 percent jump in natural gas and a 0.8 percent increase in electricity, while gasoline fell 0.1 percent (though it rose 2.9 percent before seasonal adjustment). The food index declined 0.1 percent, led by a 0.4 percent drop in food at home, the sharpest since September 2020. Major grocery categories declined, including eggs down 12.7 percent, meats, poultry, fish, and eggs down 1.6 percent, fruits and vegetables down 0.4 percent, cereals and bakery products down 0.5 percent, and dairy down 0.2 percent, while nonalcoholic beverages rose 0.7 percent. Food away from home increased 0.4 percent, with full service meals up 0.6 percent and limited service meals up 0.3 percent.

Core inflation, which excludes food and energy, rose 0.2 percent in April, following a 0.1 percent increase in March. Shelter costs rose 0.3 percent, with owners’ equivalent rent up 0.4 percent and rent of primary residence up 0.3 percent, while lodging away from home slipped 0.1 percent. Household furnishings and operations jumped 1.0 percent, and motor vehicle insurance rose 0.6 percent. Education and personal care each edged up 0.1 percent. Offsetting some of these gains, airline fares dropped 2.8 percent, extending a steep decline from March, and used cars and trucks fell 0.5 percent. Indexes for communication and apparel also declined, while new vehicles and recreation were flat. Medical care rose 0.5 percent, including hospital services up 0.6 percent, physicians’ services up 0.3 percent, and prescription drugs up 0.4 percent.

From April 2024 to April 2025 the headline index rose 2.4 percent, lower than surveyed expectations of a 2.3 percent rise.

April 2025 US CPI headline & core year-over-year (2015 – present)

Over the past 12 months, headline inflation reflected diverging trends in food and energy. The food at home index rose 2.0 percent, led by a 7.0 percent increase in meats, poultry, fish, and eggs, with eggs alone up 49.3 percent. Nonalcoholic beverages rose 3.2 percent, dairy products increased 1.6 percent, and other food at home edged up 0.7 percent, while cereals and bakery products were flat and fruits and vegetables declined 0.9 percent. Food away from home climbed 3.9 percent, with full service meals up 4.3 percent and limited service meals up 3.4 percent. Meanwhile, the energy index declined 3.7 percent, driven by sharp drops in gasoline (down 11.8 percent) and fuel oil (down 9.6 percent), partially offset by increases in natural gas (up 15.7 percent) and electricity (up 3.6 percent).

Core inflation (all items less food and energy) rose 2.8 percent over the 12 months ending in April, matching the prior month’s pace and remaining well above the headline rate of 2.3 percent, which marked the smallest annual gain since February 2021. Shelter costs increased 4.0 percent year over year, continuing to exert strong upward pressure. Other notable annual core gains included motor vehicle insurance up 6.4 percent, education up 3.8 percent, medical care up 2.7 percent, and recreation up 1.6 percent. The broader food index rose 2.8 percent, while energy declined 3.7 percent, helping to moderate overall inflation.

The April 2025 CPI data revealed a modest increase in inflation. While it reveals a slight acceleration from March’s subdued figures, overall inflation pressures remain relatively contained. Price gains in tariff-sensitive goods such as furniture, appliances, and electronics, probably reflecting some pass-through from President Trump’s “Liberation Day” tariff hikes, were partially offset by softness in categories like new and used vehicles and apparel. Of particular note, services inflation remained restrained due to ongoing disinflation in leisure-related categories such as lodging and airfares, both of which posted monthly declines. Shelter costs, however, continued to climb steadily and remain a central driver of core inflation.

The evolving effects of tariffs are becoming more visible in the goods sector. After several months of deflation in China-heavy import categories, April showed early signs of a pricing rebound, with some goods shifting from negative to modestly positive monthly inflation. Still, the overall pass-through remains limited as many importers are either absorbing higher input costs or continuing to draw from pre-tariff inventories. Disinflation was slightly more pervasive in April, with nearly 40 percent of core CPI components experiencing monthly price declines. The spread of categories showing annualized inflation above 4 percent ticked up slightly, but those in the 2–4 percent range edged lower, underscoring the uneven nature of current inflation dynamics.

Despite the mild upside in both headline and core inflation, financial markets interpreted the report as broadly benign. Treasury yields dipped briefly but retraced, and rate cut expectations remain priced in for later this year. While April’s data showed more tariff-related inflation pressure than previous months, it was counterbalanced by deflation in key services. Looking ahead and barring any considerable rollback in tariff policies, a lagged increase in core goods prices is likely as older inventories are exhausted; but whether that materializes into broader inflationary momentum remains uncertain. For now, the Fed is data focused and maintaining flexibility in its policy stance.

In its first hundred days, the second Trump administration has been anything but usual by presidential standards. From trade wars to an assault on the federal bureaucracy, Trump and his team have swiftly reshaped the landscape of government action. Amid the torrent of daily news, some critical policy discussions have been swiftly overlooked.

One such overlooked comment came from Commerce Secretary Howard Lutnick who argued in an interview that the official GDP measure should exclude government spending. Economists immediately pointed to the dangers of trying to replace such a widely used economic statistic. However, as we argue in a forthcoming article in the Review of Austrian Economics, there is a case for complementing the existing statistic with alternative measures that exclude at least some components of government spending. After all, it is true that government spending can distort our understanding of economic well-being — a concern that deserves serious consideration. So much so that it alters key facts of American economic history.

The commonly known GDP statistic is a simple sum: consumption spending, investment spending, government spending, and net exports (which is spending by foreigners). Government spending in this equation captures government activity such as the hiring of people to work in a new government office or the purchase of uniforms for soldiers.

This somewhat clashes with the formal definition of GDP: the market value of final goods and services. This reveals a conceptual problem as many government goods and services, such as military equipment and bureaucratic administration, aren’t sold in competitive markets. Without genuine market prices, their value is approximated by government spending costs. But the cost says nothing about “value.” After all, the government could hire a million persons to dig holes and fill them back up. No value is created but costs are incurred.

