Instead we got a default rate of 10%, and higher rates on (e.g.) Madagascar whose main export to the US is vanilla—which the US can't grow anyways so it's not like they they need to protect anything. Or the Falklands Islands, whose chief export is… the Patagonian toothfish. Does the US have a strategic in that? (And let's not get into the meme-worthy penguin islands.)
There are good reasons for tariffs: national security concerns, infant industry protection, national champions.
* https://www.noahpinion.blog/p/when-are-tariffs-good
But the recent policies are not that.
It's important to also consider industrial base:
> Democratic countries’ economies are mainly set up as free market economies with redistribution, because this is what maximizes living standards in peacetime. In a free market economy, if a foreign country wants to sell you cheap cars, you let them do it, and you allocate your own productive resources to something more profitable instead. If China is willing to sell you brand-new electric vehicles for $10,000, why should you turn them down? Just make B2B SaaS and advertising platforms and chat apps, sell them for a high profit margin, and drive a Chinese car.
> Except then a war comes, and suddenly you find that B2B SaaS and advertising platforms and chat apps aren’t very useful for defending your freedoms. Oops! The right time to worry about manufacturing would have been years before the war, except you weren’t able to anticipate and prepare for the future. Manufacturing doesn’t just support war — in a very real way, it’s a war in and of itself.
* https://www.noahpinion.blog/p/manufacturing-is-a-war-now
But the recent policies are also not that.
It makes sense if you consider how Chinese companies moved factories to Mexico after the first round of tariffs. You have to treat every country consistently, all at once, or else loopholes emerge. That said, there's probably a smarter way to accomplish this, such as something like setting lower tariffs based on the first $x amount of trade deficit and increasing them by volume.
Which benefits Mexican workers and by osmosis the US: the richer MX is, the more likely they'll become consumerist, and the US companies tend to sell a lot of consumerist goods.
Further, in the case of war, all those physical factories that are ostensibly owned by the Chinese could be nationalized by Mexico as they'd probably be more interested in being friendly with their immediate neighbour. Ditto for Canada: why is the US putting tariffs there?
Also: USMCA is only a few years old. There were already some Chinese-owned factories in Mexico at the time of its signing (which Trump at the time called "the best trade deal ever".) The Chinese factories didn't seem to have been a problem then.
Em. The US can and does grow vanilla commercially. It'll happily grow in USVI, Puerto Rico, Florida and Hawaii, though only Hawaii afaik has commercial growers, though Puerto Rico used to be the ninth largest vanilla producer in the world.
But then it says 'That would lead U.S. GDP to rise, resulting in higher employment, higher wages, and less debt.' This is clearly false as tariffs distort the market. With free trade every country can specialize in what it is best at (their comparative advantage) maximizing GDP. So no, the GDP would fall because Americans are forced to divert resources from more lucrative industries.
If high level broad tariffs (or sales tax) are implemented as a replacement for the progressive income tax (or regressive payroll taxes), and with a universal basic income program, then the shift would be more tolerable.
What you would really not want to do is, prior to raising tariffs, significantly reduce GDP efficient government spending, reduce welfare programs, and decrease public sector jobs.
For success, you would also want to avoid headline tariffs - people, business, and countries can make changes if you announce you are permanently changing your taxation system 1% at a time over the course of a year - and you definitely would want to avoid chastising trading partners that could reduce the control you have.
But like all tools it must be used with care in order to have the desired effect. What we've seen with Trump so far is akin to smashing everything at reach with a hammer, it's not how hammers are supposed to be used…
And it misses key related points: who are interested in more local production? who will produce in what factories in the US? and who will adjust to the excess production?
big difference
* If America is one of your largest export markets, you were just put on notice that all of that business is about to disappear - along with everyone else in the world. Everyone's going to react differently but there really isn't a replacement for the American consumer out there, China is not going to magically step in, the EU is not going to magically step in and buy all your exports, etc.
* Trump has been super loud for many years about his desire to get everyone to buy American. He's now gone as far as to put the largest tariffs on the countries that buy the least. This is all a blaringly loud signal that when the deals start getting cut if you agree to buy more American goods your tariffs will get lowered.
* Ergo we will at some point this year see those deals start to get cut and as things start to inch back in the direction of normalcy, American firms will find themselves benefiting from a ton of new demand from overseas.
* None of this upside is priced into the market today, because the tariffs look like more volatility than anyone wants to deal with - they are obviously amazingly disruptive to many American businesses if they stick around, fear is overwhelmingly the emotion of the day, as opposed to greed. Hatred for Donald Trump is absolutely crushing every other sentiment. This is what I sometimes see referred to as an artificially induced bear market, it's not linked to any clear forecast of future earnings.
But presuming that negotiated trade deals materialize, and I don't see why they wouldn't sooner or later, then things will normalize over time, and the new status quo will almost certainly be better for American earnings. So I'm all in, Buy Buy Buy.
What goods are you expecting foreigners will buy more of?
The points you've made make sense to me in a world where USA has a lot of domestic production of tangible goods. But it doesn't. USA primarily produces services - nearly 80% of GDP is service based.
It's completely possible that America produces luxury goods (ie John Deere tractors, Ford sprinter vans, airplanes) that can only have so much demand to smaller nations.
Do you expect Madagascans to buy more US goods with their $600 per capita GDP income? Because Madagascar's chief export to the US is vanilla, and it got hit with 47% tariff rate.
Or the Falkland Islands' 58% rate: is the US interested in growing its own Patagonian toothfish? Because thats what the Falklands sends to the US. What do you expect the 4000 inhabitants of those islands to buy from the US?
The other theory is some of those smaller countries would accept becoming “vassal states” and house US military in exchange for more favorable terms. Madagascar and Falkland are strategically positioned, so maybe that’s the play?
The position I have taken is, I have already seen reports of countries that are willing to negotiate, and it's a good guess that Trump will ask them to buy more American stuff, and some of them will be able to. This will lead to improved earnings at US companies. Moreover, many of those companies are trading at a discount to their usual valuations right now. That's all.
USA is 17% of worldwide importations. Other growing markets (China, further integrating Europe, Africa, South America, India; even Russia, that's coming from far down) can take that cut, even if it's a temporary hard blowback. How long can the USA take a 50% cut of their importations? How long can the USA take a shift of the international exchange going to another currency than the dollar?
American exceptionalism used to be a thing. It still is, in very specific market segments, but that are now going to be heavily challenged, for sovereignty reasons rather than economic ones.
So I am not sure where is this going? Likely not in the appreciation of US stock market. Or maybe you have some factories, and factory workers, and raw materials hidden somewhere?
The thing a lot of these criticisms of the tariffs always come back to is "everyone's now going to hate the US and sell to someone else instead." But this analysis ignores the fact that the US before April 2 was radically less protective of its domestic markets than pretty much all the other major economic powers. This is a discussion I was having with people long before Trump was elected and you can always tell who has actually looked at the trade relationships of these major economies over the years and who hasn't. China for example is notorious for essentially doing what Trump is doing now, whenever it becomes a political hot button internally, they just cut off trade with some country or other. Every country is shopping around for new trade partners all the time, regardless of what the latest POTUS is up to, and there just is no magic untapped market that's going to materialize and fill the gap.
A lot of countries are simply going to lose their #1 or #2 export market with no replacement if they don't deal. Sure we can make an argument that given 20 years something magic will happen and BRICS will all become free market liberals and sing kumbaya to each other. But this year, countries will deal.
