Steven Sidley | Professor of Practice | Johannesburg Business School | Partner | Bridge Capital | mail me |
Of all the bewildering and chaotic projectiles lobbed out of the White House, none is more confusing than tariffs.
The very word “tariff” is likely to put most citizens to sleep. However, a sudden 200% increase in the price of a bottle of French wine would jolt anyone awake. This number is a real threat from Trump.
Tracing Trump’s tariff strategy
No one can accuse Trump of inconsistency on this issue. He has complained about foreign countries since 1987. At that time, Japan was his target. Japan was beating the US in manufacturing, from automobiles to consumer electronics. Trump was not even in politics at the time. However, this did not stop him from taking out full-page ads in major newspapers.
The ads read, “Why are these nations not paying the United States for the human lives and billions of dollars we are losing to protect their interests?” It continued with, “…the world is laughing at America’s politicians as we protect ships we don’t own, carrying oil we don’t need, destined for allies who won’t help“.
His irritation with the rest of the world, excluding some dictatorships, has grown. His position is no longer, “you need to pay your fair share for our help”. It has become a slew of foreign gripes forming the core of his foreign policy. This is backed by aggressive tariff actions against America’s closest partners, friends and allies.
Economic reasons behind Trump’s tariff strategy
Vox Magazine writer Eric Levitz recently analysed the economic reasoning behind some tariffs. He found little or none.
Take Canada, for example. Trump recently imposed a 25% tariff on all Canadian goods. The original reason was the flow of drugs and illegal immigrants. However, there is little evidence of such a flow happening at any scale.
Then Trump claimed:
Canada doesn’t allow American Banks to do business in Canada, but their banks flood the American market.
This was utter nonsense. US banks operate in Canada.
Was the tariff due to Trump’s lust for US ownership of Canada? He expressed this desire in a tweet:
Canada should become our Cherished 51st State. Much lower taxes, and far better military protection for Canada – AND NO TARIFFS!
Alternatively, maybe the tariffs are meant to nudge Canadian firms to set up operations in the US.
Trump tweeted:
The USA has major deficits with Canada, Mexico and China (and almost all countries!), owes 36 Trillion Dollars, and we’re not going to be the ‘Stupid Country’ any longer. MAKE YOUR PRODUCT IN THE USA AND THERE ARE NO TARIFFS!
This tweet was addressed to the world, not just Canada. It wasn’t the finest example of persuasion, but then, it is Donald Trump.
Vox also offered one more possibility. Trump has spoken about an “External Revenue Service,” meaning the collection of funds from other countries. This is a fancy term for tariffs and taxes. Trump may see this as a way to pay off America’s growing debt.
Of course, the US consumer will pay for these punitive tariffs when prices rise. It turns out that tariffs are simply a consumption tax on US citizens to service government loans.
So what is really going on with Trump’s tariff strategy?
The administration has failed to provide a convincing rationale for tariffs against its largest trading partners. The US stock market has crashed. Trump’s ratings have plummeted, especially in foreign policy. Only 37% of Americans think he has done a good job in this area. This is an historical low.
The news is filled with GOP-leaning businessmen covering their faces in horror. America’s traditional allies are shocked by Trump’s betrayal. They are retaliating with tariffs of their own.
Trump and his officials are unapologetic. They justify tariffs using phrases like “no pain, no gain”. Meanwhile, the average citizen braces for increases in the cost of almost everything.
Will tariffs cause a recession?
Trump answered that question in what seemed like rehearsed language:
I hate to predict things like that. There is a period of transition. What we’re doing is very big. We’re bringing wealth back to America. That’s a big thing… it takes a little time, but I think it should be great for us.
In other words, he didn’t answer the question. He simply said, “trust me”.
Have tariffs worked historically? That’s a complex issue. They worked for the American steel industry in 1881. They gave US steel time to become competitive with Britain. However, tariffs failed catastrophically in the 1930s. A series of protectionist laws extended the Depression and ruined global trade.
More importantly, tariffs can be imposed quickly. However, it is much harder to reverse them. Protected industries will resist with all their political strength. It was only during the last third of the 20th century that free trade took hold, driving global wealth.
When questioned about the sudden tariff regime, European Commission President Ursula von der Leyen said:
We deeply regret this measure. Tariffs are taxes. They are bad for business, and even worse for consumers. These tariffs are disrupting supply chains. They bring uncertainty for the economy.
One thing is certain: buying goods will become more expensive for the average US citizen. Americans are being asked to make sacrifices for Trump’s idea of the greater good. Forcing voters to empty their wallets is poor strategy for maintaining loyal political support.
So again, why is he doing this?
In its first couple of decades, Meta (then Facebook) coined the motto “move fast and break things”. The message was that those who over-plan never accomplish anything important. Huge risks are required to lead. Only big swings hit the ball out of the park. Some will fail, but those that succeed will change history.
Trump loves the tech bros and seems to have adopted their ethos. The imposition of tariffs looks like a huge political and commercial gamble. However, the odds are not promising.