Historically, even Nobel-winning Simon Kuznets, who pioneered national income accounting, expressed major concerns about this issue. He suggested instead that such expenditures might be better understood as intermediate goods, already accounted for in private-sector production. Another Nobel laureate, James Buchanan, argued for something similar.

Such lines of reasoning influenced more radical economists like Murray Rothbard, who proposed entirely removing government expenditures from GDP. Rothbard’s “Private Product Remaining,” for example, excludes government spending and taxation entirely.

While most economists view this approach as overly extreme, there is an easy “midway” consensual measure we can construct.  Following economic historians Robert Higgs, Lowell Gallaway and Richard Vedder, we exclude military spending and adjust price indexes during periods of price control.

This is because military expenditures on weapons and war materials do not directly translate into better material living standards for civilians. Defense spending should be excluded from GDP when assessing living standards because military goods — like tanks, bombs, and bullets — do not directly contribute to civilian welfare. They are not consumed by households, nor do they improve the quality of everyday life. Including them inflates measures of prosperity in ways that misrepresent how ordinary people are actually doing. Moreover, a great deal of government expenditures during wars represent coerced production (e.g., drafts, requisitions, seizures, nationalizations) which make it harder to evaluate the value to civilians. Finally, during conflicts, governments impose price controls which hide the true extent of inflation.

Removing the effect of price controls and defense spending, what we dub the Defense-Adjusted National Accounts, provides a clearer picture of civilian living standards uninflated by defense expenditures and artificially suppressed wartime prices.

Of course, these corrections reduce the level of the GDP statistic. But that is not all it does. The corrections produce a new series that alters our understanding of US economic history during various periods. The most obvious, and previously covered by Robert Higgs, is during World War II. The official GDP statistics show an economy growing rapidly, which led many to consider the war effort as key to finally ending the Great Depression. Our corrections, and Higgs’s before ours, clearly show that the economy was declining. That is, for the average consumer things in the US were getting worse, not better, during the war.

In fact, our corrections applied to the entire period from 1790 to today show new key facts. Our corrected GDP series reveals that the first half of the 20th century, rather than showcasing robust growth, emerges as a prolonged period of stagnation interrupted by crises. The economy, which had grown at an exceptional pace from 1865 to 1913, gradually deviated from this path between 1913 and 1950. Many claim that this deviation only occurred during the Great Depression and that it ended during the Thirty Glorious years after. But our corrected series show that America never returned to its exceptional growth path.

Finally, pairing our corrected GDP with historical income distribution (i.e., inequality) data reshapes the narrative of the “Great Leveling” during the mid-twentieth century and particularly during wartime years. The leveling, traditionally celebrated as a period of diminishing inequality, actually coincided with declining living standards for everyone — even the wealthy.

Why does this matter today? Current discussions of economic policy often rely on GDP as the key indicator of economic well-being. Yet many Americans feel a significant disconnect between reported economic statistics and their own experiences — the so-called “vibecession.” By acknowledging that traditional GDP figures might inflate government activity’s real contribution, especially military spending, we can better align statistical measures with genuine economic conditions experienced by everyday citizens.

As policymakers grapple with budget priorities, military spending, and public perceptions of economic health, a more accurate measurement of living standards is essential. Adjusting GDP to focus explicitly on private-sector prosperity clarifies whether government actions genuinely contribute to citizen well-being or merely inflate an imperfect statistical measure.

We don’t advocate replacing standard GDP as it captures an approximation of the true statement that not all government expenditures are without value. However, adopting a Defense-Adjusted National Accounts measure can help provide another approximation of a true statement: that wars do not improve living standards. These two approximations together help provide a smaller window for uncertainty. This can help bridge the gap between official economic data and the perceptions of the American public.

Campaigning for a second term, President Donald Trump committed the United States to sweeping tariffs that have no precedent since the Second World War. Shortly after his inauguration, Trump issued multiple Executive Orders (EOs) and press releases both to enact and sometimes reverse tariffs. Anticipation, enactment and then pauses in the president’s tariff agenda all affected US and global equity markets. This essay reports on the market impact of Trump’s multiple tariff decisions. 

Table 1 summarizes values, as of April 30, 2025, for several US and foreign equity markets. It also reports our calculations of daily positive and negative market value changes resulting from Trump’s tariff decisions between election day (November 5, 2024) and April 30, 2025. The daily events are summarized in table 2 below. Cumulative changes at the foot of table 1 represent the summation of negative and positive daily changes following tariff event days, not total market changes between November 5, 2024, and April 30, 2025.

The cumulative negative impact of decisions imposing tariffs subtracted $377 billion from the market value of the Russell 2000, $2 trillion from the Magnificent Seven, $4.7 trillion from the S&P 500 (which includes the Magnificent Seven), and $2.2 trillion from the market value of equities in six seriously affected foreign countries.  

Market losses were sharply reversed when Trump paused pending tariffs on April 9, 2025. Excluding the rebound following the April 9 pause, the negative daily changes far exceeded the positive daily changes.  oreover, US shares were by far the biggest loser from Trump’s tariffs, especially the Magnificent Seven.

Table 1. Daily market capitalization changes between November 4, 2024, and April 30, 2025. $ billion.

Notes: For each country, the following indexes represent the respective equity markets: Mexico (S&P/BMV IPC, ticker: MEXBOL), Canada (S&P/TSX Composite, ticker: SPTSX), China (CSI 300, ticker: CSI300), Europe (STOXX Europe 600, ticker: STOXX600), Japan (Tokyo Stock Price Index, ticker: TOPIX), Korea (Korea Composite Stock Price Index, ticker: KOSPI). Cumulative one-day impact is the sum of daily changes following tariff events. Since the February 1 announcement was on a weekend, February 3 was used as an approximation. For China, February 5, 2025, was the first trading day of the month due to national holidays and was thus used to approximate the reaction to the tariff announcement on February 1 (*).

