As President Trump looks to transform the American economy, and perhaps the global economy, for the next generation, tariffs have become front-and-center in the discussion.
We’ve habitually seen so many of President Trump’s proposals viciously opposed with Trump Derangement Syndrome-induced vigor. Tariffs are no exception, representing a traditionally undermanaged and at times severely mismanaged aspect of US economic and foreign policies. President Trump has again recognized opportunity via an area not addressed by prior administrations, challenging a status quo no longer serving the US well.
Tariffs are a domain of the financial world for their economic impact and the political world for their foreign relations component. Financial news headlines look as clueless in their perspectives of tariffs as their fellow political “savants” opining their political nonsense.
The New York Times: “Trump Tariffs Threaten to Upend Global Economic Order”
Financial Times: “Trump has undermined US economic exceptionalism”
The Economist: “Trump’s tariff turbulence is worse than anyone imagined”
Bloomberg: “Trump’s Trade War Reignites Fed’s ‘Transitory’ Inflation Question”
Barron’s: “Trump Ratchets Up Tariff Threats on Canada, Mexico, China. They Look Unavoidable Now.”
The Wall Street Journal: “Tariff Uncertainty Will Keep Rising, Paralyzing Businesses: Heard on the Street”
Let’s take a dive regarding the disinformation, misinformation, and just plain economic falsehoods thrown against the wall in hopes of derailing Trumponomics 2.0.
A Principled Economic Policy
President Trump’s tariff strategy is key to growing not only the US economy but providing a spark for other nations to grow theirs in parallel. Undoubtedly, its tax aspects can strongly influence the world’s economic investment patterns and trade relationships. Less discussed are tax policies that individual nations can implement on their own: competitive tax rates for businesses and individuals, and depreciation allowances that can spur innovative investments.
The importance of economic growth cannot be understated. It is the foundation of “supply-side economics” and the result of our innovation efforts. Economic growth leads to investment in new product development, capacity expansion, cost reductions, and environmentally sound processes. With every new investment, the latest and most innovative processes can be brought to bear. These innovations bring more competitive products with improved financial results to follow. It adds pressure for an industry’s competitors to match or better the innovation leaders, creating a virtuous cycle of continuous improvement to the entire ecosystem. The absence of such investment eventually leads to decline and decay with a vicious cycle that creates a decline in our standards of living.
President Trump has proposed tariff rates that are more “punitive” in nature rather than “revenue raising.” It’s meant as an invitation to bring countries to the negotiating table vis-a-vis their own tariffs on American goods.
Consider: The Trump administration regards China as its greatest foreign competitor and threat. Vietnam has poor relations with China, and has made overtures to the United States to deepen our relations. Yet Trump has just slapped Vietnam with very punitive tariffs, simply because Vietnam’s tariffs on American goods are so high and Trump’s principle is to reciprocate other nations’ tariff policies toward the United States.
This tells us that Trump’s tariff policy is based entirely on economic principles, as opposed to foreign policy goals. This stands in contrast to Bidenomics, which was an economic policy designed to implement a foreign policy.
It should not be a surprise to us that President Trump prefers a personal, collaborative working relationship with other heads of state. Traditionally trade agreements tend be competitive and rely upon a bureaucracy prepped to subsequently enforce. The ultimate goal remains “zero” tariffs with reciprocity as an immediate step to force a legitimate “Free Trade” world. The end game is the breakup of artificial trade barriers so nations can determine their most competitive products and processes.
The best will develop a culture of continuous improvement. Tariffs should find the lowest level possible, not unlike the “Laffer Curve” approach with income tax rates. The driving down of tax brackets led to a generation of US economic growth. Israel’s recent rescission of all tariffs on US products is the ultimate goal for all trade relationships.
The Doomsayers
Expect to hear that tariffs will weaken the world economy.
Those proffering this view are from the globalist camp, who tend to be very short sighted in both history and economics. Sadly, those with pure “free trade” viewpoints can be sucked into this fear.
Tariffs were common government funding mechanisms for thousands of years of recorded history. Western economies adopted income taxes as a means of taxing the “Robber Barons” in the early 1900s. If tariffs are so bad for the world economy, why do other nations seem to want to place a tariff on US-produced goods?
Conventional economic wisdom taught about tariffs by “Free Trade” advocates institutionalized two principles: 1) The Smoot-Hawley Tariffs designed to pull the US out of the Great Depression made it far worse, and 2) If another nation gives you a gift, take it.
The post-World War II Marshall Plan was the ultimate victory for the “Free Traders.” It opened US trade borders which allowed America to import the cheapest of foreign commodities and goods. The US could concentrate on high value, high demand goods such as automobiles. The rest of the world could fix its local war induced ruins and focus on the lower value products we needed. Employment levels would skyrocket.
