Tariffs are a Tool. That’s it. They are a Tax which the government uses to gain some revenue off of imports (& in some exceptional cases, exports). Nothing complicated.
The complication comes when we try to model Market behaviour & what happens next. Depending on the starting conditions, you can get vastly different outcomes. I’ll use Le Robot’s summary of what the past 5 centuries of data on Tariffs has shown:
>> Historically, the effects of tariffs have been deeply context-dependent. In the mercantilist era, they served state power more than economic efficiency, while in the 19th century, they were crucial in helping late-industrializing nations like the U.S., Germany, & Japan build domestic industries. However, during the interwar period, tariffs like the U.S. Smoot-Hawley Act triggered retaliatory trade wars & worsened the Great Depression. Post-WWII liberalization under GATT/WTO boosted global trade & growth but also contributed to deindustrialization in some regions. In the 21st century, tariffs have reemerged for geopolitical & industrial reasons, with mixed economic outcomes, revealing that their success or failure depends mainly on broader national strategies & global conditions. <<
Gallagher said roughly the same thing in 'The Imperialism of Free Trade'
The most important question is not 'Are Tariffs Good or Bad?' because we know the answer:
"It depends on what other policies & collaborations are being used by business, govt, etc. It also depends on other corollaries, & once they interact, you get a mixed bag of Good & Bad."
The most important question is Geo-Economic in Nature: "What does this do to America?"
America today uses its Dollar to live beyond its means: Its consumers use it to Bid better on the international market & secure the supply of goods & services at favourable rates. This high purchasing power means trade deficits with lots of countries since Rich Americans can afford their product while poor *insert country here* cannot do the same for American products. This is a mathematical outcome; you won't see Madagascar ever buying more stuff from America than America buying from Madagascar. That's impossible, given population, currency rates, the reality of the wealth gap & other deterministic variables which favour America.
Essentially, since the 'victory condition' (i.e. Getting positive trade balances, country by country, one by one) is a pipe dream, this means that (assuming he doesn't back down, which I do expect to happen), he will continue with these Tariffs until something breaks in the wider society.
& so, what 'LIBERATION DAY' did was destroy this relationship on the Supply side. Value chains in Vietnam (for example) instantly were nuked & you now have companies like Nike who cannot build their shoes properly given these disruptions. Ditto for many others.
The American consumer is not the only one who will thus see shortages & outages in the market... American manufacturers & producers who rely on cheap inputs (like Aluminum) for industry & manufacturing will see their companies fall apart in mere weeks & months.
So this whole 'Negotiation Tool' angle doesn’t work. Because permanent destruction has already (& is still being) done to these Value chains, meaning that Deindustrialization is inevitable. That's going to be the medium to long term impact, Geo-Economically.
The Tariffs themselves are only one piece of the puzzle.
There are other pieces: Shipping Volumes, Treasury Yields, Equities, etc.
Once you look at the entire picture, it's very clear that we see America moving rapidly toward an Implosion, which is somewhat similar to the Soviets in the late 1980s. A sovereign default is basically the most likely outcome, should things continue 'Business as Usual.'
Great analysis, Ahnaf. I particularly like your point on the impact of tariffs being conditional. In this case, President Trump is trying to lower income taxes and increase tariffs which increases the incentive to be productive and reduces the incentive to consume. As far as tax reorganization goes, that's a decent start. Not sure I agree that this definitively leads to disaster. Over the weekend 50 countries wanted to negotiate and I think we can assume their offers include lower tariffs on US goods. The EU offered a zero tariff today. We could end up with lower rates all around, a possibility few are acknowledging. Finally, I'd add that the current system was unsustainable. With almost $250T in liabilities, the US government is insolvent and heading for a real default or a stealth default. Maybe these tariffs work, and maybe they won't, but doing nothing is a guarantee of disaster. Thanks for the thoughtful response!
Once you do, it becomes clear why the 'This is for Negotiations, Patriots!'-line doesn't work. It's actually very simple to figure out & analyze:
Countries who 'negotiate' say something nice for the cameras & then break the terms a few months later down the line. Honestly, this is easy to predict:
Trump himself signed the USMCA with Mexico & then wrecked the whole thing a few weeks ago. So if you're dealing with somebody like that, whose word means nothing, why give him any leeway at all? Which is thus what will happen with these 'deals.'
