Hot Take: Government by AI

Did the Trump administration use AI to devise its tariffs?

Hot Take: Government by AI
The penguins of the uninhabited (by humans) Heard and McDonald Islands. Now subject to a 10% tariff. Image by The Indian Express.

I know I only wrote about Trump's "Liberation" tariffs yesterday, but it's a rapidly moving target and plenty more has come to light since then.

First, the implications. Obviously there's the ongoing global market carnage, with indices across the world plunging for a second day. That makes perfect sense given that markets are forward-looking: they're priced today for what participants expect to happen to earnings in the future.

Trump's tariffs go against all economic theory and facts—regardless of political faction (with the lone exception of MAGA Republicans)—and those theories and facts tell us that tariffs are a tax, and taxes lower growth. Add in the chaos, the regime uncertainty, and the inevitable retaliation—Trump might think he's playing a game of chicken, but he's actually in a prisoner's dilemma—and investors are rightly fretting about how much wealth Trump really intends to destroy.

But it won't be all bad. AUT economics professor Niven Winchester estimated that Australia will be one of the largest beneficiaries of Trump's tariffs, likely because we just became a much more attractive destination for goods from many countries. We've essentially been gifted a big boost in relative purchasing power, and because we didn't trade all that much with the US to begin with, the downsides for our exporters are limited:

While Winchester's modelling doesn't account for it, futures markets are now pricing in a Reserve Bank of Australia (RBA) rate cut for May, perhaps because of the large positive supply shock which will, all else equal, lower prices in Australia (or at least slow price increases).

This isn't advice, but I'm also of the view that the news is unlikely to get worse—at least out of the US. Trump has gone for a "big shock" approach, likening his tariffs to a surgical procedure:

"The operation is over! The patient lived, and is healing," he wrote in all-capital letters in a post on his Truth Social platform this morning. "The prognosis is that the patient will be far stronger, bigger, better and more resilent [sic] than ever before. Make America Great Again!!!"

I'm no Trump whisperer, but that certainly sounds like he's calling the "operation" a success, and so from here tariffs are more likely to be eased rather than raised again—at least until May 2026, when Jerome Powell will depart the Fed and he can really start to meddle. The tariffs also don't go into effect until 9 April, so there's still time for Trump to "negotiate" some kind of back-down from which he can still claim victory.

It's also important to note that Congress has the constitutional power to overrule Trump and repeal these tariffs. But for that to happen, the few hold-out Republicans and all of the Democrats would have to co-ordinate and convince enough other Republicans to vote against their MAGA master. That doesn't look like happening; I'm sure that the Democrats are secretly enjoying the carnage, knowing full well – as Republican senator Rand Paul put it – that Trump might be ushering in the biggest electoral wipe out since Hoover:

"When [President William McKinley], most famously, put tariffs on in 1890, they lost 50% of their seats in the next election. When Smoot and Hawley put on their tariff in the early 1930s, we lost the House and the Senate for 60 years. So they're not only bad economically, they're bad politically."

But with the lunatics in charge of the asylum, who really knows. Perhaps half a dozen or so Republians will grow a backbone, or maybe they're willing to see this one through to the cold, bitter end. I guess we'll find out in the next few days and weeks.

The Trump administration is running on AI

What I also want to get into today is how these specific tariff rates came to pass. For not only are they completely idiotic from an economic perspective and bear little relationship to the actual protectionist measures in other countries, but the method to the madness is perhaps just as disturbing.

You see, in the lead-up to "Liberation Day", Trump's staffers faced a conundrum:

"He wanted them to raise significant revenue for the government, as well as provide a durable signal for companies to invest in the U.S., according to people with knowledge of the discussions. Those goals would align with a permanent, across-the-board tariff. A universal approach would also help prevent companies from avoiding tariffs by shifting production to other countries—a key issue for Trump’s economic team.

But the president also liked the idea of reciprocity, the people said—or charging nations “what they charge us,” as Trump has put it publicly. That pointed to individualised tariff rates for nations that could be calibrated according to their tariffs and other economic policies.

A senior administration official described a 'ping pong match' between universal tariffs or the reciprocal approach."

So, how do you square that circle? Simple: you try to do both.

The result was a predictable mess; almost as if it was devised by a simple AI prompt submitted by a first year university student. And I don't know if it's because all the competent people have left the government—or are just flat out refusing and/or sabotaging Trump's agenda—but that might be exactly what happened.