{"id":3512084,"date":"2025-04-14T10:22:32","date_gmt":"2025-04-14T10:22:32","guid":{"rendered":"https:\/\/www.resilience.org\/?p=3512084"},"modified":"2025-04-14T13:10:07","modified_gmt":"2025-04-14T13:10:07","slug":"understanding-trumps-tariffs","status":"publish","type":"post","link":"https:\/\/www.resilience.org\/stories\/2025-04-14\/understanding-trumps-tariffs\/","title":{"rendered":"Understanding Trump\u2019s tariffs"},"content":{"rendered":"<p>I\u2019ve been digesting tariff chat for the past few days, like everyone is, and trying to make sense of the political economy of it. \u2018Make sense\u2019 as in trying to piece together the MAGA mindset and then think it through, beyond the economics of it. And just as I had a piece drafted, the Administration turned around and \u2018paused\u2019\u2014up to a point\u2014most of the tariffs it had imposed.<\/p>\n<p>If you do want a straight review on how tariffs work, and don\u2019t work,\u00a0<strong><a href=\"https:\/\/www.noahpinion.blog\/p\/trade-deficits-do-not-make-a-country\">Noah Smith has a good explainer<\/a><\/strong>. Kyla Scanlon\u00a0<strong><a href=\"https:\/\/kyla.substack.com\/p\/tariff-q-and-a-welcome-to-the-actual\">also does a Q&amp;A<\/a>\u00a0<\/strong>(thanks to The Browser for this link).<\/p>\n<p>But before I get to the heavier end of the content, let\u2019s turn to the Bloomberg newsletter, in which Jessica Karl treads smartly but lightly over what\u2019s happening in the world. On this occasion by\u00a0<strong><a href=\"https:\/\/www.linkedin.com\/posts\/heather-landy-1910002_tariffs-teenagers-genz-activity-7314008624568164353-2HVZ\">quoting a Bloomberg editor<\/a><\/strong>\u00a0on GenZ slang:<\/p>\n<figure class=\"wp-block-image\"><a class=\"image-link image2 is-viewable-img\" href=\"https:\/\/substackcdn.com\/image\/fetch\/f_auto,q_auto:good,fl_progressive:steep\/https%3A%2F%2Fsubstack-post-media.s3.amazonaws.com%2Fpublic%2Fimages%2Ff1a08b35-9c3b-4722-b5a8-592e5f2e7da9_1104x686.jpeg\" target=\"_blank\" rel=\"noreferrer noopener\"><img decoding=\"async\" src=\"https:\/\/substackcdn.com\/image\/fetch\/w_1456,c_limit,f_auto,q_auto:good,fl_progressive:steep\/https%3A%2F%2Fsubstack-post-media.s3.amazonaws.com%2Fpublic%2Fimages%2Ff1a08b35-9c3b-4722-b5a8-592e5f2e7da9_1104x686.jpeg\" alt=\"\" \/><\/a><figcaption class=\"wp-element-caption\"><em>(Source: Heather Landy, LinkedIn).<\/em><\/figcaption><\/figure>\n<p>That also seems to be how the world has responded to the initial announcement, perhaps because the randomness of the numbers created suspicions that the White House policy was based on asking an AI [1].\u00a0One of the metaphors about Trump that\u2019s been used in the past that seems to have stuck in his second term is of the gangster\u2014even in the pages of the\u00a0<em>Financial Times<\/em>.\u00a0But gangsterism still needs a credible threat if it\u2019s going to work. For this reason, I also liked the article\u2014I\u2019ve mislaid the link\u2014that pointed me to\u00a0<em>The Sopranos<\/em>\u00a0as a metaphor for what was going on:<\/p>\n<p><iframe loading=\"lazy\" title=\"The Sopranos - Patsy and Burt failed extortion attempt at &quot;Starbucks&quot;\" src=\"https:\/\/www.youtube.com\/embed\/_Gsz7Gu6agA?feature=oembed\" width=\"100%\" height=\"347\" frameborder=\"0\" allowfullscreen=\"allowfullscreen\"><span data-mce-type=\"bookmark\" style=\"display: inline-block; width: 0px; overflow: hidden; line-height: 0;\" class=\"mce_SELRES_start\">\ufeff<\/span><\/iframe><\/p>\n<p>There\u2019s a lot going on here, so I\u2019m going to try to parse it out. I\u2019m going to start with the rationale, and then try to unpick some of the political economy here.