US Equity Market Reactions

Figure 1 depicts US equity markets for two quite different share categories – the Russell 2000 and the Magnificent Seven – beginning with the general election on November 5, 2024, and ending on April 30, 2025. The Russell 2000 index includes approximately 2,000 small-cap US equities, firms with limited exposure to foreign trade or investment. By contrast, the Magnificent Seven are highly successful tech firms deeply engaged in world markets, both through trade and investment: Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla.

As figure 1 shows, the Russell 2000 index rallied after Trump’s election, but then lost most of those gains by inauguration day. The Magnificent Seven, however, enjoyed a stronger and more durable rally, gaining about 20 percent between election and inauguration. Evidently, investors believed that Trump’s policies would be highly favorable, at least for large tech firms.

On inauguration day and in the following weeks, Trump issued multiple Executive Orders (EOs) decreeing far higher and more comprehensive tariffs than markets had anticipated. Gloomy prospects of domestic inflation, foreign retaliation, and business chaos shocked the financial markets. Both the Russell 2000 and the Magnificent Seven indexes fell sharply until Trump announced a dramatic tariff pause on April 9, 2025.

Figure 1.  Russell 2000 and Magnificent Seven market indexes.

Notes: Each index is normalized to 100 based on its own value on November 4, 2024. This allows for a direct comparison of relative performance over time.

Digging deeper, we explore equity market valuation changes immediately following each Trump tariff announcement. For this exercise, we examine the change in market prices between the close on the previous day and the close on the announcement day. But for “reciprocal” tariffs that were announced after the market closed on April 2, 2025, we examine the change between the close on April 2, 2025, and the close on April 3, 2025. 

Invoking the efficient market hypothesis, we assume that the expected effects of an announced tariff change on corporate earnings, interest rates and other factors are quickly reflected in equity valuations. Initial expectations may prove too pessimistic or too optimistic. The efficient market hypothesis, however, asserts that immediate expectations as to the price effects of a shock provide the best available forecast on that day. Further, by attributing all valuation changes on the announcement dates to tariff changes, we assume that other contemporaneous shocks were generally minor.

Table 2 lists the dates and summarizes the content of Trump’s tariff announcements, starting with his election on November 5, 2024. Election day is included because market participants then knew that major tariff changes were a near certainty. Trump’s inauguration day, January 20, 2025, was also included because that marked the beginning of specific tariff decisions. Table 2 further shows the percentage change on each valuation day of an ETF for the Russell 2000 (IWM) and the Bloomberg index (BM7P) for the Magnificent Seven. The daily percentage changes in table 2 provide the basis for calculating the daily dollar changes in table 1.

On most valuation days, the Russell 2000 and Magnificent Seven share the same direction of change and roughly similar magnitudes. For example, following the “reciprocal” tariff announcement on April 2, 2025, the Russell 2000 dropped 6.3 percent, while the Magnificent dropped 6.7 percent 

At the foot of table 2, the first row summarizes cumulative negative market reactions recorded on valuation days, expressed in percentage terms. Perhaps surprising, the Russell 2000 index dropped almost as much as the Magnificent Seven. 

The second row at the foot of table 2 summarizes cumulative positive market reactions recorded on valuation days, expressed in percentage terms. In total, positive market reactions exceeded negative market reactions, thanks to the huge relief rally when Trump paused tariffs on April 9, 2025.

The third row at the foot of table 2 summarizes cumulative positive reactions in percentage terms, apart from the April 9 relief surge. Evidently, without the tariff pause, the Russell 2000 index and the Magnificent Seven would both have been deeply in the red at the end of April 2025.

Table 2. One-day price returns of Russell 2000 and Magnificent Seven on Trump announcement days. Daily percent changes.

Evaluation Day	Event	Russell 2000, 1-day returns (%)	Magnificent Seven, 1-day returns (%)
11/5/2024	Election Day	1.9	1.8
1/21/2025	Inauguration Day (Jan 20, 2025)	1.8	0.3
2/3/2025	On February 1, Trump issued EO announcing tariffs on Canada, Mexico, and China.	-1.3	-1.7
2/10/2025	Trump announced 25 percent import tariffs on steel and separate proclamation imposing 25 percent tariffs on aluminum as of March 12.	0.4	0.4
3/4/2025	EOs to raise the new tariffs on all imports from China from 10 percent to 20 percent, impose 10 percent tariffs on imports of Canadian oil and energy products and 25 percent tariffs on the remainder of imports from Canada.	-1.1	-0.6
3/25/2025	The White House issued secondary tariffs on third countries importing Venezuelan oil.	-0.7	1.2
3/26/2025	The White House imposed 25 percent tariffs on automobiles and certain automobile parts.	-1.0	-3.0
4/3/2025	On April 2, the White House invoked IEEPA to impose baseline 10 percent tariff starting April 5 and then “reciprocal” tariffs starting April 9.	-6.6	-6.7
4/8/2025	The White House amended to impose additional 50 percent tariff on imports from China, increasing to 84 percent.	-2.7	-2.4
4/9/2025	The US imposed an additional country-specific tariff on China; then paused other “reciprocal” tariffs for 90 days, except for China. China will now face 125 percent of tariffs.	8.7	14.4
4/11/2025	The White House issued a list of products, including smartphones and semiconductors, to be excluded from the April 2 executive order	1.6	1.9
4/29/2025	The White House issued a proclamation and an executive order to address concerns over stacking tariffs and avoiding the cumulative tariffs. The proclamation also amended previous tariffs under Section 232 regarding automobiles and automobile parts.	0.6	0.6
Cumulative one-day loss (%)		(13.4)	(14.4)
Cumulative one-day gains (%)		14.9	20.6
Cumulative one-day gains (%), without April 9		6.2	6.2

Source: Bloomberg and authors’ calculations. Bown, Chad P, “Trump’s Trade War Timeline 2.0: An Up-to-Date Guide.” 

Notes: One-day price returns are calculated by the percentage change between the closing price on the announcement day and the closing price on the previous trading day. 