It worked, until it didn’t. After all, the concept of “There Ain’t No Such Thing As A Free Lunch” (TANSTAAFL) remains unchallenged by economists. Countries subsidized the production of higher value goods as they figured out that’s where the American money is. Some such as Japan, South Korea and Germany focused on steel, consumer electronics, and autos. France and others developed high fashion and similar products. Some were more aggressive with metal, agricultural, or energy commodities. A compliant UN World Trade Organization (WTO) provided regulatory subsidies and environmental set asides for “developing countries” to speed their development. Too often, with the US manufacturing base taken for granted, multi-national companies searched worldwide for the lowest possible wages.
The most unforeseen impediment to Free Trade was China’s perpetual devaluation of the Yuan to enhance its competitive export position. It’s likely this topic has been overlooked with the prominence of the mandatory technology transfers to China and its hegemony over the WTO. The world’s second largest economy has effectively been able claim poverty securing institutional waivers of environmental and other regulations borne by competitors.
China will continue to weaken the Yuan in anticipation of tariffs. Devaluation was part of their 2016 election playbook when China’s central bank made its largest devaluation of the Yuan in a decade. The Yuan is currently at its weakest levels against the dollar since 2007. We must expect China to threaten weakening the Yuan further. They feel they must win the currency war they started.
Expect to hear tariffs will be inflationary. This is hugely upon hugely incorrect.
Inflation is created by central banks creating more money faster than the growth in the supply of goods. Bidenflation was created by our Federal Reserve creating ten years’ worth of money supply growth in a two-year period. Their response: deny inflation existed, call it “transitory”, then claim it’s “a supply chain problem”, later passing huge demand-spiking legislation such as the misnamed “Inflation Reduction Act.” After all these failed, the Fed cut back on its Quantitative Easing program, which worked as it slowed the growth of the money supply.
By the way, have you ever heard a progressive economist or politician call a sales tax inflationary? Isn’t a tariff really a sales tax by another name? A tariff is assessed on the goods upstream from the final sale to the consumer. Both taxes get their take off the top of the transaction, not the profitability of the transaction.
Expect to hear tariffs will cause a recession. Exceptionally misleading.
We will hear tariffs are “bad for business” because businesses need to know their costs before they make investments. Businesses may not “like” change, but they will deal with tariffs just like they deal with other things that change every day. Rerouting goods, reclassifying products are a common game to avoid the most onerous of taxes.
Any business making this argument is demonstrating its inability not only to successfully adapt to changing government policy, but its failure to listen to President Trump’s campaign messaging. What were businesses’ responses to the “Obamacare” changes? Adjust and move on.
Look to companies’ first quarter earnings results along with management’s discussion and guidance for the rest of 2025. Propriety research suggests the maximum new tariffs by both the US and retaliatory tariffs by others would be $210 Billion per year, or 0.8% of US GDP, and 0.2% of Global GDP. With such minimal impact, few corporate CEOs are likely to cite tariffs for a shortfall to prior earnings forecasts and drops from prior profit levels.
The recession fears and recent financial market volatility result from the market’s traditional readjustments. The first year after a change in power and party of the presidency historically has higher volatility that the next three. Overreactions are common in financial markets. Disciplined decisions are the usual winner over emotional ones.
A speculative comment: Responding to the current financial market volatility, hedge funds and others may sell off many of their fast-rising tech stocks and take a position in the traditional safe havens of US treasuries. This could be great news for interest expenses as unforeseen demand for treasuries could drive down interest rates. The Biden Administration pumped up its borrowing volume of short-term treasury securities to pay for its massive deficit spending. The Trump treasury team has inherited this historically high quantity of bonds to rollover in 2025. A drop in market interest rates would save billions of dollars of interest costs. As a reminder, interest costs on the US deficit exceed our Department of Defense budget.
Expect to hear tariffs are unfairly and harshly directed at our closest trading partners.
This is a confession by national leaders they were caught flatfooted and did not pay attention to President Trump’s campaign rhetoric. Tacit in their comments: confirmation inappropriate tariffs were placed on the US. They don’t want to openly acknowledge these tariff levels or drop them until being forced to. It’s an admission they did not invest and innovate over the past 80 years to become more competitive in these segments of the world economy.
When your customer is hurting, their pain will back up to your business. The question is when. Our workers have taken it in every way possible over the past generation. Our unsecured borders have allowed in job ending cheap goods, life ending cheap fentanyl, and enabled abuse of those most vulnerable via human trafficking. Mexico and Canada can help secure our borders to stop the most dangerous elements of humanity. China’s manufacture of fentanyl is in many respects a payback for the opium trade of prior centuries that destroyed so much of their population. In many respects, these costs are far more painful than any benefit of cheaper imported goods.
Conclusion
President Trump’s goal remains the elimination of all tariffs placed by others on US products. Tariffs can be avoided with investment in US facilities. Multinational companies have already announced their intention to place hundreds of billions of dollar investments in the US in just the first two plus months of the Trump presidency. Moreover, the UAE and Saudi Arabia are at a combined $2.4 Trillion for the next 10 years according to Reuters.
Final judgements of the success of the Trump Administration’s tariff strategies will be measured by the GDP growth of the US economy. Our challenge is to grow our taxpaying base faster than the growth of the federal deficit. Combined with DOGE’s results to cut our costs, we can restore America’s financial footing. May the rest of the world join in!
