🔋The Spins
Are the Trump tariffs really tariffs?
If you’re anything like me, you’re probably already sick of all the tariff talk coming out of the Trump administration. While I like to stay politically neutral here at The Gray Area, I have not been shy to criticize policies on both sides of the political aisle over the last few years for their economic flaws. I have been critical of things like Tariffs and price controls in the past, which are blunt protectionist economic tools that go against the power of the free market. But are Trump’s tariffs really tariffs?
Liberation Day on April 2nd may not go down as a historic day like Trump has claimed. Only weeks later, he announced a 90-day pause on the extremely aggressive tariffs that had been announced. The stock market was not expecting that announcement, falling 10% to a total correction of ~20% for the S&P 500. Every day, there is new news about negotiations, increased tariffs, more tariff pauses, and more. Sometimes I can hold off writing articles until the news settles in time, but this one may take a while.
Everyone expected retaliatory tariffs to take effect based on the tariff rates of the opposing country. The term retaliatory was misleading because the actual tariff rates were calculated based on the trade deficit with the country (trade deficit divided by 2), not based on the specific tariff rates they impose.
This instantly raises some eyebrows as the policy has some major flaws. The small landlocked nation of Lesotho was hit with the largest tariffs out of left field. The tiny country happens to house 11 total factories and exports textiles to the United States. Whether that tiny nation with a negligible economic impact is taking advantage of the US is not up to me to decide, but it is certainly a surprising move.
Coffee cannot be grown in the United States due to its cooler climate, but we have to balance this trade deficit at the threat of aggressive tariffs? The most shocking move was that tariffs were placed on islands with zero inhabitants. The Heard and Macdonald Islands were slapped with 10% tariffs even though there are plenty of penguins, but no humans. These tariffs were not well thought out, or it is very difficult to create a global tariff strategy.
This goes to the heart of one of the issues. When I wrote about my distaste for price controls, part of the reason was that whole government departments had to be created to monitor and appraise price controls, which adds government bloat and inefficiencies. On the same token, the US will have its hands full trying to implement, enforce, and monitor changes in tariff rates. How will the Department of Government Efficiency respond to hundreds of federal employees being hired to enforce and track tariffs if imposed as an economic strategy?
Trump has shown great success as a businessman, which is less common in today’s politicians. However, is he and his small team the experts on the African Textile industry, novel semiconductor technology, or energy grid and infrastructure? The second major issue with tariffs is that no central planners have as much expertise and knowledge as the free market does. Yes, Nvidia would like to maximize profits as a corporation, but no one knows how to make the best economic decisions about semiconductor technology like them, certainly not a handful of politicians. The free market knows how to allocate resources better than Trump, and there is a reason why industries move where they are.
That reason is because the US has the reserve currency, which it spent trillions of dollars and many years of war protecting, as I wrote about last week. According to how the tariffs were implemented, Trump thinks the trade deficit is fundamentally bad. When you learn introductory macroeconomics, they teach you about the theory of comparative advantage. This is the ability of a country to produce a good or service at a lower opportunity cost than others. It explains why entities benefit from specializing in what they do best and trading for other goods, even if they are more efficient at producing everything.
The US could produce everything it needs, but it would come at the cost of certain competitive industries. Further, the trade deficit is what made US capital markets the premier assets in the world. Recently, I discussed how Trump’s plan to reduce trade deficits could have a scary unintended side effect. Foreign dollar profits are currently recycled back into US assets like stocks and bonds, meaning that those assets may see downward price pressure without those money flows. Further, with other countries likely to worry about the safe treatment of their capital in the uncertain political environment, they may invest their profits elsewhere.
If Trump is truly serious about killing the trade deficit, that would require sacrificing the functionality of the reserve currency. Expect a collapse in US stocks if this happens, a return to gold and other currencies as trade mediums, and global economic slowing as trade friction increases. The hope among Trump enthusiasts is that these will spark negotiations that bring favorable deals to the US. If he won’t stop until the trade deficit is reversed and the US produces everything, the foreign capital flowing into stocks and bonds will no longer be there.
Tariffs are nothing more than a tax on imports or exports. While Trump’s tariffs were not truly retaliatory based on industries, but trade deficit-weighted. They apply huge taxes and friction on global trade. While tariffs are paused currently, and could stay away forever if trade deals get struck, there is already some international trade trust that has been broken. If returned, the new tariff policy is flawed and will be severely disruptive for the economy. The true reasons for the trade deficits and comparative disadvantage for the US in certain industries have not been addressed. Until next week,
-Grayson
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