But there's a deeper point here: The Victory condition of 'Trade surplus with EACH country' wont be met even if all tariffs against America are dropped. Vietnam in 2023 exported 95 billion to America, & imported about 9.8 billion... that gap will only close a little bit because (again) Vietnam cannot AFFORD american stuff, which is more expensive, while Americans (with more purchasing power) can buy Vietnamese stuff.
This means whether it is Vietnam (or whoever else) the trade 'imbalance' will remain & so will the Tariffs until something more fundamental breaks. My hunch? It's going to be on the Supply side, impacting US consumers, producers, etc. The Math doesn't work EVEN IF Vietnam does a 'negative tariff rate' against America. That's how silly this all is. Anyhow, moving onto the supposed revenue increases that will happen:
Tariffs will at most (I am using the US Debt clock) generate 600+ billion per annum, assuming Volumes stay the same (NOPE) compared to the 2.6 trillion per annum from Income Tax, & 2.4 trillion from other Taxes (again, US Debt Clock) which will take a hit of 10% or greater due to lower tax receipts a la the coming Supply shocks.
Basically... the 400-600 billion per annum increase is easily offset by the 500+ billion decreases in tax receipts... & this is before we factor in the Treasury Yield Spikes & the increase in Borrowing costs they will bring. Once you see equities tank (CHECK) meaning capital outflows, coupled with said higher borrowing costs thanks to Yield spikes in US Treasuries... most retail outlets, small suppliers, etc will be Nuked.
Here's but one example of someone who is not going to be clearing his Customs Bills anytime soon (& I expect more such people to follow in the coming weeks):
Besides tariffs, the other factors required for reindustrialization (and the jobs & tax revenues it will create) are to roll back excessive regulation, rein in Big Law, simplify our excessively complex tax regime. Unfortunately, fixing those problems will require action by Congress -- and Congress is the failing institution which created all those problems in the first place, and then stuffed their own pockets while working Americans lost their jobs.
No-one can tell how much pain Americans will have to feel before Congress finally changes direction and tries to work for the common good instead of their own bank balances.
Great points. I agree and would add reducing Congressional overspending as another crucial element to fixing the situation. Like you, I think the probability of Congress doing any or all of these things approaches zero.
I'm honestly tired of hearing everyone fearmonger over the tariffs in my day-to-day life. Like you mentioned, the criticism of the tariffs make sense on paper. I'm certainly no economist, but something is off about it. If tariffs are apparently so universally bad, why did all these other countries already have tariffs on us? Also, a lot of people seem to be pretending that the pre-jan 20, 2025 economy of America was all free and prosperous, and it just wasn't. So clearly something had to be done. Many countries seem like they are bending the knee. so maybe it will work, maybe it won't, but I'm highly doubtful of this economic doomsday narrative.
I think that's a sensible approach. Somehow, the same people who think it's terrible that the US is raising tariffs are ok with other countries having larger tariffs against our products. I'd like to know why...or is it they just like the status quo because it comes with asset bubble inflation which helps their stock portfolios. I'm always amazed at the professional money managers who need ever-higher valuation multiples to make money. I don't worry if the market is up or down - we can adjust exposure for that. Also agree with you that the economy isn't in good shape. I've been writing about a bifurcated economy for years. Weakness in the productive private sector is being masked by more Congressional overspending. GDP growth is fictional. When more than 100% of GDP growth is debt-fueled government consumption, I think we have a Potemkin economy.
Most of it is obviously just TDS. He announces the tariffs and suddenly all the leftists are supportive of a free market. Pretty funny to watch. Important to remember that a lot of the people criticizing this don’t believe in anything and are basically insane.
Yes - people are pointing to the stock market (down slightly from all-time bubble highs) as "proof" this will destroy the international trading regime. If they're invested in the stock market, they're talking their book. If they're not, then it's a fake concern. Again, better to control your exposure than to try to control the government.
Tariffs are a Tool. That’s it. They are a Tax which the government uses to gain some revenue off of imports (& in some exceptional cases, exports). Nothing complicated.
