On a personal note, if I keep writing about hot political topics, I may have no friends left. Both of my economic articles in 2024 were critical of the sitting democratic administration at the time. Now this one is critical of the current republican president. Maybe I'll get a point or two for independent thinking.
Tariffs are a complicated topic. I'm certainly no expert, though I'm moderately well read in macroeconomics and aspects of market manipulation.
See Potential Benefits below.
It seems pretty clear that President Trump enjoys bullying. It seems to me that that's one of the satisfactions that he's getting out of his impositions of tariffs and related bully-like rhetoric.
Does it strike you as odd that these tariff numbers oscillate up and down on an almost daily basis? There are several potential reasons for this action. One is to bluff countries into cooperating on U.S. interests. Another is to jump in and then make rapid adjustments as issues evolve—an innovation technique known as fail fast." There may be another motivation however.
Insider trading is a pretty obvious MO for some politicians, evidenced by their net worths increasing by tens of millions of dollars during their terms in office. Trump has a magic wand that can reliably move markets by several percentage points. He knows when he will, or even say he will, raise and lower tariffs, and how it will move markets. All he has to do is pass that info on to hedge fund managers or large investors. They could easily kick back his cut through hard-to-trace channels. Do I know he's doing that? Of course not. Do I think he's doing that? I think the odds are better than 50 percent.
Can impose financial leverage on other countries to tighten up their borders and reduce the flow of illegal drugs across U.S. borders. I do support this one. I think it can be gentler on the population of the target country than broad financial sanctions.
One narrative is that a primary goal of the tariffs is to address China's existential threat to the U.S., both militarily and economically. I believe that both concerns are valid. Xi Jinping seems to be gearing up to invade Taiwan by as soon as 2027. China has also been increasingly assertive in the South China Sea, especially against the Philippines. China dominates the supply chain to many products, including military drones. If China were to cut off the U.S. from its supply chains, presently the U.S. would not be able to produce enough drones for a full-scale mechanized war 1. Computer chips from Taiwan are also a critical supply item.
The tariffs could be used to negotiate strategic alliances to reduce China's trade leverage around the world, and reduce their military strength relative to the U.S.
Can bring parity on tariffs between countries. This I also support. It appears though that Trump isn't going for parity. He seems to be going for a net plus in favor of the U.S. See Potential Negative Effects of Tariffs below. On the other hand, see also National Security immediately above.
May stimulate American manufacturing.
Some of the revenue will ultimately come from American consumers. One might say, "that's only if they buy foreign goods." If they don't buy foreign goods however, then imports are reduced and income from tariffs are reduced, so again, a portion of the revenue comes from American consumers, or it doesn't come at all.
One exception is if tariffs don't remain for very long. Some companies may opt to eat the cost of tariffs for a short time in the hopes that the tariffs will be soon removed. This would potentially prevent the company from losing future repeat sales to consumers that would switch brands for lower prices. In this scenario the U.S. government would indeed capture revenue from foreign, and to some extend domestic, companies rather than from the U.S. consumer. This could be one reason for the on-again off-again tariff style that we're witnessing.
A very big reason that American auto manufacturers increased the quality of their cars in the 80s was that Japan was kicking their butt. China and South Korea could potentially incentivize American car manufacturers to do the same on value (price/quality.) With high tariffs however, the incentives for productivity and innovation relative to foreign competition is muted. That's not helpful for the American consumer. It's not even helpful for American manufacturing in the long run.
May cause an upward spiraling of tit-for-tat tariffs between countries. May also cause cascading inflation because businesses not directly effected by tariffs may still need to pay increased cost-of-living raises to their employees and therefore charge more for their goods and services.
Imposing a net plus on tariffs between countries, combined with bullying rhetoric, can erode foreign relations. This can have long term and unforeseen consequences. It is generally accepted for example that U.S. economic sanctions have necessitated a strengthening of economic, military, and diplomatic alliances between Russia, North Korea, Iran, and China, out of the need to respond to the lack of trade with the U.S. 2. Tariffs can have the same effect, except with tariffs we can now add Canada, Mexixico, 27 countries of the EU, and some South American countries to the list of countries that may conclude that they would benefit by forming alternative alliances.
As a general rule, only about half of the tariff percentage is passed on to the customer. The reason is that the tariff is on bulk import of raw product. After that there are packaging, marketing, sales, and storage costs, and markup, before final sale. So on average the tariff was imposed on about half the final sales price of the item.
Tariffs can provide a more even playing field for global trade and incentivize countries to cooperate on national security concerns, including the growing existential thread of China's dominance of supply chains. However, they have had ambiguous results in the past 3.
While tariffs may shelter U.S. producers from foreign competition, ultimately that lack of competition will erode the capabilities of these same U.S. producers. The consumer will likely not benefit from excessive tariffs.
Anyone who thinks they can be sure of the outcome of increased tariffs, or threat of tariffs, is kidding themselves. Stakes are high. There are competing factors. It seems risky business. Time will tell.
1. ChatGPT: Does China dominate the supply chain for military drones? Does the U.S. have the manufacturing capacity to support a full-scale, mechanized war.
2. ChatGPT: How have U.S. economic sanctions affected alliances between Russia, North Korea, Iran, and China?
3. ChatGPT: Please describe examples in U.S. history of tariffs that have proven unbeneficial?