The equity market surge, following the tariff pause on April 9, 2025, was a game-changer, not only for the markets but also for Trump’s political fortunes. According to press reports, Commerce Secretary Howard Lutnick and Treasury Secretary Scott Bessent sold Trump on the pause, overshadowing tariff hawk Peter Navarro.

If that account is accurate, Lutnick and Bessent gave Trump good advice. Without the pause, equity market losses for the six months between November 2024 to April 2025 would have overwhelmed equity market gains.

Foreign Equity Market Reactions

Figure 2 compares the S&P 500 index with indexes of exchange-traded funds (ETFs) for six affected countries. Between election and inauguration, the S&P 500 rallied about 6 percent, while most of the country ETFs fell to varying extents.

Within weeks after inauguration, as the breadth and extent of Trump’s tariffs were revealed, most markets fell. Of course, US tariffs were not the only shock moving markets. Notably, Chinese equities rose in response to government stimulus. Trump’s sweeping “Liberation Day” tariffs on April 2, however, provoked a slump in all markets, reversed to varying degrees by the April 9, 2025, 90-day pause.

Figure 2. S&P 500 and Foreign Market Indexes.

Notes: Each index is normalized to 100 based on its own value on November 4, 2024. This allows for a direct comparison of relative performance over time.

Table 3 shows the percentage change on each valuation day for the S&P 500 ETF (SPY) and ETFs for six heavily affected countries: Mexico (EWW), Canada (EWC), China (FXI), South Korea (EWY), Japan (EWJ) and the European Union (JGK). The first three are the top US trading partners. All six have large bilateral surpluses in their merchandise trade with the US, resulting in high (but falsely named) “reciprocal” tariffs. All ETFs are traded in New York, ensuring that valuation changes occur during the same time period. 

At the foot of Table 3 the first row shows cumulative negative losses between November 5, 2024, and April 30, 2025, expressed in percentage terms; the second row shows cumulative positive gains in percentage terms; and the third row shows cumulative positive gains, apart from the surge on April 9, 2025, again in percentage terms.

In percentage terms, the S&P 500 experienced the biggest cumulative losses from Trump’s negative tariff announcements, though Canada and South Korea were close. China and Europe were least affected. Trump’s tariffs dealt a heavier blow to US equity values than to the supposed targets, especially China.

Moreover, foreign equity markets generally enjoyed equal or larger cumulative gains than the S&P 500 from Trump’s positive tariff announcements. Foreign one-day gains, apart from the April 9 surge, exceeded the S&P 500 gains. Worth noting is that cumulative S&P 500 losses, apart from the April 9 relief rally, were almost twice as large as gains. If President Trump wants US equity market to prosper, he should pause more tariffs. 

Table 3. One-day price returns of selected ETFs on Trump announcement days. Daily percent changes.

Evaluation Day	S&P500	EWC (Canada)	EWW (Mexico)	FXI (China)	EWJ (Japan)	EWY (South Korea)	VGK (Europe)
11/5/2024	1.2	1.1	-0.1	2.4	1.5	0.4	0.7
1/21/2025	0.9	1.7	1.9	1.1	1.7	1.6	2.3
2/3/2025	-0.8	-1.6	2.5	-0.5	-1.0	-1.1	-1.5
2/10/2025	0.7	0.9	0.2	2.7	0.4	1.8	0.7
3/4/2025	-1.2	-1.7	0.3	1.5	-0.8	0.5	0.2
3/25/2025	0.2	0.5	1.1	-1.0	0.7	-0.4	0.6
3/26/2025	-1.1	-0.8	-1.1	-0.1	-1.3	-0.5	-1.4
4/3/2025	-4.8	-2.3	4.0	-0.9	-4.1	-2.7	-1.4
4/8/2025	-1.6	-1.6	-0.9	-1.4	0.5	-3.7	-0.4
4/9/2025	9.5	6.4	7.9	7.1	7.6	8.9	7.4
4/11/2025	1.8	2.9	0.8	4.4	2.5	4.8	2.7
4/29/2025	0.6	0.2	-2.9	-0.6	0.4	0.8	0.2
Cumulative one-day losses (%)	(9.5)	(8.0)	(5.1)	(4.5)	(7.2)	(8.4)	(4.7)
Cumulative one-day gains (%)	14.8	13.7	18.6	19.2	15.4	18.7	14.8
Cumulative one-day gains (%), without April 9	5.3	7.3	10.7	12.2	7.8	9.8	7.4

Source: Bloomberg and authors’ calculations. 

Notes: One-day price returns are calculated by the percentage change between the last price of the evaluation day and the previous trading day. If an announcement is made on a non-trading day, the evaluation will be based on the nearest trading day.

President’s Trump Liberation Day announcement of higher tariffs was supposed to trigger massive reshoring and restructuring of the US economy towards its manufacturing industries. 

Instead, it provoked a sharp drop in financial markets. Such a widespread drop typically signals the onset of recession, not the redistribution of labor and capital from sectors that are damaged by tariffs to the few that may prosper. The potential for recession is evident in the widespread sell-off in US stock markets, slumping commodity prices, a sharp devaluation of the US exchange rate, and lower short-term interest rates. The anomaly of rising bond yields in a weak economy reflects the increased menace of stagflation as higher tariffs fuel higher expectations for inflation even as recession fears pummel stocks. 

The retreat in financial market prices highlights the false dichotomy between the interests of Wall Street and Main Street cited by many pundits. For example, the latest reading on small business sentiment about the direction of the economy from the National Federation of Independent Business saw a 16 point drop to its lowest level since 2020. Main Street cannot thrive when investors shift funds to the bond market or to other countries and when the wealth of Americans is shrinking rapidly. The outlook is grim even for manufacturers, based on surveys by the Federal Reserve branches in New York and Philadelphia. Put simply, Trump’s tariffs are already plainly hurting those whom they were apparently meant to help. 