<\/p>\n<h3 class=\"wp-block-heading header-anchor-post\">The rationale<\/h3>\n<p>Trump, in general is obsessed with material goods, and not so much with services. So he obsesses about trade deficits, and doesn\u2019t notice the large service surplus that funds them. (Or that America, pretty much uniquely, exports dollars for use as a reserve currency by other countries, which effectively also subsidises the US.)<\/p>\n<p>Hence his notion that every other country in the world is \u201cripping off America.\u201d<\/p>\n<p>Noah Smith suggests that this is because\u00a0<strong><a href=\"https:\/\/www.noahpinion.blog\/p\/once-again-imports-do-not-subtract\">his economic advisers have misunderstood<\/a><\/strong>, deliberately or not, the basic equation for Gross Domestic Product [GDP] that people learn the first time they do economics [2]:<\/p>\n<blockquote class=\"wp-block-quote is-layout-flow wp-block-quote-is-layout-flow\"><p><em>The formula is\u00a0<strong>Y=C+I+G+(X\u2212M)<\/strong>, where\u00a0<strong>C<\/strong>\u00a0is consumption,\u00a0<strong>I<\/strong>\u00a0is investment,\u00a0<strong>G<\/strong>\u00a0is government spending,\u00a0<strong>X<\/strong>\u00a0is exports, and\u00a0<strong>M<\/strong>\u00a0is imports.<\/em><\/p><\/blockquote>\n<p>So it looks obvious: if you get rid of that -M, you\u2019re that much richer. But as Smith reminds us, this is just a way of tidying up the data, because consumption, investment, even government spending, all include imports, but they\u2019re harder to measure there: much easier just to count the imports as they come in and deduct them from the total [3].<\/p>\n<h3 class=\"wp-block-heading\">Complex supply chains<\/h3>\n<p>There\u2019s a second assumption that sits inside the White House worldview: that if all of those imports stop coming in, then American companies will start making those goods themselves. Well, the best answer to this is:\u00a0<em>it depends<\/em>. In a world of complicated goods and <strong><a href=\"https:\/\/www.theguardian.com\/commentisfree\/2025\/apr\/12\/make-america-make-again-trumps-tariffs-will-only-be-manufacturing-pipe-dreams?CMP=Share_iOSApp_Other\" target=\"_blank\" rel=\"noreferrer noopener\">complex supply chains<\/a><\/strong>, it is much less likely than it used to be. In the\u00a0<em>Financial Times<\/em>, after the initial round of announcements, their veteran economics writer Martin Wolf reckoned that the\u00a0<em>shape<\/em>\u00a0of trade in goods with America would mostly remain the same even after the punitive levels of tariffs announced last week, but there would just be less of it.<\/p>\n<p>But even if American companies filled the gap, there would be a delay. It takes time to build capacity, skills, products, markets, and so on.<\/p>\n<p>The other thing here is that in terms of the overall American economy, manufacturing production\u2014which is what\u00a0<em>all<\/em>\u00a0of this is about\u2014is\u00a0<strong><a href=\"https:\/\/theconversation.com\/trump-thinks-tariffs-can-bring-back-the-glory-days-of-us-manufacturing-heres-why-hes-wrong-253991\">small beer these days<\/a><\/strong>. It makes up 8% of the US economy. Even if every single one of the manufactured goods that are currently imported into America was made in the United States instead, that figure would climb to\u2026 9%.<\/p>\n<h3 class=\"wp-block-heading header-anchor-post\">What\u2019s going on<\/h3>\n<p>So this is a lot of chaos, even with the \u201cpause\u201d announced on Wednesday, for a tiny and possibly hypothetical gain.[4]\u00a0It\u2019s not exactly smart policy. You\u2019re left with several choices about what\u2019s going on.<\/p>\n<p>The first is that the White House genuinely doesn\u2019t have a clue: Trump is obsessed with tariffs, and always has been, and his cast of MAGA sidekicks see it as their job to go along with what the President wants. It is a tiny talent pool, after all. We\u2019ll come back to the ideological point in a moment.