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President Donald Trump announced "Liberation Day" on Wednesday with a divisive, across-the-board 10% tariff on imported items and much bigger tariffs on countries like China, Japan, and the EU. I'm not here today to dig deep into the details of the plan or the merits of that tariffs chart Trump showed off in the Oval Office yesterday.
Instead, I'd like to give you the orbital view of the big picture — risks, rewards, the whole thing — and that gives us a lot of ground to cover. So pour yourself a glass of something lovely and find a comfy place to sit.
In a perfect world, there would be no tariffs. Americans would be free to buy, sell, and trade with whoever offers us the best deal, without the heavy hand of government picking winners and losers.
We do not live in a perfect world. You might have noticed.
Tariffs can be useful for nurturing vital industries, steering trade away from hostile, rival, or s***hole countries, and protecting U.S. wages. They're also a cudgel for motivating other countries to reduce their trade barriers if that's the intent. But, like anything else the government does for our own good, things don't always work out as intended. And the road from here (Liberation Day) to there (American Manufacturing Renaissance) is probably rocky.
Today's essay is a tricky one because tariffs are a surprisingly emotional issue, involving jobs, buying habits, and sometimes sentimental notions about the good old days, on top of the drier macroeconomic and geopolitical concerns. So before we go any further, please understand that I have more questions than answers. What I have for you today is more of an exploration than an argument in favor of one side or the other.
Let's also clarify what tariffs are: they're a consumption tax. When Trump raises tariffs on China, nobody in China pays them. They're a tax collected by Washington and, in one way or another, passed on to Americans. The cost can be paid directly by consumers in the form of higher prices. Or businesses might choose to wholly or partly eat those costs, but the result would be lower profits, fewer investments, and less innovation. A made-in-China toaster that cost $50 yesterday might cost $60 with new tariffs. Walmart could pass that $10 along to shoppers, take it out of next year's wage increases, or just take the loss. But somebody has to pay the $10. Maybe it's shoppers at the checkout line. Maybe it's pension funds generating smaller returns.
TANSTAAFL (There Ain't No Such Thing As A Free Lunch) is as immutable as the law of gravity.
Trump's tariffs are yuge. White House aide Peter Navarro said last week that the administration expects increased tariffs to yield $6 trillion in revenue over the next ten years, or $600 billion per year.
That's an awfully large cost borne by the vast majority of Americans to protect a very small number of manufacturing jobs — about 472,000 at last count. Even if tariffs could triple that number and create a million new manufacturing jobs (a noble cause that I wholly endorse), the potential political thorniness of a broad-based tax benefiting a relatively small number of workers remains.
I'm not saying it isn't an effort worth pursuing. I am trying to make readers aware of potential risks and costs.
While Beijing doesn't break out its tax revenues by type, the best estimate I could find for China's 2023 tariff income (2024 wasn't available, even as an estimate) was roughly $35 billion. Whatever China does to protect its domestic manufacturing — and it does a lot, including direct subsidies, overseas dumping, currency manipulation, and hyperregulation of foreign goods — tariffs are a small part of it. But China seems to have reached something like an economic dead end. Whatever they're doing, we should not want to emulate it.
There's also the trade deficit, and I have some news for you on that, even though it isn't really news. We'll have a trade deficit for as long as the rest of the world wants dollars more than we want the rest of the world's funny-looking money. Look at it this way. People around the world want dollars for all kinds of reasons. Oil-poor nations (that's most of them, look it up) need dollars to buy oil because oil is (mostly, and at least for the time being) priced in dollars. Foreigners want dollars to invest in our dynamic equities markets and our innovative tech firms. They also want dollars as a hedge against their governments' bad decisions.
Aside from a vacation to Italy or wherever, how often does an American need a fistful of euro? Lots of companies invest in China, but since their currency isn't fully convertible, getting the profits out requires — you guessed it! — dollars. And since the EU has regulated innovation and growth nearly out of existence, the eurozone is no longer a great place to invest.
Foreigners make goods tailored to the U.S. market because they need dollars. We don't tailor nearly as many of our goods for export because A) we already have them, the world's most awesome currency, and B) currencies like the euro or the renminbi aren't much use outside of China or the EU. To the extent that our trade deficit is matched by a foreign investment surplus — and almost exactly 100% of the deficit is offset by foreign investment inflows — it's actually a good thing for U.S. productivity and growth.
To the extent that tariffs might reduce the overseas demand for dollars, they're a net drain on foreign investment in the American economy. "But on the other hand," to quote President Harry Truman's least-favorite economist, if tariffs do result in an American manufacturing Renaissance, the result might be even more foreign investment. We just don't yet know how it will play out, although early indicators like Hyundai's recent decision to invest heavily in American manufacturing rate as "So far, so good."
Another concern is the politics, which don't seem to work out. Trump's tariffs are a $600 billion annual tax hike that falls mostly on the bottom half of earners. The Tax Foundation estimates that the "10 percent universal tariff would increase taxes on U.S. households by $1,250 on average." If that tax increase is offset by increased wages, great. But that will take time, and the midterms are just 18 months away.