The complication comes when we try to model Market behaviour & what happens next. Depending on the starting conditions, you can get vastly different outcomes. I’ll use Le Robot’s summary of what the past 5 centuries of data on Tariffs has shown:
>> Historically, the effects of tariffs have been deeply context-dependent. In the mercantilist era, they served state power more than economic efficiency, while in the 19th century, they were crucial in helping late-industrializing nations like the U.S., Germany, & Japan build domestic industries. However, during the interwar period, tariffs like the U.S. Smoot-Hawley Act triggered retaliatory trade wars & worsened the Great Depression. Post-WWII liberalization under GATT/WTO boosted global trade & growth but also contributed to deindustrialization in some regions. In the 21st century, tariffs have reemerged for geopolitical & industrial reasons, with mixed economic outcomes, revealing that their success or failure depends mainly on broader national strategies & global conditions. <<
Gallagher said roughly the same thing in 'The Imperialism of Free Trade'
https://www.britishempire.co.uk/maproom/imperialismoffreetrade.pdf
The most important question is not 'Are Tariffs Good or Bad?' because we know the answer:
"It depends on what other policies & collaborations are being used by business, govt, etc. It also depends on other corollaries, & once they interact, you get a mixed bag of Good & Bad."
The most important question is Geo-Economic in Nature: "What does this do to America?"
America today uses its Dollar to live beyond its means: Its consumers use it to Bid better on the international market & secure the supply of goods & services at favourable rates. This high purchasing power means trade deficits with lots of countries since Rich Americans can afford their product while poor *insert country here* cannot do the same for American products. This is a mathematical outcome; you won't see Madagascar ever buying more stuff from America than America buying from Madagascar. That's impossible, given population, currency rates, the reality of the wealth gap & other deterministic variables which favour America.
Essentially, since the 'victory condition' (i.e. Getting positive trade balances, country by country, one by one) is a pipe dream, this means that (assuming he doesn't back down, which I do expect to happen), he will continue with these Tariffs until something breaks in the wider society.
& so, what 'LIBERATION DAY' did was destroy this relationship on the Supply side. Value chains in Vietnam (for example) instantly were nuked & you now have companies like Nike who cannot build their shoes properly given these disruptions. Ditto for many others.
Shipping Volumes are already cratering from the nonsense: https://www.thenationalnews.com/business/economy/2025/04/06/shipping-industry-sinks-into-crisis-as-trumps-tariffs-disrupt-global-trade-flows/
The American consumer is not the only one who will thus see shortages & outages in the market... American manufacturers & producers who rely on cheap inputs (like Aluminum) for industry & manufacturing will see their companies fall apart in mere weeks & months.
So this whole 'Negotiation Tool' angle doesn’t work. Because permanent destruction has already (& is still being) done to these Value chains, meaning that Deindustrialization is inevitable. That's going to be the medium to long term impact, Geo-Economically.
The Tariffs themselves are only one piece of the puzzle.
There are other pieces: Shipping Volumes, Treasury Yields, Equities, etc.
Once you look at the entire picture, it's very clear that we see America moving rapidly toward an Implosion, which is somewhat similar to the Soviets in the late 1980s. A sovereign default is basically the most likely outcome, should things continue 'Business as Usual.'
Great analysis, Ahnaf. I particularly like your point on the impact of tariffs being conditional. In this case, President Trump is trying to lower income taxes and increase tariffs which increases the incentive to be productive and reduces the incentive to consume. As far as tax reorganization goes, that's a decent start. Not sure I agree that this definitively leads to disaster. Over the weekend 50 countries wanted to negotiate and I think we can assume their offers include lower tariffs on US goods. The EU offered a zero tariff today. We could end up with lower rates all around, a possibility few are acknowledging. Finally, I'd add that the current system was unsustainable. With almost $250T in liabilities, the US government is insolvent and heading for a real default or a stealth default. Maybe these tariffs work, and maybe they won't, but doing nothing is a guarantee of disaster. Thanks for the thoughtful response!
Study his first term.