<\/p>\n<p>The second is a reminder that we are dealing with a man who told an aide during his first term that he needed to \u201cwin\u201d something every day. \u201cWin\u201d as in having stories about him that put him in the spotlight and made him look good. The attention is the message. This makes for lots of tactical noise and no strategy.<\/p>\n<h3 class=\"wp-block-heading\">Share tips<\/h3>\n<p>Then there\u2019s the thought that it might all have just been an insider trading play. The stock markets headed down, fast, in response to the original tariff announcements. They didn\u2019t recover. When the \u201cpause\u201d announcement was made, they picked up again quite quickly.<\/p>\n<p>So someone who sold at the right time\u00a0<strong><a href=\"https:\/\/newrepublic.com\/post\/193823\/trump-tariffs-corruption-insider-trading\">and bought at the right time<\/a><\/strong>\u00a0would have done pretty well. Of course, there used to be rules to stop politicians doing that in the US, but one of the first things the Trump administration did was to remove them. Anti-corruption measures are for the little people. And here\u2019s Donald issuing share tips just before the \u201cpause\u201d announcement on his Truth Social platform:<\/p>\n<p><a class=\"image-link image2\" href=\"https:\/\/substackcdn.com\/image\/fetch\/f_auto,q_auto:good,fl_progressive:steep\/https%3A%2F%2Fsubstack-post-media.s3.amazonaws.com%2Fpublic%2Fimages%2F1528f13f-5e94-4e97-a371-2931e139fd10_1702x408.jpeg\" target=\"_blank\" rel=\"noreferrer noopener\"><img decoding=\"async\" class=\"aligncenter\" src=\"https:\/\/substackcdn.com\/image\/fetch\/w_1456,c_limit,f_auto,q_auto:good,fl_progressive:steep\/https%3A%2F%2Fsubstack-post-media.s3.amazonaws.com%2Fpublic%2Fimages%2F1528f13f-5e94-4e97-a371-2931e139fd10_1702x408.jpeg\" alt=\"\" \/><\/a><\/p>\n<p>It\u2019s <strong><a href=\"https:\/\/x.com\/spencerhakimian\/status\/1910120891637186965?s=61&amp;t=WrqIxif5aHmRqRtWx-MfiA\" target=\"_blank\" rel=\"noreferrer noopener\">pretty evident<\/a><\/strong> that <strong><a href=\"https:\/\/www.btimesonline.com\/articles\/173691\/20250410\/trump-hit-insider-trading-accusations-9-market-surge-tariff-reversal.htm\" target=\"_blank\" rel=\"noreferrer noopener\">some of this happened<\/a><\/strong>, but I don\u2019t think it is the\u00a0<em>reason<\/em>\u00a0it happened.<\/p>\n<h3 class=\"wp-block-heading header-anchor-post\">Income tax<\/h3>\n<p>What seems to sit behind Trump\u2019s obsession with tariffs is that he hates income tax. He said as much in his so-called \u201cLiberation Day\u201d pronouncement, as Heather Cox Richardson noted on\u00a0<strong><a href=\"https:\/\/heathercoxrichardson.substack.com\/p\/april-7-2025\">her currently unmissable blog<\/a><\/strong>:<\/p>\n<blockquote class=\"wp-block-quote is-layout-flow wp-block-quote-is-layout-flow\"><p><em>\u201cYou know, our country was the strongest, believe it or not, from 1870 to 1913. You know why? It was all tariff based. We had no income tax.\u201d<\/em><\/p><\/blockquote>\n<p>Of course, this is a total misreading of history:<\/p>\n<blockquote class=\"wp-block-quote is-layout-flow wp-block-quote-is-layout-flow\"><p><em>[T]he Panics of 1873 and 1893 devastated the economy, few Americans at the time thought the Gilded Age was a golden age\u2026 Congress passed the 1913 Revenue Act imposing income taxes to shift the cost of supporting the government from ordinary Americans, especially the women who by then made up a significant portion of household consumers, to men of wealth.<\/em><\/p><\/blockquote>\n<h3 class=\"wp-block-heading\">Sales tax<\/h3>\n<p>So in brief, tariffs, then as now, fell disproportionately\u2014in effects as a sales tax\u2014on working-class Americans. Income taxes did not. The logic here is that same logic that ensures that Trump administrations are willing to go into debt to give tax cuts to the wealthy.