Larger companies, whose market valuation has fallen even more than small firms, have the additional problem of dealing with the international damage to the US image as a reliable partner. Boycotts of American brands already are inflicting significant damage on the US economy that cannot be negotiated in treaties between governments and likely will persist long after higher tariffs are repealed; for example, Canadian visitors — the largest source of international tourism to the US — plunged 17 percent in March. Canada is not alone; a Ifop poll in France found 62 percent support a boycott of American companies. 

The shift of trillions of dollars from private sector equities to public sector bonds is the exact reverse of what is needed to sustain America’s prosperity. The slump in the stock market and commodity prices, especially those most closely linked to industrial demand such as copper, shows investors know that the damage from tariffs will be much greater than the increase in investment the Trump administration cites as the justification for tariffs. The devaluation of the US dollar testifies to investors avoiding its assets, the opposite of Mr. Trump’s claim that “Money is pouring in and we want to keep it that way.” Markets have rallied in recent days in lockstep with administration actions to roll back tariffs and expectations that agreements with other countries will avert full-scale trade wars.  

The one benefit of the carnage in financial markets is it should put to rest the wonky belief that tariffs are a boon to economic growth for at least a generation. The disastrous experience of the 1930s tariff war, which played a major role in the Great Depression and the Second World War, led to the creation of the post-war policy framework initiated by the General Agreement on Tariffs and Trade in 1947 that lowered trade barriers steadily for over 60 years. Discrediting tariffs for decades to come is the one consolation to take from the current upheaval in global financial markets. 

The tariff war already makes it unlikely that Mr. Trump will be able to duplicate the economic success of his first term. The positive effects of Trump’s lowering taxes and deregulation efforts will not be nearly as visible because of tariff-induced pain, and this will in turn damage the credibility of those of us who argue lower taxes and fewer regulations stimulate growth. 

Even if tariffs are repealed and taxes and regulations are slashed later this year, investor confidence will not easily be restored by an administration that embraced such needlessly destructive and short-sighted policies despite ample warning of their dangers.  

Some years ago, the singer and activist Bono shocked many of his supporters when he told them, “Aid is just a stopgap…Commerce [and] entrepreneurial capitalism take more people out of poverty than aid. We need Africa to become an economic powerhouse.” 

Trade is a vital part of that entrepreneurial application of commerce as it connects entrepreneurs to global markets, dramatically increasing their reach and allowing for specialization and economies of scale.

The modern world is an interconnected world, and trade is one of the main connectors we have. What many do not appreciate is that trade has been a major facilitator of human development over the past fifty years or more. While most think of international development as a function of international aid shipments, it is trade that has really driven the astonishing decrease in global poverty. The United States’ role as a linchpin of this system has enhanced its position as the pre-eminent global power. Yet the new administration’s curious tariff policy threatens all of this, for no discernable benefit.

Moreover, increased competition from international rivals and access to new technology and sources of capital encourage innovation and efficiency, thereby creating wealth. Foreign direct investment helps create jobs and infrastructure, which in turn contribute to more wealth creation. We have seen this happen across the globe, most especially in southeast Asia and east Africa.

With these jobs, infrastructure, and wealth come rising living standards and poverty alleviation. Yes, many of the jobs are in what are disparagingly called sweatshops, but they provide significantly higher standards of living than the subsistence-level jobs they replaced. The increased income means that parents can now invest in their children’s education, often at low-cost private schools, rather than requiring them to work from an early age. This in turn increases the human capital in these countries.

It is sometimes said of trade that “we only export to pay for the imports,” and in the case of international development the imports are seen as a universally good thing. Specialization and gains from trade result in more affordable and better-quality goods for the inhabitants of countries lifting themselves out of poverty.

Thus do American investment, purchase of imports, and indeed exports raise the standard of living in previously desperately poor countries. As those countries become connected into the global value chain, particularly in industries like textiles and electronics, low-income countries become connected to high-growth sectors. Thus, countries like Vietnam not only engage in international trade but become signatories to trade agreements like the Comprehensive and Progressive Agreement for Trans-Pacific (CPTPP.)

In turn those agreements encourage more investment through things like investor-state dispute settlement procedures, which strengthen property rights and the rule of law in countries that might previously have had shaky institutions. This is what is meant by the “rules-based trading environment,” which is designed specifically around promises of reciprocity and lowered tariff and non-tariff barriers to trade. So these countries become valued members of the international community.

I asked Marian Tupy, co-author of the book Superabundance, to sum up the role of trade in this transformation. He told me, “From Hong Kong and Singapore to Taiwan and South Korea, trade liberalization helped transform nations from third world to first-world status within two generations. More recently, China’s and India’s partial embrace of globalization lifted hundreds of millions out of absolute poverty. Today, absolute poverty is largely confined to sub-Saharan Africa, the least globalized and most aid-dependent region in the world.”

Yet this trade hasn’t just been advantageous to the developing world; it has helped America, too. Obviously, we get the imports (which, pace the President, actually represent a consumer surplus) but we get other things too. The cash we exchange for the imports comes back to the US in the form of investment, allowing us to gain jobs and infrastructure. Some of it buys treasury bonds, which allow us to invest in our military and national security.

Yet an under-appreciated aspect of US trade policy relates not to the tangible benefits, but to the increase in what students of geopolitics call “soft power,” usually defined as international influence without coercion. America’s policy of “Trade, not aid,” allowed it to increase its international soft power without as many of the problems that come with international aid, such as funds being diverted into warlords’ pockets (warlords are terrible for business investment) or questions about waste back home.

With soft power comes many benefits. You are seen as a trusted ally, a reliable partner when things go wrong. You will have other nations vote with you in international fora. US interests are foremost in the minds of the leaders of these countries. In a multipolar world, soft power pays for itself over and over and America has been peerless in its projection of soft power.

Indeed, trade does not need a formal trade agreement to bind the parties together. While formal agreements have allowed America to export some of its values and sensibilities (for instance, progressives have been successful at writing labor and environmental standards into trade agreements), the simple existence of a mutually-beneficial trade relationship gives America leverage over its trading partners. Americans get rare minerals like diamonds, for instance, and make the diamond supplier friendlier to the US. That might allow for the siting of a strategic military base as much as a vote in the United Nations.