Those lower-earning households need tax relief or they'll revolt against MAGA, and rightly so. But the bottom half already pays very little in income taxes, so how to provide that relief? I'm open to suggestions here because aside from ditching income and payroll taxes in favor of the Fair Tax — a national sales tax offset by a monthly cash "prebate" to keep it progressive — I'm out of ideas.
We've talked about some of the costs. Let's talk now about some of the benefits.
The advantage of having the world's reserve currency is that people almost everywhere want to make things we want to buy and sell them at an attractive price. Who doesn't like a bargain, right? The pitfall came when two things happened. First, President Richard Nixon took us off the gold standard. The second was our relentless pursuit of free trade, including with potential mercantilist and expansionist rivals like China.
Those two acts allowed for some very naughty behavior in Washington and on Wall Street — a $37 trillion national debt and the loss of two million good-paying manufacturing jobs (not to mention the national security benefits that came with domestic production).
Japan in the '80s was a great example. Japanese companies took advantage of our free markets and Tokyo's currency manipulation to compete directly and often unfairly with American manufacturers. They brought a lot of money back to Japan and then repatriated those profits to buy T-bills. That kept interest rates low and enabled Washington's addiction to deficit spending.
"Japan’s bond-buying innovation in the 80s removed any need for fiscal discipline in DC," Cody Penn-Dent reminded people on X yesterday. "They [Washington] could run up debt and pay no price — surplus trade partners parked their dollars there."
"It ultimately led to the 'gig economy.'"
China followed Japan's path, starting small in the '90s and eventually on a much larger scale. Want to know how China's growing navy can afford to outbuild ours by better than three ships to one? The answer lies in large part with those $50 toasters.
German Chancellor Olaf Scholz yesterday called the tariffs "an attack on a trading order that has created prosperity across the globe – a trading order that is also to a very significant extent the result of American efforts." While that last part is true, it also misses the point. Besides, I'm in no mood to hear a lecture on prosperity from a man presiding over the deindustrialization and diminution of Europe's soon-to-be-former economic powerhouse.
If Trump's tariffs work as intended — and the transition won't be easy, as today's stock market implosion shows — we could bring back manufacturing and force some fiscal discipline on Congress.
That's a win-win.
Tariffs alone, however, won't get the job done of putting Americans back to work. That's where deregulation and energy dominance come into play. If tariffs are the stick to bring jobs back, then deregulation and cheap energy are the carrots — making America again a land of opportunity, not of cheap, disposable imports.
Writing today for the Washington Examiner, Salena Zito had a great example of both in the town of Homer City, Pennsylvania. "When visiting Indiana County in September," Zito wrote, "President Donald Trump vowed to a packed rally that if elected to a second term in the White House, he would unleash Pennsylvania’s energy sector. He pledged to get workers in the key swing state 'pumping, fracking, drilling and producing like never before.'"
That was then. This is now:
Eleven days after the massive smokestacks and cooling towers of Pennsylvania’s largest coal-fired power plant came down in a dramatic fashion in this Indiana County village, causing both emotional and economic distress and a sense of hopelessness, Homer City Redevelopment announced that an even bigger natural gas power center would be built in its place.
“What this means for us is I can bring the boilermakers home back to Pennsylvania. This will be anywhere from a four-to-six-year job. They will need hundreds of boilermakers and thousands of construction workers. This is good for everybody in the building trades,” Shawn Steffee told Zito.
If scenes like the one in Home City scale up nationwide, it might be $1,250 in the bank.
Looking further ahead, stories like that one from Pennsylvania make me wonder if tariffs might be the price we all have to pay to bring workers back into the labor force. Our labor participation rate is an anemic 62% due to several factors, but I'd pin most of the blame on two big ones. The first is Barack Obama's stealth undoing of the 1996 Bill Clinton/Newt Gingrich welfare reform that Democrats hid inside the 2009 stimulus act. The second is a simple lack of traditional manly work that came with the loss of so many manufacturing jobs. "Learn to code?" someone like Steffee might ask. "I'd rather bend steel."
For those still wondering why MAGA resonates so strongly with young men of all races, that might be it right there.
The country has been long on free money and short of work for men.
Paris-based analyst Pascal-Emmanuel Gobry posted to X earlier today, "Shortly after the election I was invited to speak to a group of French CEOs to explain Trump's economic policies. I was asked to summarize them in a sentence."
That might sound impossible, but he pulled it off. Trump, Gobry told the CEOs, will "raise the barriers around the country, and he's going to remove the barriers inside the country. So if you're exporting to America, Trump will be bad for you, but if you're investing in America, Trump will be good for you — which is the whole point."
It's a typically Trumpian play, a big gamble with a potentially bigger reward. But "we've got a long way to go and a short time to get there," the wise man once sang about another wager with an uncertain outcome. Win or lose, though, it's great to see somebody betting big on America.
Previously on the Thursday Essay: 'Peace Through Strength' Is Back... Almost