<\/p>\n<p>The other missing piece in this is that the cost of government was tiny in the later part of the 19th century, and manufacturing and resources was a much larger part of the economy, and not just in America.<\/p>\n<p>But at least this is of a piece with\u00a0<strong><a href=\"https:\/\/justtwothings.substack.com\/p\/1-march-2025-ideologies-addiction\">other parts of MAGA thinking<\/a><\/strong>: the hatred of Woodrow Wilson as the architect of \u201ctotalitarian government intervention\u201d, which has only been extended over the course of the century since, and the assaults on the administrative state.<\/p>\n<h3 class=\"wp-block-heading\">Giveaways<\/h3>\n<p>This point about income tax was underscored by the Democrat Senator Elizabeth Warren\u00a0<strong><a href=\"https:\/\/www.removepaywall.com\/search?url=https:\/\/www.newyorker.com\/news\/the-financial-page\/elizabeth-warren-is-trying-to-stop-the-dumbest-financial-crisis-ever\">in an article<\/a><\/strong>\u00a0by John Cassidy in\u00a0<em>The New Yorker<\/em>:<\/p>\n<blockquote class=\"wp-block-quote is-layout-flow wp-block-quote-is-layout-flow\"><p><em>In our conversation, Warren underscored that the Republican desire for tax cuts seems to know no bounds. \u201cEven in the middle of this chaos, they are moving forward on a bill that has trillions of dollars in giveaways to corporations and billionaires,<\/em><\/p><\/blockquote>\n<p>But leaving aside all of the other issues around tariffs, even if the imposition of tariffs worked, the revenues would be a tiny fraction of the funding needed by a modern government.<\/p>\n<h3 class=\"wp-block-heading header-anchor-post\">Markets<\/h3>\n<p>It\u2019s seems clear now that the \u201cpause\u201d on Wednesday night was prompted by the fact people were selling American Treasury bonds as well as stocks. It\u2019s not supposed to work like this\u2014normally investors turn to Treasuries as a safe haven for their money when stock markets are volatile. Without going into the technicalities of this, when investors buy bonds, and their price goes up, it means that the US government is paying less to service its loans and debts.<\/p>\n<p>Because investors were selling rather than buying, the cost of servicing government debt was going up rather than down. There\u2019s been a a couple of explanations for this, and both might be true. The first is that the market crash was squeezing some financial sector players, risking a financial crisis. John Cassidy, again, on Thursday:<\/p>\n<blockquote class=\"wp-block-quote is-layout-flow wp-block-quote-is-layout-flow\"><p><em>Lawrence Summers, a former Treasury Secretary, warned online that \u201cdevelopments in the last 24 hours suggest we may be headed for serious financial crisis wholly induced by US government tariff policy.\u201d<\/em><\/p><\/blockquote>\n<h3 class=\"wp-block-heading\">Selling bonds<\/h3>\n<p>The second is that countries holding US Treasury bonds, who were on the receiving end of tariffs, sold their bonds. China, almost certainly; and also a group of traditional American allies co-ordinated by Mark Carney, once the Governor of the Bank of England and now the Prime Minister of Canada. Canada had been <em>building up<\/em> its holdings of US bonds against this moment.<\/p>\n<p>According to <a href=\"https:\/\/open.substack.com\/pub\/deanblundell\/p\/carneys-checkmate-how-canadas-quiet?selection=f2918c58-07c2-4d8f-a504-812067489d50&amp;r=1147&amp;utm_medium=ios\" target=\"_blank\" rel=\"noreferrer noopener\">Dean Blundell\u2019s Substack<\/a>:<\/p>\n<blockquote class=\"wp-block-quote is-layout-flow wp-block-quote-is-layout-flow\"><p><em>Carney [held] closed-door meetings with the EU\u2019s heavy hitters\u2014Germany, France, the Netherlands. Japan was in the room too, listening closely. The pitch was simple: if Trump went too far with tariffs, Canada\u2026 would start offloading those Treasury bonds. Not a fire sale\u2014nothing so crude. A slow, steady bleed.