With the President’s “Liberation Day” tariff announcement, however, this is all now gone in an instant. Not only has the trade policy alienated our close allies and neighbors like Canada (“Blame Canada!” was an amusing joke until very recently) but developing nations in particular have felt the brunt of the policy. In fact, the methodology of the policy hurt them for the crime of being poor.

The “reciprocal tariffs” were meant to account for the other nations’ imposition of tariffs, non-tariff barriers (like food standards,) and “cheating” against the US. However, the tariff rates were not calculated by any assessment of the relative weight of these factors, but by a simple formula: its trade surplus with the US divided by its total exports, divided by two. For nations with a trade deficit with the US, like the UK, which would otherwise have had a negative tariff using this formula, a baseline of 10 percent was used.

The trouble is that many poor countries have a trade deficit with the US because they export what they can to us but cannot afford to buy our high-value products in return. They export jeans, for instance, but don’t buy Harley-Davidsons. Yet the formula really punishes countries like that. That’s why the highest reciprocal tariff rate was imposed on the tiny African nation of Lesotho.

An economic analyst from the nation told Reuters, “The 50% reciprocal tariff introduced by the US government is going to kill the textile and apparel sector in Lesotho…Then you are having retailers who are selling food. And then you have residential property owners who are renting houses for the workers. So, this means if the closure of factories were to happen, the industry is going to die and there will be multiplier effects.” He concluded, “So Lesotho will be dead, so to say.”

In many ways, this is the exact converse of the “trade not aid” philosophy. It regards exporting to the US as a cost to the US that the other nation should pay for, not as a form of mutually-beneficial cooperation with humanitarian benefits. It also kills US soft power with these nations and leaves a geopolitical vacuum into which US rivals like China will expand. High tariff rates on south east Asian countries, for example, will exacerbate the drift of those countries towards the Chinese sphere of influence that has been happening in the wake of trade uncertainty since the first Trump administration.

The administration’s trade policy sends a message to the world: America is an unreliable ally that sees you only as a source of wealth; and if you don’t have wealth, you’ll pay for it. It’s a self-contradictory and hostile message to countries that have been valued partners in trade for decades or more. As such, it also represents a repudiation of the value of soft power.

Once it is given up like this, soft power can be hard to regain. As the saying goes, a reputation is a terrible thing to waste. While the Treasury Secretary may have said, “America First does not mean America Alone,” it sure looks that way to the rest of the world.

Proponents of laws banning so-called hate speech often couch their arguments in terms of dignity: that is, they claim that banning hate speech is essential for protecting the dignity of minorities from racial slurs and other denigration. As David Shih writes for NPR, hate speech is “nothing more than state-sanctioned injury of people of color.”

This argument sounds plausible; but in actuality, free speech is the best friend of minorities. In his book Kindly Inquisitors, gay activist Jonathan Rauch documents the brutal conditions under which gays and lesbians lived in the United States in the 1960s.

Gay Americans were forbidden to work for the government; forbidden to obtain security clearances; forbidden to serve in the military. They were arrested for making love, even in their own homes; beaten and killed on the streets; entrapped and arrested by the police for sport; fired from their jobs.

What helped gay men and women to change the culture of the United States such that they could begin to live lives of dignity and grace? Free speech. As Rauch writes,

In ones and twos at first, then in streams and eventually cascades, gays talked. They argued. They explained. They showed. They confronted. … As gay people stepped forward, liberal science engaged. The old anti-gay dogmas came under critical scrutiny as never before.

Rauch documents how gays and lesbians fought for their rights and their dignity, and how that fight slowly bore fruit in building a culture that respected both. Free speech is one of the best tools that disempowered people have to push the culture at large to respect their innate human dignity.

But I want to flip the dignity argument around on would-be censors like Shih even further. The truth is that if we’re really serious about respecting the dignity of every human being, then we need a culture of free speech.

One reason is that every human being has unique experiences, which lead to a unique perspective. None of us have lived the exact same life as someone else, which means that all of us have a unique outlook on life that cannot be fully captured by anyone else. Each of us can add our own beautiful note to the grand symphony of the human experience.

When we censor people, we degrade their perspective. We tell them that their note isn’t worth adding to the symphony, that the rest of us can get along just fine without the unique knowledge and perspective that only they can contribute. That’s an incredibly insulting way to think about our fellow human.

This is especially true because, contra the myth of many of those who would ban so-called hate speech, the people who would suffer under these laws aren’t just people who want to use racial slurs and denigrate others. Hate speech laws are invariably broad, which means they’re going to punish a lot of speech that might have value. For instance, feminists in England have been charged with hate speech because they insist that there are biological differences between men and women. In the United States, a graffiti artist in Brooklyn was charged with hate speech for spraypainting messages such as “a wrongful arrest is a crime” that criticized the NYPD.

And even if so-called hate speech truly did have no value, laws banning it still have to be enforced. That enforcement presents its own concerns. When a government throws a young man in prison for posting a meme on social media that the government doesn’t like, can we really say that his dignity is being respected? No matter the noble impulse of some censors, there’s something barbaric about how this censorship looks in practice.

This is even true when the censorship isn’t being performed by the government, but by private citizens forming cancellation mobs. Like official bans on hate speech, cancel culture has often been defended as being about dignity: a way of calling out the powerful and giving a voice to the powerless. But it rarely looks this way. In practice this kind of cultural censorship looks like ordinary peoples’ lives being destroyed, often for jokes or for statements that are misinterpreted by the cancelers. One man was fired from his job for having just moved to New York and not knowing what a bodega was. The video he made airing his frustration was deemed racist by the online mob, but he disagrees. Rather than making fun of the minorities who run bodegas, he says, “It was more of an intent to almost like make fun of myself for being a new person in the city.” When we make snap decisions to destroy a person’s livelihood based on a single video clip without first trying to understand the context or intent of that clip, are we really respecting the other person’s dignity?

