Trump's Tariffs: Twisted Logic
The Wall Street Journal calls it ‘the dumbest trade war in history.’
‘He doesn’t understand tariffs are passed to the consumer!’ comes the shriek.
Even 300 year-old Mitch McConnell is more perplexed than normal and can’t figure it all out.
I couldn’t find a decent explanation as to why Trump is doing a tariff war in any media. At least an explanation that didn’t just put it down to Trump being Trump.
‘Orange man bad,’ which has been the tenor of much of the commentary, insults our intelligence.
I’m not saying orange man isn’t bad, but we have to at least understand the rationale for why he’s doing what he’s doing.
And I especially couldn’t figure out if, as much liberal commentary is portraying it, tariffs are uniquely bad for the importing country, why Canada and Mexico have hit back with their own tariffs?
It’s retaliation, we’re told.
Huh?
If Trudeau and Sheinbaum are cool logical characters in comparison to Trump’s impulsive madman, they wouldn’t retaliate emotionally with tariffs that only hurt their own people. They wouldn’t choose to make life harder for their own citizens for no good reason. Why is China threatening to sue the US at the World Trade organisation? If tariffs only hurt the importer wouldn’t we all just laugh at Trump’s tariffs as the ultimate self-inflicted wound and move on with our day?
It’s pretty much impossible to get any answers to any of this. The media seems to be ignoring key angles and context.
The first thing to say is that Trump and his people obviously know that a tariff is paid by the importer and then passed on to the buying citizen in full or part. We can bin the ridiculous idea that if only he knew it was a tax on the consumer! he wouldn’t be doing it.
Musk had talked before the election about Americans having to suffer temporary hardship. Trump now talks of ‘a little bit of pain.’ They know very well who pays these tariffs.
So then you have to ask why they’re doing it and why they think this pain is worth it.
And that starts with the idea of surpluses and deficits.
The US runs a deficit with every single one of its trading partners, from Mexico to Canada to China to the EU.
This just means the US spends more on importing things from these places than it does on selling things to these places.
China’s trade surplus with the US was $279bn in 2023. It will be $300bn+ for 2024. Canadian companies sold American companies $64 billion more worth of goods than they bought from them in 2023. US companies bought $209 billion more worth of stuff from the EU than they sold them.
On paper then, you’re in the black. Superficially it looks bad.
THE DEFICIT has, in American political life, especially on the right and vis a vis China, become a totem of America’s humiliation on the world stage. (Incidentally outlets like The Wall Street Journal have led the cries for someone to tackle THE DEFICIT for years, so it’s amusing to see them crying about Trump’s effort to do it.)
America Firsters want to eliminate the deficit. And tariffs, because they are paid as a tax by the importing company to their own government, can, in theory, help do this. Many importers will pass on some or all of the costs to people buying the stuff, the ‘end consumer.’ Some will look domestically to replace the stuff they previously imported. Some will look to import from non-tariffed countries. But the end result will be that revenue to the US government goes up and the deficit goes down.
Trump has labelled this imbalance in payments a subsidy. It isn’t and he knows it, but the term plays well because it suggests a one-way relationship. As if Canada is a vassal state. (Of course Trump will never talk about the actual subsidies given to Israel, a true vassal state.)
In any case, as it pertains to Canada, the opposite might be more true. A trade imbalance means you, as the purchasing party are, to some extent, reliant on the place selling you the stuff. If they decide to stop selling you these things, they could, theoretically, hurt you.
And this seems to be the related and secondary rationale among Trump, Musk and the gang.
They don’t like the idea America is reliant on anyone for anything. They want to force manufacturing, food production, everything, according to the list of Canadian goods being tariffed, back to America.
It won’t work. It can’t work. America isn’t going to establish a maple syrup industry. It doesn’t have the trees to replace Canadian lumber on any kind of meaningful scale. But this is the rationale. And we have to at least understand the rationale.
This isn’t to say tariffs will be a total failure on this front. The tariffs on China since 2017, initiated by Trump and ramped up by Biden, have resulted in a greater share of certain things being made in the US rather than China. The same might happen now across a wider range of stuff given the tariffs are across the board on America’s largest trading partners.
