Now that the cheering and jeering at Trump’s April 2nd “Liberation Day” tariffs have died down and the global markets have firmly expressed their dissatisfaction, it is worth trying to understand some of the details behind the blanket tariffs that were levied against friends and foes alike, and what they may portend.
The whole matter of tariffs is a bit of a head scratcher, especially for people not steeped in matters of international trade and economics. There are three major reasons for them to be levied, at least historically.
The first is easy. Another country decides to raise tariffs and other trade barriers against you, so you retaliate (or, in more economically polite terms, reciprocate).
The second is a little more complicated, but it boils down to erecting tariffs when other countries make better or cheaper mousetraps. Which is how you protect your local industries which have come under threat from the better (or cheaper) mousetraps. At least for a while. These are called protective tariffs.
The third is to raise revenue, particularly effective when your products are desirable outside of your country, and no one can easily source them elsewhere. The foreign buyer is forced to pay a premium for the desirable US product. This one also has the added benefit of offering a cudgel to the tariffing country to pile on pressure in unrelated political matters. Support our national aspirations and we’ll talk about a gentler trade deal.
So which one of these did Trump announce last week? The answer is not that simple because he went rogue.
Let’s start with the first traditional driver, retaliatory tariffs. Trump would have you believe that US goods have been prejudiced by everyone outside of the US erecting unfair trade barriers (we have been “raped and pillaged” in his more sensational language), and so he is just “levelling the playing field”, but even a cursory inspection of the numbers across all countries shows many of these new tariffs to be unrelated to any retaliatory tit-for-tat − the calculus just doesn’t add up. For instance, China was hit with far higher tariffs than those that they levy on the US, and Mexico, already under the tariff whip, has zero reciprocal tariffs.
Deadpan piece
As CNN pointed out in a deadpan piece, tariffs have been levied against even tiny jurisdictions with little or no trade with the US, including the British Indian Ocean Territory whose only purpose is to house an American airbase. Or the case of South Africa, in which additional punitive tariffs have been levied because Trump is under the bizarre impression that white people are within a hair’s breadth of being marched into concentration camps.
The easy-to-swallow soundbite about “levelling the playing field” by retaliating against unfair external tariffs is simply untrue, pure propaganda. Worse than that − it is shot through with blatant misinformation − Nobel prize-winning economist Paul Krugman pointed out that the European Union places tariffs of less than 3% on average on US goods, while Trump maintained its tariffs are 39%.
The second well-trodden driver for tariffs, to protect against better mousetraps from other countries, is certainly at play here. One only needs to look at EVs. Tesla’s cars are no longer competitive with China’s BYD EVs in either quality or price. The only way to protect Tesla and other US-made EVs is to make it unprofitable for non-US competitors to enter US markets. Or to try and get them to build in the US, which China has announced it will not do.
These protective tariffs will certainly help local manufacturers, but the cost is that consumers will end up paying more for the same (or even inferior) locally made products. It is a tax on consumers, nothing less. Worse, they are hard to dismantle because protected industries grow complacent and get very unhappy when protections are removed at some point in the future.
And then there is the third driver − revenue-raising tariffs. This works for as long as the global demand for the local US product at even premium prices outstrips supply, which given the nature of global competition, will always be temporary. But as a short-term capital-raising gambit, it works, and it is likely that this played into Trump’s thinking.
So how did the administration do its “Liberation Day” numbers? This is where they went rogue. It turns out that the new tariffs were driven by an entirely new calculus, only partially related to the three drivers mentioned above. The US looked to see where they had trade deficits and simply erected tariffs to erase them (this was spotted by some sharp-eyed nerds who reverse-engineered the formula from the trade deficit numbers). Simple. And astonishingly dangerous. Why? Because it does not go to the root cause of deficits (such as the US simply being not competitive enough in some areas of production). It says: you are making too much money from us with your products, so we’re going to keep you away from our buyers.
By the way
Oh, and by the way, every country on earth gets levied with a baseline 10% tariff, deficit or not. Why? Because we can.
The brains behind this scheme are not fools, obviously. Here is their gamble − the size of the US market is so great that no one can afford to turn away from it. The bet is that they will bend the knee to retain access to the US. They will make deals, grovel and ingratiate themselves in the hope of tariff reprieve.
Yes, well. Perhaps. Realpolitik is nothing if not an unpredictable bitch.
Finally, there may be a far more complex chess game at play. The new US tariffs will raise domestic prices, which will push inflation upwards, which will feed into economic uncertainty, which will weaken the dollar, which will make foreign debt holders nervous, which will cause them to sell the US-originated debt, which will further weaken the dollar, which will lower the US foreign debt obligation (which currently accounts for 25% of national debt). Oh, and the cheaper dollar will also make US products cheaper, which will stimulate exports, which will…
Oh, and another one. The US needs to bring down the rate of the 10-year US bond yields which are due for debt rollover and the best way to do this is to weaken the dollar.
Got it? Me neither.
Something is going on here, presumably designed by very smart people. That is a generous assumption − even the reliably conservative The Economist magazine ran its Thursday cover title “Ruination Day”, and there are no economists on any side of the political spectrum that I could find giving this a thumbs up. Already an alarm-riinging open letter signed by 16 Nobel Prize-winning economists has been published, and one of those, Paul Krugman, has called the tariffs “monstrously destructive”.
But then there is Scott Bessent, Trump’s Secretary of the Treasury. He is not an economist, but a famed wrangler of capital markets and hedge fund manager, widely admired on both sides of the aisle (and very far from your typical MAGA ideologue). In a recent interview, he defended the tariff policy, noting its benefit as a political negotiating tactic. Is it possible that theoretical economists are wrong and battle-tested money managers like Bessent are right?
In any event, it feels like a once-in-a-century big and wild swing at the pitcher’s ball. Maybe they will knock it out of the park. I hope they know what they are doing.
[Image: reve.art]
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