Other people have been tracking the tariff situation in much more detail than I have, so the best thing I can do is offer a quick summary.1 The broad story is already well-known:
Trump claims that the U.S. is getting screwed over by other countries because of the trade deficit. He uses this as the basis for declaring an emergency and placing tariffs on the entire world, including uninhabited islands. The calculation for the tariffs, which he calls “reciprocal” (there is nothing reciprocal about them), came from measuring the trade deficit with each country, with a 10% minimum.
China retaliates with higher tariffs.
Trump puts a “pause” on most of the tariffs while increasing them on China, leaving the full effect about the same as if the “pause” did not happen.
China and the U.S. ratchet up tariffs until China says “this is silly.”
Trump comes to an agreement with China where both sides temporarily lower tariffs.
The “pause” ends, and the originally announced high tariffs have been gradually reinstated or raised on a country-by-country basis. Deals have been demanded, but nothing of substance has come yet. Some deadlines have been extended, with more delays possible.
There are other tariffs specific to different industries, and the details change every day, but that’s where we are right now.
Here’s the tricky part: even at the “low” point of the tariffs, the U.S. still had its highest tariff rate since the 1930s. The infamous Smoot-Hawley tariffs are often credited with being a major part of why the Great Depression was so bad, but what we’re looking at right now is actually much worse because the world is more connected and the U.S. tariffs started from a much lower level.
The economic impact of this situation can be summarized by one of my former economics professors’ comments about the tariffs, an expert who has studied trade for 30 years: “I believe these tariff policies are the single most self-destructive set of policies I have seen in my lifetime.” He had a lot more to say, but that really says it all.
If you ask AI, you’ll probably get an answer that says “both sides have merit,” while it tries to explain what benefits could come from these tariffs. This is misleading. The reality is that the risks far outweigh benefits. Even the main arguments for enacting the tariffs are flawed.
The first, and most common, is that it might bring manufacturing back to the U.S. But the reality is that we should not even care if things are produced in the U.S. unless there are concerns about safety and security. There is an economic concept called comparative advantage (they teach this in the very first econ class!): One country might be better at doing everything, but it is comparatively better at doing one thing, so it does the most valuable thing and trades with other countries that do other things. The U.S. has better things to do, and that’s a good thing!
For example, even if something was manufactured in China, it can still create U.S. jobs by being designed in the U.S., marketed in the U.S., etc. Manufacturing creates other jobs too, and there are different stages of manufacturing that fit different countries better. This is obviously oversimplified, but it’s the easiest way to explain the economics.
And if bringing manufacturing back to the U.S. was a good idea, then placing broad tariffs on almost everything from almost everywhere is not the right policy to reach that goal. “Punishing” a business or country for manufacturing outside the U.S. just means that it will find another country to buy what it sells (and the people being punished are actually U.S. consumers, because a tariff is just a sales tax by another name).
The right policy would be to provide incentives that attract business, a strategy that was already in place from the previous administration’s CHIPS Act (which is now under threat of getting canceled entirely).
This is also not a “short-term pain, long-term gain” type of situation. Tariffs done this way is an insult to international trading partners, and could permanently break supply chains or permanently lock American businesses out of some international markets, even if they were reversed within a few days.
The other argument is that tariffs will bring in tax revenue. This is a contradiction to the goal of moving manufacturing — if you take it to the extreme, and all production was moved inside the U.S., then the tariffs would bring in zero tax revenue.2
The most likely, economics-backed outcome, is slower economic growth and higher inflation. This is called stagflation. This could be a repeat of what the U.S. experienced in the 1970s, but it could also be more like the 1930s. We are already seeing some of the economic damage in retail and manufacturing, and it will only get more complicated as the months drag on.
There are situations where tariffs work: Tariffs can be a good policy if they’re intended to help a new industry get off the ground, or if they are targeted at a specific country in a certain market for using unfair trade practices. But broad tariffs on almost everything is not a good policy. And broad tariffs with arbitrary calculations is not a good policy.
The way the tariffs have been moved up and down has also created so much uncertainty that the uncertainty itself is bad for business. Long-term forecasts can’t rely on the whims of one person, and the market can only speculate on the impact of the tariffs. At the moment, the market doesn’t seem to care — traders have come up with what they call the “TACO trade” (Trump Always Chickens Out) — but economists are still concerned.
I think it goes deeper than what I’ve seen economists or investors discussing. From my perspective, the problem is even more fundamental than the issue of tariffs:
Short-term thinking that blows up any potential for long-term trade negotiations. Why make a deal that might be broken next year, or next week?
An assumption that America has the strongest trade position. This might be true in a direct confrontation with anyone other than China or the European Union, but attacking every country in the world at the same time is not a fight that the U.S. can win. And the first point makes America’s trade position even weaker, because other countries have been exploring new trade deals that exclude the U.S.
A belief that trade deals can only have winners and losers, and that it can’t be win-win. Free trade can create losers in the short-term, but the long-term benefits have been proven over hundreds of years.
Combine those three things, and you get a really bad way to make policy decisions. The risk does not come from tariffs alone. It comes from a bad process.
Yahoo Finance has an ongoing list that updates when the trade policy changes. Apricitas Economics provides an excellent analysis of the impact for every time the tariffs change.
This is obviously not possible because some things simply cannot be made in the U.S., but it demonstrates the contradiction.