(The US government hasn’t yet hit the EU with tariffs but is almost certain to do so in the coming weeks).
So, having seen the China tariffs work to re-shore in part some of the targeted industries, he’s replicating it with more force across other trading partners and industries. And the workers for this massive re-shoring of production will be all the federal government workers they want to buy out. Trump said as much last week. You can disagree with it, but the logic is clear.
Trump’s other rationale for the tariffs (stopping fentanyl and its precursors coming from China, Mexico and Canada and curbing immigration at the border) are impossible to realise, especially via tariffs. It hardly makes sense, unless as a threat. (Edit - it was a threat. Trump has agreed to postpone them for a month in return for Mexico moving troops to the US border.) But they make good talking points for the base and add to the victim story he sells so well.
Canada and Mexico are compelled to hit back. Standing up to Trump is good politics, and attempting some of your own rebalancing as a result of US tariffs isn’t a terrible idea. Canada and Mexico can’t just let the US balance the books on the back of their economies.
It is however difficult to see Mexico and Canada coming out of this better off than the US. They imposed tariffs for this reason. They’re trying to force Trump to back down. So no, tariffs don’t just hurt Americans.
Both Canada and Mexico sell more to the US than they buy because America is richer. Simple as that. Decadence and prosperity allows you to stop making things and buy them instead. White collar replaces blue collar. The computer replaces the factory. As a significantly poorer country that relies on the decadence of Americans to buy what they make, Mexican companies may be especially hard hit if US importers look domestically or elsewhere for goods.
As for the broader consequences, everyone is viewing it through their ideological prism.
The right is telling us the US will win the trade war, the centre is telling us it’s mutually assured destruction and the left is looking at it all as the contradictions of globalised late stage capitalism coming to a boil.
There is some basis for all of these, but a global superpower economy has never done anything like this to its largest trading partners. We really don’t know what comes next.
So what are the possible outcomes?
A US ‘win’ (deficit eliminated, factories re-open, new industries sprout up)
Mutually assured destruction (global recession, limited success on deficit reduction or ‘re-shoring’)
The unwinding of global capital (end of US dollar hegemony, switch to yuan/BRICS currencies)
Strengthening of global capital (re-assertion of US dollar hegemony)
Not much (WTO trade rules and other legal clauses in trade agreements compel a return to the status quo)
The only solid forecast right now is inflation. You can’t slap 25% taxes on trillions in trade value without prices going up, possibly quite substantially on some things.
So if you’re the prepping and stockpiling type of person, you might want to consider doing that now.
Trump has attempted to detonate the liberalised global market order that has dominated for the last fifty years.
Anyone telling you with any certainty how the pieces will fall to the ground is lying.
And despite the incredulous response by much of the liberal class, none of this is a mystery or unexpected. This has all been on the cards since the financial crash in 2008, and the choices since then haven’t been a mystery either.
The refusal of the liberal class to accept that the future was left populism or right populism gave us Trump, and now we must live with his plans for how the liberal order should end.
Trump does not have to face another election. Break enough stuff and it may preclude holding another election when his term supposedly concludes.
Trump can play us as victims of unfair trade and he is right, we are. Trump just does not label correctly the perpetrators of this unfairness: the corporate class that engaged in global labor arbitrage.
What we in the wealthy west have never come to terms with is how our lifestyles depend upon stripping the global south of resources and replacing those with our refuse. That will end.
Trump's trade war will not find a victory. But maybe the impoverishment of the US can lead to a more sustainable environment. That is certainly not Trump's goal, but that could well be the result.
The trade war is a distraction from the larger point. This is less about economics and more about his starving us into accepting his terms. He is intentionally tanking our economy. When we're good and screwed he'll then tell us only he can fix it and offer us a Four Year Plan. It won't work, but we'll all be so broke that we'll accept his "solutions" as a matter of survival. We'll overlook a lot of bad things out of self-preservation, and even more to protect our kids. This is basic 1930s Germany playbook stuff. Trump may not know what he's doing but the puppeteers pulling his strings do. Watch for increasing tax benefits or stimulus checks to people who are newly married and starting families. It'll happen when people really start hurting.