Let's Talk About Tariffs

I like Trump. I voted for him. I think he’s brilliant when it comes to some things. I support DOGE and I hope they drastically cut the level of spending the government does. I think the judges ruling against him are not objective arbiters of law, and in fact, America is in a Cold Civil War. When it comes to tariffs, Trump is not brilliant. He is wrong.

The trade deficit is a meaningless number. It focuses on fixed pies, not ever-expanding pies. If you get gains from trade, it’s good. If you don’t, then don’t trade. The US clearly receives gains from trade. We are far better off trading, and the fact that we are the largest consumer market in the world makes it so everyone wants to sell here. Free trade also keeps our interest rates lower.

There has been a lot of disinformation and total misunderstanding about tariffs. Democrats love tariffs just as much as Trump does. Biden increased steel and other tariffs during his term, but I am sure he doesn’t remember, and neither will the media. He didn’t get rid of any of the Trump tariffs or any other tariffs from other administrations, either. The last “free trade” President the US had was Reagan.

Trump’s mistake is thinking that tariffs are a revenue generator and can replace income taxes. They can’t, and if they could, why not get rid of all income taxes at the same time? As any regular reader of this blog knows, a consumption tax that replaces the current and entire US tax regime is the smartest thing the US could do. There is no such thing as “Liberation Day”.

I think it’s best to put up some Friedman videos. He explains it so everyone can grasp the concepts. We always say that things may change, but basic economics remains the same. Economics is about trade-offs. In the case of the tariffs that came down yesterday, the question that should be asked is this: How much are you willing to pay to have a person in some manufacturing or other industry supposedly benefitting from tariffs to keep their job?

When a similar question was asked about global warming, the answer was zero. No one wanted higher costs to “save the planet”.

This will help anyone understand the mechanics of tariffs as they relate to free trade. You should get a sense of how they work or don’t work. I know Joe Biden said Milton Friedman was dead and Joe led one of the worst presidencies in the history of the US. Maybe he should have listened. Thanks to technology, we can!

This one is good. One quibble with the present situation is that we aren’t talking quotas, just tariffs. Gun to your head and given a choice, having a tariff with no quotas is better than a quota with no tariffs. But, either is a bad choice.

Because we are only talking about tariffs and not quotas, the gun in the boat analogy holds. The last point Friedman makes is salient and relevant. When a country receives US Dollars in return for selling its goods here, it has to do something with those dollars. Often, they buy US Treasury bonds. That drives down our interest rates. Even if they exchange the dollars for another currency, that agent has to do something with the money.

Longer form presentation here on free trade.

I get that other countries tariff the US. It’s not fair, or is it? What’s fair? Should billionaires pay their fair share or are they already paying their fair share?

Fair is a subjective idea. It’s hard because often there is a lot of emotion involved but we have to be objective.

Democrats will say Trump is trying to tank the economy. I don’t think he is trying to tank the economy. I think Trump truly believes that tariffs are a path forward. Democrats tanked the economy with massive illegal immigration and huge marginal jumps in government spending, and they were silent, so they don’t have any agency or standing to criticize anyone.

I said yesterday that if it is a negotiating ploy to get everyone to 0%, and it works, he should be thanked. He ought to get some sort of Nobel Prize. Vietnam and Israel ended their tariff policy on US goods. Canada made noise about it. Let’s hope that is the direction it goes.

China did not. But, China is a bad actor when it comes to world trade. China has no such thing as rule of law, property rights, or any respect for anything. This is where if Friedman were alive, he might see a different path.

I don’t have great answers where China is involved. They are hell bent on getting Taiwan, and they are hell bent on creating a new dynasty all over Asia, and the world, which they control. They are communists, and you cannot reason or negotiate with a communist. They will always stab you in the back.

There is a reason to protect industries that have a military defense angle. But, NOT every industry is related to the military, and as soon as you codify that carve out every single industry will say they are integral to military defense. That’s a huge problem with tariffs. They are political, and they are gamed.

Some countries have an advantage over others when it comes to producing things. In the US, we don’t grow any coffee except some gourmet stuff in Hawaii. The US is better off having other countries grow coffee and trading for it. We shouldn’t tariff coffee because we can’t produce it.

