A Short Note on Tariffs
A tariff for a tariff makes the world inefficient
For the U.S., tariffs are a poor policy framework if the objective is to re-shore manufacturing. Instead, the optimal policy path would be in the format of carrot-first industrial policy:
Interest free loans
Tax subsidies
Tax breaks
Direct subsidies
Export tax rebates
De-regulation
The list goes on. Tariffs for certain economies in their adolescence can benefit at times from tariffs. Those in theory allow for the development of domestic industries which are not as competitive relative to ones in developed economies. State support plus tariffs under these very unique circumstances can make sense.
However, for the U.S. in its current position/phase of its development, this is foolish. Manufacturing low-value goods in the U.S. should not be a priority.
The marginal benefit would be outweighed by the costs associated with manufacturing them here. Instead, Asian economies with significantly lower costs of labor which are less developed garner more benefits per dollar earned than their developed counterparts. There is also the question of strategic value.
Take a look at the difference between semiconductors and textiles. It is self evident that manufacturing chips, solar panels, and electric vehicles for instance is much higher value than t-shirts or shoes.
In the U.S., chip manufacturing adds about $370,000 per worker annually, while apparel barely hits $50,000-$70,000. The semiconductor market pulls 30-50% profit margins, which dwarfs textiles’ 5-10%, where a t-shirt’s manufacturing value is often under a dollar.
A single chip can fetch hundreds or thousands of dollars and fuel innovations like AI, while low-value goods like clothing don’t move the needle economically. That’s exactly why mature economies like the U.S. prioritize advanced industries over basic manufacturing.
Tariffs might save some t-shirt jobs short-term, but they can’t compete with the long-term payoff of high-value sectors.
China has been struggling to move onto high-end manufacturing and is stuck at the low end. More value and leverage is acquired through domestically manufacturing high-end goods that are growing in demand. For developed economies like the U.S. with high costs of labor, regulations, and GDP per capita, low-end manufacturing makes little to no sense.
As for sticks, rather than tariffs against rivals like China, Washington should deploy targeted, narrow export controls. Doing so:
Slows down the narrowing technological gap between the US and its rivals e.g. China
Limits market disruption/volatility
The new modus operandi of governments around the world is a nation-first industrial policy. Specifically, vertical (e.g. industries like semiconductors or green tech) as opposed to horizontal which focuses on broad, industry-agnostic infrastructure.
Tariffs are one tool used in this new global, secular trend of industrial policy and nation-first security frameworks. It’s just not a good one for the U.S. The exception might be solar panels, EVs, and other technologies with similar strategic value.
Tariffing chips from Taiwan, an ally and key node in the U.S.’ foreign-techno policy in Asia is strategically unsound. Incentivizing domestic production - rather than penalizing foreign exporters - appears to be the most effective method with limited market disruptions.
As for Trump, based on precedent early in his term, the “method to his madness” (so to speak), appears to be the following:
❌Impose tariffs
✋Pause or delay
🤝Make announcements of future negotiations
❌Impose tariffs
✋Pause or delay
Rinse and repeat. What makes it difficult for businesses to plan around is the uncertainty of whether the tariffs will hold. Firms can plan around suboptimal circumstances, but they can’t switch back and forth every 30-90 days.
Some may argue that’s inflationary, and there’s a good point to be made. My counterpoint is companies looking to expand operations and commit capital will wait or may even let people go amid the uncertainty. That is deflationary to the extent that it dampens consumer sentiment and consumption.
Something that we are also seeing that I forecasted a few weeks ago has been the idea of a barter system: India for instance lowered tariffs on Harley Davidsons, but not fully. In exchange for the remaining tariffs, they’d purchase more energy to offset it. The EU is doing the exact same.
It is also lost among many that the US running a trade deficit means that for every good imported, dollars are exported. State coffers are then filled with US Dollars which locks them into a global economy glued together by USD.
This gives the US immense influence vis-a-vis sanctions without resorting to military options with higher risks and resource demand. Reserve currencies are built around open trade, and power can be used for global statecraft.