In fact, joining online mobs to culturally censor someone is often less about making the world a safer and kinder place for minorities, and more about indulging our own human capacity for cruelty. Former canceler Barrett Wilson describes his “gleeful savagery” in tearing apart other peoples’ lives for minor misdeeds. He regrets the “destruction and human suffering,” that he and other cancelers caused, suffering that they often had to selectively forget in order to maintain the myth in their own minds that they were the good guys.

Authoritarianism — including the urge to censor — can be linked to some pretty nasty psychological traits. As social psychologist Bob Altemeyer notes, authoritarians “strongly believe in punishment, and admit that they derive personal pleasure from administering it to ‘wrongdoers’.”  (Altemeyer was studying right-wing authoritarians, but his insights apply to authoritarians across the political spectrum).

It can be tempting to look at the racial slurs and other insults that some minorities have to deal with and conclude that bans on hate speech are essential to respecting our human dignity. But the truth is the opposite. If we truly want to build a society that respects the dignity of every human being, then we have to start by affirming the right to speak.

Tariffs are the talk of the town. The Trump administration is advocating for tariffs on just about everything and everyone, employing various justifications — they will bring back manufacturing jobs, help us combat China, and improve US national security — to sell them to the public. The national security argument is popular among foreign policy and national security experts, but the way it is often framed is flawed, which leads to erroneous policy conclusions.

Supporters of tariffs and similar policies that curb trade to improve national security argue that citizens who engage in foreign trade do not adequately consider the impact trade has on the national security community’s foreign policy goals. From the foreign policy perspective, if tariffs help secure the nation e.g., make it easier for foreign policy officials to negotiate national security agreements, then tariffs should be part of trade policy even if they hinder the economic choices of individual citizens. In this view, the desire of individuals to trade with the lowest-cost provider of a good or service is only one consideration, and often it is of secondary importance to the security goals of the nation.

One example of this view is the idea of the ‘national security externality’. As the economist and former Member of the European Parliament Luis Garicano describes it:

The national security externality exists because private actors do not account for how their decisions affect their government’s bargaining power through resilience to conflict. When a US company imports cheap Chinese chips and builds infrastructure dependent on them, it creates a strategic vulnerability — a cost not reflected in market prices.

In this framing, private citizens impose an externality on government actors, whose bargaining power is reduced by the actions of private actors pursuing their goals while ignoring non-market costs. Because of this market failure, government officials are justified in imposing some restrictions or taxes (tariffs) on the international economic activity of citizens.

This framing is wrong. Externalities only exist if two parties with different objectives can impose costs (or benefits) on each other in ways that are not captured by relevant prices. In America, government exists to protect the rights of individuals, and government officials should have no interests or objectives of their own, separate from the citizens who empower them, that can be impacted by externalities.

As stated in the Declaration of Independence, it is the government’s duty to protect the rights of individuals. This includes the right to engage in commerce, including commerce with foreigners. In fact, one of the grievances that motivated the Declaration was “For cutting off our Trade with all parts of the world.”  If international trade makes obtaining a given level of national security more expensive, the government can communicate this to the citizenry and request more resources to properly conduct its charge. The externality framing, however, makes it seem as if the goals of the government and citizens are of separate but equal concern.

If instead the government is viewed as a means for protecting the rights of citizens, with no objectives of its own, then all the costs of national security can be internalized. Citizens, through the democratic process, then choose the proper level of national security and trade considering these costs. Tariffs may have a role to play in the solution, but they should be compared to other remedies such as direct taxation, and only if citizens concede that national security is in fact being underprovided.

A non-tariff example may help illustrate this point. Suppose someone mows my lawn for $50 per week. Now, my son has taken up an interest in croquet, and the hoops in the yard make the mower’s job more difficult. In response, the mower tells me he must increase his price by $25 per week to compensate him for the extra time it takes to navigate my yard with the hoops in place. This extra cost is not an externality. There is only one set of preferences here, mine, and the cost my child’s hobby imposes on the mower can be internalized by the price the mower charges. Similarly, if my preference to trade with international producers imposes a cost on the US national security apparatus charged with maintaining a given level of security, they can communicate this to me and charge me more in taxes. Alternatively, I may decide to pay the same in taxes and accept less national security. Similarly, I could keep paying the mower $50 and accept a worse lawn-care experience.

In short, there is no government with its own goals separate from its citizens on which citizens can impose an externality. There are only citizens who make choices that can increase or decrease the cost of providing for their national security. Constrained by these costs, citizens must determine the most effective way to protect their shared interests from belligerent actors.

Government officials are not a separate interest group that can just assume a national security market failure and then take unilateral action to correct it since the citizens may in fact be maximizing their welfare subject to a resource constraint. In economic jargon, there is only one production possibilities frontier and one national objective function, and it is through the democratic process that we decide where to lie on that frontier.

The North American Free Trade Agreement (NAFTA) between the United States, Mexico, and Canada harkens back to a not-so-distant past when Congress took its constitutional role “to regulate Commerce with foreign Nations” seriously. 

In his final weeks in office, Republican President George H. W. Bush signed the agreement on December 17, 1992. The House and Senate approved NAFTA less than a year later in a bipartisan fashion with Democrat President Bill Clinton signing the Implementation Act in December 1993. 

Just over 31 years since, NAFTA and its updated USMCA have proven a boon to the American economy. 

The agreement slashed many tariffs immediately upon enactment in 1994. By 2008, nearly all import duties between the three nations had disappeared. Central to the agreement was manufacturing freedom. But NAFTA also removed unfair trade barriers placed on service industries — including banking, insurance, and telecommunications. Guaranteeing fair treatment for foreign investors also spurred cross-border investment. This included protecting their property from expropriation and providing international arbitration in lieu of oft-biased local courts. Patents, copyrights, and trademarks also received protection from piracy and counterfeits to an extent unprecedented in trade deals. Cross-border commerce soon soared. The US, Canada, and Mexico benefited greatly from lower costs, more investment, and streamlined trade.  