<\/em><\/p><\/blockquote>\n<p>There\u2019s lots more here, but there\u2019s a bigger point. There\u2019s no such thing as a \u201cfree market\u201d. All markets are underpinned by some combination of laws, regulations, contracts, social institutions and social relationships. And one of the things that seems to have spooked investors\u2014apart from the randomness of the tariff announcements and the strange calculations that sat behind them\u2014is the lawlessness of the current Administration.<\/p>\n<h3 class=\"wp-block-heading\">Risk premium<\/h3>\n<p>As Katie Martin said in the (paywalled) <em>Financial Times <\/em>on Friday:<\/p>\n<blockquote class=\"wp-block-quote is-layout-flow wp-block-quote-is-layout-flow\"><p><em>[A] risk premium will sit on US assets that was not there before\u2026 Its stocks carry political risk for the first time. Its bonds no longer act like they are truly risk-free. The dollar is not acting like a magnet during periods of stress.<\/em><\/p><\/blockquote>\n<p><img decoding=\"async\" class=\"wp-image-10609 aligncenter\" src=\"https:\/\/thenextwavefutures.wordpress.com\/wp-content\/uploads\/2025\/04\/img_7352-1.jpg?w=1024\" \/><\/p>\n<p style=\"text-align: center;\"><em>The VIX index shows market perceptions of uncertainty. Showing change since start of January.<\/em><\/p>\n<p>Given Trump\u2019s personal business history, I\u2019ve also seen it suggested that investors may have also feared that the Administration might just default on some its debts.<\/p>\n<h3 class=\"wp-block-heading header-anchor-post\">China<\/h3>\n<p>The \u201cpause\u201d on tariffs didn\u2019t extend to China. Gangsters need to find a way to save face when they back down. But doubling down on China seems like it might be a mistake. If any country in the world understands the intricacies of global supply chains, it\u2019s China.<\/p>\n<p>China responded to the tariff announcement\u00a0<strong><a href=\"https:\/\/cleantechnica.com\/2025\/04\/05\/china-just-turned-off-u-s-supplies-of-minerals-critical-for-defense-cleantech\/#google_vignette\">by announcing new licensing arrangements<\/a><\/strong>\u00a0for exports of a series of critical minerals\u2014samarium, gadolinium, terbium, dysprosium, lutetium, scandium, and yttrium. Michael Barnard described them as<\/p>\n<blockquote class=\"wp-block-quote is-layout-flow wp-block-quote-is-layout-flow\"><p><em>the elements that don\u2019t make headlines but without which your electric car doesn\u2019t run, your fighter jet doesn\u2019t fly, and your solar panels go from clean energy marvels to overpriced roofing tiles.<\/em><\/p><\/blockquote>\n<h3 class=\"wp-block-heading\">Precision<\/h3>\n<p>In other words, they target, very specifically, defence, advanced manufacturing, and cleantech. Barnard goes into some detail on each of these\u00a0<strong><a href=\"https:\/\/cleantechnica.com\/2025\/04\/05\/china-just-turned-off-u-s-supplies-of-minerals-critical-for-defense-cleantech\/#google_vignette\">in the piece<\/a><\/strong>. It\u2019s not a ban. It\u2019s just paperwork. But the person who made the decision knew what they were doing:<\/p>\n<blockquote class=\"wp-block-quote is-layout-flow wp-block-quote-is-layout-flow\"><p><em>They\u2019re chosen with the precision of someone who\u2019s read U.S. product spec sheets and defense procurement orders\u2026 They didn\u2019t need to say no. They just needed to say \u201cmaybe later\u201d to the right set of paperwork.