What if both countries produce the same item? Does it make sense to tariff it? For example, Canada and the US both produce lumber. Canada heavily subsidizes its lumber industry, and it also has quite a thicket of protectionism to protect it. Canada enacts tariffs and quotas. It’s the nuclear option and the worst possible choice when economies are open and free trade is achievable.

What happens? Canada taxpayers pay for the bad government policy. The US consumer that buys lumber from Canada might enjoy a lower price for that lumber than they normally might pay if they were forced to use a US producer. In response to the tariff, US producers might be able to raise prices on their own lumber to be just below or at the same level as Canada lumber. Less lumber is sold by Canada, and their economy experiences what is called “deadweight loss”.

Fewer jobs get created. It’s not just about jobs as a lumberjack or working in the sawmill. Construction jobs are eliminated because the cost of lumber is artificially high and less building takes place. That means fewer products are produced to fill up those buildings.

Unions love tariffs because they see them as protecting jobs, even though they don’t. Except they make industries less competitive. They delay innovation and change. See Detroit. US policy on the automotive industry since the Japanese invasion of the late 1960s has been abysmal. Is Detroit building better cars? No. In fact, because of the intrasingence of the unions combined with terrible US policy and continuous missteps by management, the US auto industry is leaving Detroit and going to places like South Carolina.

Tesla is the brightest spot in the US auto industry.

At the end of the day, the consumer bears the cost of tariffs, duties, increased taxes, or any other distortion of the free market when the government enters it.

Instead of tariffs, there are things we can do.

1. End all subsidies of US companies and industry. Force them to compete. Will also go a long way in cutting spending.

2. Deregulate everything. Labor law. Environmental law. Repeal Dodd-Frank and Sarbanes-Oxley. End stupid do-nothing things like CAFE standards in the auto industry, which only make cars cost more.

3. Make the cost of energy cheap. Drill, baby drill. Abundant supplies of energy make it cheaper to build stuff.

4. End our current tax regime and go to a consumption tax.

5. Radically revamp our educational system and enact school choice.

One big issue is what do people who are in their late 30s and 40s do? They have 20 or more years to work. If they lose their jobs because of a change in policy, we need to figure out how to help them. In many cases, retraining them is extremely difficult. This is especially true after the age of 40. In most cases, the cake of your career is baked.

Unleashing the free market might help them. Do things the right way and there will be opportunity. It will behoove companies to pay to retrain people because they need the people so badly to keep pace with growth.

I am empathetic to factory workers who lost jobs. In many cases, it wasn’t foreign competition that made them unfortunate but US government policy or the policy of the state they live in. California, New York, and Illinois are not business-friendly. Businesses are fleeing those states for other states. Tesla didn’t set up in Texas because of EV competition from China. It was California. It’s just easy to blame other countries instead of your own state or country.

That being said, every person isn’t the same. We aren’t robots. We aren’t all resilient. Some of us need some hand-holding.

I thought this thread on X was interesting.

I'm on the machine builder side of the equation, out of Japan. Looks like our product is going up 24% in price (we'll probably absorb some, but machine tool margins are not astronomical). We do production machines. Our biggest single customer is Apple, so when you need 100,000+ of something, you call us. If this was just a Japan trade war, we would be boned... But it isn't. My books were already full of projects coming back from China. Small companies with big, commodity (500k+ unit) volumes, and we were already showing that you *can* do stuff in the US at a competitive cost with good process design, smart machine selection, and existing automation. This market will be able to absorb a 20% equipment price increase, and still come out way ahed compared to building their product oversees (not just China, but bejesus... overseas *anywhere*). So short term, this is gonna suck... but the future was going in a direction of unlimited downside, and if this is what it takes to swing that into long-term health? So be it - all of the people saying this is insanity seem to be clinging to a status quo that everyone with eyes could see is headed towards disaster - they have no better answers.

Ideally, we’d like to see no tariffs. Unfortunately, that isn’t realistic. As bad as it feels, stomaching other countries tariffing our goods is actually better for the American consumer in the short and long run than putting tariffs on their goods. It doesn’t seem fair on the surface, but it is overall. However, the US has to get its own house in order to create opportunities for citizens.

We ought to negotiate hard to get other countries to end tariffs and subsidies. I wouldn’t be buying the stock market with both hands today. It’s going to be a very bumpy ride. But, if other countries wake up and smell the coffee, taking tariffs off, you will see the mother of all rallies. Until then, buy puts.