As NAFTA pried open markets by limiting quotas and other non-tariff barriers, trade transformed and blossomed. Since 1994, American exports have nearly tripled, even after you adjust for inflation.  American goods exported exceeded $2 trillion last year. Exports from the US to Mexico jumped from about $40 billion a year to an all-time high of $334 billion in 2024. Our exports to Canada more than tripled, rising from $100 billion to a near all-time high of $349 billion last year. Both of America’s NAFTA partners import more than twice as much from the US as China — number three on the list.

No agreement is perfect, of course. Some sectors, notably dairy, received cronyist carveouts. But contrary to popular belief, American exporters enjoyed a manufacturing renaissance. 

The US agricultural sector saw a major boost from NAFTA. With tariffs on many farm goods eliminated, exports to Canada and Mexico soared. Corn exports to Mexico jumped from negligible levels to billions of dollars annually, while soybean, pork, and beef shipments also climbed. In 2023, Mexico and Canada accounted for more than 32 percent of US agricultural exports — over $55 billion a year in sales. Farmers in Iowa, Ohio, Nebraska, and Texas literally reap the rewards of this expanded market access. 

The auto sector thrived under NAFTA’s integrated supply chains. Tariffs on vehicles and parts dropped to zero, letting companies like Ford, GM, and Chrysler source components from Mexico and Canada at lower costs. This kept US-made cars competitive globally — exports of vehicles to Mexico alone grew from under $1 billion in 1993 to nearly $29 billion in 2024. Plants in Michigan, Ohio, and the Midwest benefited from this cross-border efficiency, even as some assembly shifted south. The American automotive sector exports more than $160 billion annually, nearly doubling in inflation-adjusted terms since 1994. Across the nation, American factories churn out automobiles for export — including BMW’s South Carolina plant which employs 11,000 Americans. Motor vehicles are among the top three exports in 14 states, including Missouri, Michigan, Ohio, and Tennessee.  

Beyond autos, manufacturing broadly gained from cheaper inputs and bigger markets. Machinery, electronics, and chemicals saw export booms — US machinery exports to NAFTA partners tripled in value post-1994. Firms in industrial hubs like Illinois and Pennsylvania found new customers, while lower-cost Mexican imports (like steel or plastic components) trimmed production costs, helping manufacturers stay lean in a global race. America’s aerospace industry now exports nearly $100 billion a year.  

The energy sector, particularly oil and gas, benefited as well. Much of the record levels of US-produced oil is sent to Canada for refining before returning to fuel our vehicles. Meanwhile, Canada became the US’s top supplier of some types of crude oil needs. Although the United States produces more oil on net than we consume, petroleum types and uses vary. For this reason, we imported nearly 4 million barrels a day from Canada in 2023 representing 97 percent of their oil exports. Mexico sends refined products north to us as well. The boom in American natural gas production helps supply the energy needs of all three nations — all without tariff taxation. More than half of our natural gas exports flow to Canada and Mexico, 8 percent of our total production. This keeps energy prices stable, directly supports extraction and pipeline jobs in Texas, North Dakota, and elsewhere. Industrial electricity prices — essential to competitive manufacturing — benefit as well. 

Retailers and consumer goods companies — like Walmart or food processors — benefit from cheaper imports and a larger export market. American families enjoy Mexican fruits and vegetables — in the middle of winter — at affordable prices. American brands like Coca-Cola, Kraft, and John Deere profit by more sales in Mexico.  

Deeper ties with Canada and Mexico drove efficiency, created jobs, and increased output. Of course — some industries like textiles and furniture faced tough competition. It’s a misnomer to claim manufacturing has been “hollowed out.” In fact, the United States is a bigger manufacturing powerhouse today than 30 years ago. Industrial output increased by more than half since 1994 — and is near all-time high today.

At the same time, fewer people are employed in manufacturing despite the increased output because efficiency has surged. Our economy has shifted to much higher-paying, advanced services. In fact, we now export far more of these services than we import. In other words, free trade has allowed us to purchase low-cost products from overseas, focusing on these new high-paying sectors where we enjoy a comparative advantage. 

The services sector — including finance, logistics, and tech — expanded under NAFTA. US banks and insurers gained easier access to Canadian and Mexican markets, while cross-border trucking and shipping grew to handle booming physical trade. American service exports to NAFTA partners topped $128 billion in 2023, boosting well-paying white-collar jobs.  

Of course, protectionists bemoan the fact that our imports from our partners grew by even more. But a trade deficit is identical to our capital surplus that flows back to the United States often in the form of foreign direct investment (FDI) in businesses here. Since NAFTA’s enactment, FDI exploded more than 500 percent to more than $330 billion annually. This helped spur a doubling in overall worker productivity in the past 40 years. Competition forces producers to innovate. As efficiency grew, GDP across all three nations grew.  

It’s not just investors or managers who benefit from rising productivity. Workers share in this abundance of affordable, available, and diverse goods. American families are far better off. Thanks largely to the innovation and efficiencies from free trade, millions of Americans enjoy new opportunities in well-paying professions. Middle-class real annual family income increased more than $28,000 since 1994. By 1980s income standards, middle-class shrank as a share of the population only because millions of these families are now earning what would have been upper middle-class incomes. Yes, that’s in real, inflation-adjusted terms. Meanwhile, a greater percentage of prime-working age adults are employed today than pre-NAFTA. 

NAFTA exhibits how widely shared abundance materializes when governments meddle less and let markets work.  Trade barriers — tariffs, quotas, and restrictions on investment — distort prices, prop up inefficient producers, and rob consumers of choice. 

Tearing down these barriers between the US, Canada, and Mexico generated widespread abundance. Free trade certainly means lower prices for businesses and families. Who wants to pay a Canadian lumber tariff when building a home — or a Mexican tequila tax? But, just as importantly, free trade means the liberty to buy and sell without seeking the approval of or paying off the central planners in Washington, DC.