<\/em><\/p><\/blockquote>\n<p>It\u2019s more sophisticated than that, because the licenses ensure that China will learn a lot about who is using these materials, and for what reasons. Eventually the US might be able to source some of this from elsewhere,\u00a0<strong><a href=\"https:\/\/time.com\/7275818\/rare-earth-china-tariffs-metals-minerals\/\">but not quickly<\/a><\/strong>. In some of the commentary I\u2019ve seen, it\u2019s suggested that this isn\u2019t even a \u201cretaliation\u201d by China. It\u2019s more like an opening shot across the bows, by way of a gentle reminder.<\/p>\n<h3 class=\"wp-block-heading\">Footnotes \u2014<\/h3>\n<p><em>1 This is explained by\u00a0<a href=\"https:\/\/www.theverge.com\/news\/642620\/trump-tariffs-formula-ai-chatgpt-gemini-claude-grok\">The Verge<\/a>. Alex Tabarrok thinks they could have used\u00a0<a href=\"https:\/\/marginalrevolution.com\/marginalrevolution\/2025\/04\/ai-on-tariffs.html\">better prompts<\/a>.\u00a0<\/em><\/p>\n<p><em>2 The famous Upton Sinclair quote comes to mind here: \u201cIt is difficult to get a man to understand something, when his salary depends on his not understanding it.\u201d<\/em><\/p>\n<p><em>3 If this seems technical, imagine a barren island with a lighthouse on it. The island produces nothing, and everything the lighthouse keeper needs has to be shipped in by boat. The island\u2019s GDP is zero: all of the lighthouse keeper\u2019s Consumption is covered by Imports.<\/em><\/p>\n<p><em>4 The \u201cpause\u201d still leaves 10% tariffs on American imports, more on some categories of goods, and a hike on the tariffs on China. The decision seemed to have been made so quickly that the White House wasn\u2019t able to give clear answers on the detail. But American tariff levels, even with the \u201cpause\u201d are at <a href=\"https:\/\/www.theguardian.com\/us-news\/2025\/apr\/12\/donald-trump-is-now-badly-wounded-europe-and-the-uk-can-seize-an-advantage\" target=\"_blank\" rel=\"noreferrer noopener\">their highest levels for a century<\/a><\/em>.<\/p>\n<p>\u2014<\/p>\n<p><em>This is an updated version of an article that was also published on my <a href=\"https:\/\/justtwothings.substack.com\">Just Two Things Newsletter<\/a>.<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"<p>I\u2019ve been digesting tariff chat for the past few days, like everyone is, and trying to make sense of the political economy of it. \u2018Make sense\u2019 as in trying to piece together the MAGA mindset and then think it through, beyond the economics of it.<\/p>\n","protected":false},"author":128238,"featured_media":3512133,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[79717,213528],"tags":[],"class_list":["post-3512084","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-economy","category-economy-featured"],"acf":[],"_links":{"self":[{"href":"https:\/\/www.resilience.org\/wp-json\/wp\/v2\/posts\/3512084","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.resilience.org\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.resilience.org\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.resilience.org\/wp-json\/wp\/v2\/users\/128238"}],"replies":[{"embeddable":true,"href":"https:\/\/www.resilience.org\/wp-json\/wp\/v2\/comments?post=3512084"}],"version-history":[{"count":8,"href":"https:\/\/www.resilience.org\/wp-json\/wp\/v2\/posts\/3512084\/revisions"}],"predecessor-version":[{"id":3512134,"href":"https:\/\/www.resilience.org\/wp-json\/wp\/v2\/posts\/3512084\/revisions\/3512134"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.resilience.org\/wp-json\/wp\/v2\/media\/3512133"}],"wp:attachment":[{"href":"https:\/\/www.resilience.org\/wp-json\/wp\/v2\/media?parent=3512084"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.resilience.org\/wp-json\/wp\/v2\/categories?post=3512084"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.resilience.org\/wp-json\/wp\/v2\/tags?post=3512084"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}