The Hubris Of Tariffs

At the core of President Trump’s Tariff Policy are the multiple goals of reducing the nation’s trade imbalance, re-industrializing the country, and raising funds for the government budget. Almost no one would argue with these objectives.

Trump’s campaign slogan, Make America Great Again, encapsulates these goals. Today, we are a country burdened with debt, reliant on overseas suppliers, and seemingly unable to manufacture the items we need and want. The operative word is: “again.”

This once-great country is no longer as great as it once was. It’s a reality that so resonated with the voters that Trump was re-elected President in 2024. Americans of all stripes see people experiencing homelessness, driving on below-standard roads, and facing power shortages every summer. The list of repairs and rebuilds is extensive, but we are all familiar with them. America needs to be upgraded, and the MAGA approach seemed like the ideal solution.

On April 2, when the President unveiled his Tariff Policy, we all held our breath, hoping that this would be a strategy that would set our economic course for the next generation.

Indeed, we all seemed to be on the same page when the President issued, also on April 2, an Addendum to the Tariffs:

“Large and persistent annual U.S. goods trade deficits have led to the hollowing out of our manufacturing base; inhibited our ability to scale advanced domestic manufacturing capacity; undermined critical supply chains; and rendered our defense-industrial base dependent on foreign adversaries.”

https://www.whitehouse.gov/presidential-actions/2025/04/regulating-imports-with-a-reciprocal-tariff-to-rectify-trade-practices-that-contribute-to-large-and-persistent-annual-united-states-goods-trade-deficits/

Here, President Trump is right on the money when he declares that our manufacturing base has been “hollowed out.” For years, American manufacturing has declined, and, as the President states elsewhere, it currently accounts for only 11% of the nation’s GDP.

Clearly, the country needs to promote domestic manufacturing.

Trump then proposes two basic strategies to promote American manufacturing.

The first is aimed at the price disparity between US production and the rest of the world.

“Significant and persistent annual US goods trade deficits are primarily caused by a lack of reciprocity in our bilateral trade relationships. This situation is evident in the disparate tariff rates and non-tariff barriers that make it more difficult for US manufacturers to sell their products in foreign markets.”

op cit

Indeed, for over half a century, American consumers have consistently demonstrated a preference for purchasing the lowest-priced goods. The imposition of tariffs will help reduce the disparity between low-priced foreign-produced items and their American counterparts. This is where Tariffs are an appropriate instrument.

However, what Tariffs will not do is enable American manufacturers to compete in foreign markets, or, for that matter, to produce products more efficiently in this country. The sad reality is that much of US manufacturing is woefully outdated, and Trump’s Tariff Program does nothing to help bring plants and equipment into the 21st century.

We’ve written extensively on this topic; refer to the article on the nearly century-old General Dynamics Facility that supplies the 155 mm artillery shells needed in Ukraine, or the recent sale of US Steel facilities to Nippon Steel and its century-old Edgar Thompson Works here in Pennsylvania.

Trump subsequently examines the global markets and evaluates America’s ability to become more competitive.

“This is also evident in the economic policies of key US trading partners, which suppress domestic wages and consumption, thereby reducing demand for US exports, while artificially increasing the competitiveness of their goods in global markets. These conditions have given rise to the national emergency that this order is intended to abate and resolve.”

op cit

Here, I’ll assume that this description is primarily aimed at China, as it certainly does not apply to such advanced trade partners as the EU, Canada, and Japan. If it’s the case that the President is, indeed, describing China, then regrettably, his view of that country is woefully out of date. Although China was a relatively backward country, full of underpaid labor, in the mid-20th century, that’s no longer the case.

Just days before Trump announced his Tariffs, Chinese Premier Li Qiang emphasized the importance of domestic consumption in China’s future economic growth. For some time, China has been focused on encouraging its own consumption, and with a population of over 1 billion, this would be the largest marketplace in the world. It is why it has been so challenging to bring major US Companies, like Apple Computer, back home.

https://english.www.gov.cn/policies/latestreleases/202503/16/content_WS67d6b21bc6d0868f4e8f0da0.html

That Trump missed this reality suggests the Administration’s view of manufacturing is stuck in the past. To become globally competitive, American businesses must catch up to the rest of the world, NOT compete with low-cost labor.

In fact, the President performed a subtle sleight-of-hand here, implying that Tariffs would somehow be used to help domestic production. His repeated use of the word “we” when describing the trade imbalances. As in: “We’ve been ripped off.” Trump suggests that because American manufacturing is losing sales to offshore makers, Tariffs would bring some of that income back to them. That’s not the case; all of Trump’s Tariffs will flow directly into the US Treasury. Not a dime will go to the US Steel or General Dynamics to upgrade their plants.

Finally, a note about the roll-out of tariffs: not a day goes by without the President adjusting them. Although the negotiation process continues, only a handful of the 194 countries have signed a Tariff agreement; nonetheless, Trump continues to modify the terms and conditions of the tariff.

Our three largest trading partners, Mexico, Canada, and China, have faced four, six, and six different Presidential Executive Orders, resulting in new levels of tariffs. It creates an indescribable amount of confusion among both offshore exporters and domestic importers.

It takes, on average, two months for a large container ship to cross the Pacific from Asia to the ports of Los Angeles and Long Beach, California. During that time, the President may have changed the Tariff rate. Thus, the prices set when the ships sailed may not be the prices when they arrive in the US Port.

September begins that window during which retailers must place their orders for the Holiday Season, the most crucial shopping time of the year. Investors should start watching now, as I expect what may be a difficult Christmas ahead.

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