Once you do, it becomes clear why the 'This is for Negotiations, Patriots!'-line doesn't work. It's actually very simple to figure out & analyze:
Countries who 'negotiate' say something nice for the cameras & then break the terms a few months later down the line. Honestly, this is easy to predict:
Trump himself signed the USMCA with Mexico & then wrecked the whole thing a few weeks ago. So if you're dealing with somebody like that, whose word means nothing, why give him any leeway at all? Which is thus what will happen with these 'deals.'
But there's a deeper point here: The Victory condition of 'Trade surplus with EACH country' wont be met even if all tariffs against America are dropped. Vietnam in 2023 exported 95 billion to America, & imported about 9.8 billion... that gap will only close a little bit because (again) Vietnam cannot AFFORD american stuff, which is more expensive, while Americans (with more purchasing power) can buy Vietnamese stuff.
This means whether it is Vietnam (or whoever else) the trade 'imbalance' will remain & so will the Tariffs until something more fundamental breaks. My hunch? It's going to be on the Supply side, impacting US consumers, producers, etc. The Math doesn't work EVEN IF Vietnam does a 'negative tariff rate' against America. That's how silly this all is. Anyhow, moving onto the supposed revenue increases that will happen:
Tariffs will at most (I am using the US Debt clock) generate 600+ billion per annum, assuming Volumes stay the same (NOPE) compared to the 2.6 trillion per annum from Income Tax, & 2.4 trillion from other Taxes (again, US Debt Clock) which will take a hit of 10% or greater due to lower tax receipts a la the coming Supply shocks.
Basically... the 400-600 billion per annum increase is easily offset by the 500+ billion decreases in tax receipts... & this is before we factor in the Treasury Yield Spikes & the increase in Borrowing costs they will bring. Once you see equities tank (CHECK) meaning capital outflows, coupled with said higher borrowing costs thanks to Yield spikes in US Treasuries... most retail outlets, small suppliers, etc will be Nuked.
Here's but one example of someone who is not going to be clearing his Customs Bills anytime soon (& I expect more such people to follow in the coming weeks):
https://x.com/KH954/status/1909347529780560117
Besides tariffs, the other factors required for reindustrialization (and the jobs & tax revenues it will create) are to roll back excessive regulation, rein in Big Law, simplify our excessively complex tax regime. Unfortunately, fixing those problems will require action by Congress -- and Congress is the failing institution which created all those problems in the first place, and then stuffed their own pockets while working Americans lost their jobs.
No-one can tell how much pain Americans will have to feel before Congress finally changes direction and tries to work for the common good instead of their own bank balances.
Great points. I agree and would add reducing Congressional overspending as another crucial element to fixing the situation. Like you, I think the probability of Congress doing any or all of these things approaches zero.
I'm honestly tired of hearing everyone fearmonger over the tariffs in my day-to-day life. Like you mentioned, the criticism of the tariffs make sense on paper. I'm certainly no economist, but something is off about it. If tariffs are apparently so universally bad, why did all these other countries already have tariffs on us? Also, a lot of people seem to be pretending that the pre-jan 20, 2025 economy of America was all free and prosperous, and it just wasn't. So clearly something had to be done. Many countries seem like they are bending the knee. so maybe it will work, maybe it won't, but I'm highly doubtful of this economic doomsday narrative.
I think that's a sensible approach. Somehow, the same people who think it's terrible that the US is raising tariffs are ok with other countries having larger tariffs against our products. I'd like to know why...or is it they just like the status quo because it comes with asset bubble inflation which helps their stock portfolios. I'm always amazed at the professional money managers who need ever-higher valuation multiples to make money. I don't worry if the market is up or down - we can adjust exposure for that. Also agree with you that the economy isn't in good shape. I've been writing about a bifurcated economy for years. Weakness in the productive private sector is being masked by more Congressional overspending. GDP growth is fictional. When more than 100% of GDP growth is debt-fueled government consumption, I think we have a Potemkin economy.
Most of it is obviously just TDS. He announces the tariffs and suddenly all the leftists are supportive of a free market. Pretty funny to watch. Important to remember that a lot of the people criticizing this don’t believe in anything and are basically insane.
Yes - people are pointing to the stock market (down slightly from all-time bubble highs) as "proof" this will destroy the international trading regime. If they're invested in the stock market, they're talking their book. If they're not, then it's a fake concern. Again, better to control your exposure than to try to control the government.